Get ready for a surge on activism in 2011. This is the word from both the activists and their potential targets.
According to a survey by the law firm Schulte Roth & Zabel the majority of both corporate (60 percent) and activist (64 percent) respondents expect shareholder activism will rise next year.
This is a big change for the corporate crowd. When the law firm produced its first study in 2008, just 39 percent of the corporate respondents said they expected shareholder activism to increase in 2009 and 2010.
Schulte Roth interviewed 25 senior corporate executives and 25 activist investors on a variety of issues related to shareholder activism and their expectations for the coming year. They agreed on a number of issues. A majority of both groups expect to see hedge funds step up their activist activities next year. They also agreed that the new Say on Pay rules will play an important role. And they all agree that good communication is critical.
However, most interesting is the apparent disconnect between the two groups on a number of very critical issues. This could cause a lot of tension as many potential targets are taken by surprise. For example, activists said the number one factor that will drive their activity is excessive cash on companies’ balance sheets, cited by 68 percent. However, just 15 percent of their potential targets cited this factor. Carl, you reading this?
On the other hand, the corporate crowd most believes (54 percent) their financial performance will be the most significant issue for the activists. The investor group also thinks this is important, but not as important as excessive cash as well as strategic/operational changes.
The two groups also have vastly different perceptions of which industries figure to be put in play. For example, 77 percent of the corporate crowd believes financial services and energy/utilities will be the two most popular targets among the activists.
Warning to entrenched management: Activists don’t see it this way at all. Yes, a majority singled out these two industries, but only 58 percent of the activists. Rather, another 22 percent believe Technology/Media/Telecom will be prime targets. However, this vast, once hot sector wasn’t even singled out by the corporate crowd.
Two other industries identified by the activists but not by the corporate crowd as potential targets include Construction (9 percent) and Consumer/Retail (4 percent). The two camps even disagree over who they believe will become more actively involved.
Although both groups expect hedge funds to play a larger role, more than two-thirds of the activist crowd identified pension funds compared with just 38 percent of the corporate crowd.
In addition, nearly 8 of 10 activists (76 percent) believe shareholders will become more active in connection with companies’ proposed M&A strategies. This compares to just 40 percent of the corporate respondents. Note to corporate crowd: See “Dynegy.”
The wide divide on a number of issues suggests that many companies figure to be caught surprised when they become targets of aggressive investors. In fact, except for hedge funds, they are seemingly not aware of whom their biggest threat is.
Look for a surge in those quickie, last–minute poison pills instituted after an activist accumulates at least 5 percent of their shares. And I suspect this will lead to more proxy fights.
For those like I who enjoy watching these battles from the sidelines, 2011 is shaping up to be an exciting year.
