TL;DR: Companies should closely monitor their shareholder base and deploy stock surveillance to address an activist investor taking a position. If an activist engages, management must listen to their concerns, communicate the company’s strategy to other shareholders, and seek common ground rather than fight a costly proxy battle.
Succinct Answer: When a company is being “stalked” by an activist investor, it should deploy stock surveillance to monitor stake-building, rally a response team to review vulnerabilities, and proactively engage with the activist and key shareholders. The key is to be prepared, address weaknesses, and communicate openly – turning a potential showdown into a constructive activist engagement.
Introduction:
Back in 2013, I was hiking on the border between Montana and Alberta with the future mother of my son. About halfway through our hike around Beauvais Lake, we came upon a young male grizzly bear that looked emaciated. We spent the next two hours walking backwards, facing the bear as he continued his slow inexorable approach. We clapped our hands. Yelled at him. Sometimes we managed to scare him, and he would retreat back to 100 feet. But he would always return to being about 50 feet from us.
We managed to survive the day and lived to tell the tail. But it could have gone the other way.
Many companies have frequent activists in their share register. Sometimes the intentions of frequent activists are completely benign. But often, that activist investor is quietly circling… buying up stock, scrutinizing every move, stalking management.
Just like being stuck in the woods with a grizzly, the situation is challenging but manageable with the right approach. In this post, we explain the first steps companies should take when a frequent activist takes a position in their stock. You’ll learn how stock surveillance can monitor the activist’s position in near real-time and how effective activist engagement can turn a potential showdown into a productive dialogue. We’ll cover early warning signs, preparation steps, engagement tactics, and more. By the end, you’ll know how to protect your company’s interests while addressing an activist’s concerns.
Spot the Signs Early
Activist investors often quietly accumulate shares before announcing their intentions. They stalk companies for weeks and months before attacking management and the board in the open.
Shareholders in the U.S. are required to publicly disclose holdings and their intentions once they own more than 5 percent of a company’s outstanding shares on Schedule 13D or 13G. In Canada, investors that own more than 10 percent of a company’s outstanding shares must file an Early Warning Report. However, by then it’s normally too late for management to head off an embarrassing public activist campaign. It is common for activists to begin aggressively engaging boards and management before they accumulate more than 1 percent of a company’s shares outstanding.
Early detection is critical. Prior to the 13D and Early Warning Report, companies can monitor 13F and sum-of-fund filings to identify activist entrants. Companies should carefully monitor any shifts in their shareholder base. It is the responsibility of management, and by extension their IR team, to immediately alert their boards should a frequent activist take a position.
Implement Stock Surveillance
Modern stock surveillance tools track real-time ownership changes. Instead of relying only on quarterly filings, surveillance services provide real-time data on who is buying or selling your stock. While the practicality of stock surveillance as an early warning system is questionable given the prohibitive costs, once a management team is aware there is a frequent activist lurking, stock surveillance is warranted. Such intelligence can even reveal activist activity via derivatives or “wolf pack” allies before it becomes public, giving management a chance to respond proactively.
Activate Your Shareholder Activist Playbook
Don’t wait for a proxy fight to start preparing. MCI Capital Market’s Activist Playbook For Management is a good place to start in your preparation. Assemble an internal response team as soon as you suspect activist interest. This team should include senior executives, the board, investor relations, legal counsel, and objective third-party advisors (that will not railroad management and the board into conflict for their own benefit).
Have a clear action plan that defines roles and messaging in an activist scenario. In other words, have a “break glass in case of emergency” plan to communicate with shareholders when an activist emerges.
Ensure your investor relationship management system is up to date with the records of all investors engaged within the past two years. If there are holes in this information, plug them. Your investor relationship management system offers a key advantage over an activist during a hostile campaign.
Annual vulnerability assessments by MCI Capital Markets can help shore up defenses and provide mitigation strategies. This assessment analyzes areas activists target including strategy, performance gaps, capital allocation, governance practices. Address any obvious weaknesses before an activist exploits them. While preparation and foresight are helpful, an active long-term value generation strategy that holds management clearly accountable is your company’s best defense.
Engage with the Activist and Your Shareholders
When an activist does emerge, proactive engagement is an important first step towards Activist Resolution. MCI Capital Markets can help structure your engagement with shareholder activists to establish and maintain a constructive dialogue.
Stay calm and listen. Remember, activist investors usually do extensive homework and likely have valid points about unlocking value that will resonate with your company’s other investors. You dismiss their ideas at your own peril. The goal is to enter a private and constructive dialogue that unlocks shareholder value and leads to a mutually agreeable solution behind closed doors. However, if the activist launches a public attack, resist the urge to trade blows; there’s little to gain by sparring in the press. Instead, focus on facts, maintain a professional tone, and try to find an off ramp to constructive discourse.
Meanwhile, don’t neglect your other shareholders. The activist will reach out to your major investors, so you should do the same. Communicate early and often with top institutional shareholders, both in person and in the public realm. Keep all shareholders abreast of the situation and the actions of leadership. Keep your shareholders focused on the Company’s Value Generation Strategy and management’s progress against it. It may become necessary to have a board member explain to investors why the board believes its strategy is best for long-term value generation.
If you’ve built trust over time, investors are more likely to give management and the board the benefit of the doubt during an activist challenge. In some cases, other shareholders’ feedback might persuade the activist to moderate their demands or back off, especially if the broader investor base isn’t on board with the activist’s agenda. Use these engagements to show that you welcome input, while also demonstrating that the company has a clear plan for sustainable value creation.
Conclusion: Stay Prepared and Proactive
Facing an activist investor can be intimidating, but it doesn’t have to spell disaster. With early detection, stock surveillance, MCI’s activist playbook, and open communication, your company can often defuse the activist’s grievances while opening new avenues for value creation.
Prepare in advance by working with MCI Capital Markets to package and launch a 3-5 year value creation strategy. This is your best defense against activism and an opportunity to ensure you align your company’s value generation strategy with shareholder interests. When activists surface, respond thoughtfully: listen to their concerns, communicate your perspective, and be willing to compromise if it serves long-term value. MCI Capital Markets article on How Shareholder Activist Campaigns Evolve can provide helpful insights on the motivations of your activist.
Most of all, don’t neglect your relationships with all shareholders. Their support is your strongest asset in any activist campaign. Handled well, an activist challenge can even leave your company stronger in the end.
If your company needs guidance in monitoring stock activity or handling activist engagements, reach out to MCI Capital Markets for expert support.
Key Takeaways:
- Early Warning: Monitor your company’s shareholders regularly to spot activist investors quietly building a position and respond before a campaign goes public.
- Implement stock surveillance: Monitor the activist’s position changes in near real time to inform your strategy.
- Have a Plan: Create an activist response playbook and team in advance – treat activist situations as a “when, not if” scenario.
- 3-5 Year Plan: Your company’s best defense against activism is the launch and execution of a 3-5 year value creation strategy. This is an opportunity to ensure you align your company’s value generation strategy with shareholder interests.
- Constructive Engagement: If an activist emerges, proactively engage them, hear them out, and evaluate their ideas objectively. Communicate your plan to major shareholders and seek their support.
- Build Trust: Maintain regular dialogue with investors and take their concerns seriously. Strong shareholder relationships can deter activists or help fend off a campaign.