An activist hedge fund investor tweets at 8 a.m. that he has bought shares in your company and will be pushing for changes to the board or a takeover. In an instant, you have lost control of the flow of information and are scrambling to regain the initiative.
You might well be a target. After all, there is a growing insistence after waves of revelations of mismanagement, that shareholders should hold companies to account. There are agitators out there, following a longstanding tradition in the United States, and they may not need much encouragement.
Today’s activist investors and hostile bidders tend to be investing for the longer term than the so-called corporate raiders of the 1980s, but without a doubt they are still doing it to make a large return.
They can also use social media to talk publicly and directly to other shareholders and the mainstream press, increasing pressure on their targets. How should you react? Ignoring the vocal investor is not an option.
There are two courses of action, and both require as much intelligence as you can lay your hands on.
Assess the Evidence
First, the company must honestly assess whether the activist shareholder has a good point—do changes need to be made and is the proposed strategy better than the existing one? If that is the case, then the agitator has a good chance of winning the support of the rest of the shareholders; the best thing a board can do is work to make changes that will see the share price rise to a better level.
But agreeing in principle with an aggressor still requires intelligence on who they are pushing for promotion to the company board. Will new board members supported by the activist investor really improve the way a business is run? If not, there is the opportunity for the company to look for its own replacement board candidates and seek shareholder support for them.
The second route is to establish with as much proof as possible that the activist investor is promoting nonsense. To prove that to the rest of the shareholders, a target company needs to investigate the claims being made about its business and respond with facts. It also needs to investigate the track record of the board candidates being put forward, and look at its existing board members to find and nullify any weaknesses that an agitator may dig up.
In emerging markets, this kind of assessment is even more important because it can be very hard to trace the ultimate beneficial owner of the shares held by the agitator—a shell company could be stirring trouble on behalf of a rival, a senior politician or his family.
In some African countries for example, you must go in person to a share registry to find out who the ultimate owner is. If the company named as holding the shares is located offshore, it can be virtually impossible to find the true owner.
Of course from the activist investor’s point of view, deep intelligence about the target company is also vital—in the case of natural resources companies for example, feet on the ground can often be the only way to find out the true value of a mine or well.
For both sides, the only sure way to counter the sound and fury is to gather as much impartial intelligence as possible from advisers who do not have a dog in the fight.