Understanding Activists, Their Motivations, and the Evolution of their Campaigns
The Corporate Finance Institute categorizes activists in terms of individual, private equity, or hedge funds. While not necessarily inaccurate, such classifications are irrelevant to strategy. Emotions and motivations are the only thing that are relevant to the playbook that should be used by management to navigate an activist campaign. The underlying motivation of an activist will dictate how the activist campaign will evolve, the types of communication and engagement that are possible, where the off-ramps might be, and which parts of the Activist Investor Playbook management teams are able to leverage. We group activists into three broad categories: The Rational Activist; The Promotional Activist; and the Irrational Activist.
The Rational Activist
Rational activists have a specific set of pragmatic recommendations they want to see implemented at a company based on their investment priorities. The common themes of these recommendations include:
- Achieving greater shareholder returns through the changes they are proposing;
- Improved governance; and
- A broader set of ESG priorities embraced by management.
These activists provide multiple off-ramps from their campaign if management teams are willing to engage, and respectful engagement is typically what they are looking for. Within those engagements, education and context can convince the activist they don’t have the whole picture. Alternatively, they may see value creation opportunities that management has not. These activists are the most amenable to the Activist Investor Playbook, and can remain as long-term shareholders.
The Promotional Activist
This is an activist, often early in their evolution as a fund or firm, trying to make a name for themselves. They are establishing their activist brand in the marketplace. Their activism is part marketing campaign (media heavy) to raise attention for their fund amongst investors and the market, and partly to prove their “value creating” thesis (regardless of its ability to actually generate shareholder value). These activists exist on the fringe of an exclusive ecosystem of funds.
They are typically shorter-term in nature, involving quick investment and early exits created through volatility in the share price. A supporting cast of hedge funds are usually present related to these quick and volatile returns. Promotional activists are often ego driven and aggressive as they act to capitalize on their volatile ownership position. Management must check their own egos, conduct themselves with professionalism and grace, while pandering to the ego of their activist.
The Irrational Activist
All campaigns can become irrational given enough inappropriate moves by management. The irrational campaign is one that has devolved into a personal attack directed at management and the board. What was once about shareholder value becomes a grudge the investor has developed towards management and the board of directors. Once campaigns reach this stage, activists can embrace a scorched earth policy. Management will be offered few, if any, off ramps from the activist campaign at this point. These typically lead to an aggressive shareholder proxy battle for the removal of an existing board with fund representatives.
The Evolution of Activist Campaigns
How activist campaigns evolve and what activist investors do during a campaign generally evolve along a common set of pathways. The infographic below illustrates the nature of these campaigns. It also highlights the opportunities management may have to steer the campaign into constructive dialogue. Management teams should do everything they can to keep the the activist in constructive dialogue (the left side of this flow-chart).
Motivations Dictate the Campaign’s Evolution
Management teams are pushed further down the flowchart as motivations move from rational, to promotional, to irrational. These management teams expend vital resources while their focus is pulled away from more important objectives. The onus is entirely on management to do everything appropriate to prevent the activist campaign from devolving into irrationality.
If you’re dealing with an activist, don’t automatically gravitate to an activist defense. Let MCI Capital Markets support your engagement and move both parties toward constructive dialogue, value-creation and Activist Resolution.