Blurring the Lines: The Intersection of M&A and Shareholder Activism

M&A and Shareholder Activism

Activists are blurring the lines between M&A and shareholder activism, ranging from opposing potential acquisitions to proxy contests to force directors out to full-blown hostile takeovers. For example, some activists are targeting companies that have a live M&A deal underway to seek higher prices or better terms, such as Carl Icahn’s recent campaign against Southwest Gas.

1. Breakups

As activists gain momentum, a number of factors may influence the effectiveness of their efforts. For example, investors and proxy advisers will be looking more closely at activist nominees for election to company boards. This could be a result of the US Securities and Exchange Commission’s new universal proxy card rules, activists taking a more “constructive” approach to engagement with companies or improved quality of activist board candidates.

Even in a slow M&A market, activists continue to push for breakups and divestitures as part of their campaigns, with such demands accounting for 44% of activist demands this quarter. This is in addition to a continued focus on capital allocation policies, with activists scrutinizing the use of resources by companies and calling for greater return of those assets to shareholders.

Companies considering a M&A should consider the potential impact of an interloper and take steps to minimize any vulnerabilities activists might exploit, such as through structural takeover defenses. It is also wise for merger parties to include provisions in their deal agreements to address the issue of a hostile takeover bid from an activist investor during the transaction process.

2. Acquisitions

A variation on classic M&A activism is a ‘deal’ activism campaign that involves an industry competitor buying a key stake in the target company on market after a merger announcement but before the transaction is completed. Activists can use this strategy to disrupt the deal, or as leverage in a negotiation with the other party for better terms.

Activists’ strategies and tactics are constantly evolving. Understanding recent activist trends will help boards prepare for and anticipate these attacks. Boards should put in place the usual activism ‘preparedness and response’ steps, including: having a robust process to evaluate potential M&A transactions; regularly reviewing their shareholder register and assessing changes; and proactively communicating strategy. M&A deals should also include provisions in the merger agreement to allocate liability for interloper activity between the parties. These steps can reduce the risk of a hostile activist attack and mitigate the impact of such an attack. Wei Jiang, Tao Li, and Danqing Mei (2019). All rights reserved.

3. Shareholder activism

Shareholder activism is a broad term that can conjure up images of hedge funds waging proxy battles. But, it really refers to any effort by any investor to leverage its rights and privileges as an owner to change a company’s practices or strategy.

Activist investors are typically looking to unlock value they believe is going unrealized. Companies with a low ratio of market value to book value, excessive cash on hand or lots of monetizable assets like real estate may fall into their crosshairs. Similarly, those with governance weaknesses like long-tenured boards or executive compensation plans that are not aligned with performance can also face activist scrutiny.

Directors can help fend off activist attacks by being transparent about their views on key issues and keeping up to date on broader activism trends. They should also be prepared to explain to shareholders why the company believes that a given proposal is not in its best long-term interests.

4. Hostile takeovers

Hostile takeovers are a part of the M&A world that generate front-page news. They involve an investor or acquiring company attempting to acquire a target company without the company’s management team’s approval.

The acquiring company may use several hostile takeover strategies such as tender offers, proxy fights and purchasing shares on the open market to gain control. The tender offer involves bypassing the target company’s board and directly offering to buy shares of the company at a premium to the current market price. The proxy fight includes a campaign to replace the target’s uncooperative board members. The stock purchase strategy involves buying shares on the open market until the acquiring company reaches a certain ownership threshold.

Taking proactive measures to avoid hostile takeovers can help companies protect shareholder value and enhance their business reputations. Boards should encourage stewardship teams to monitor governance and other issues that may attract activist attention. They should also promote high levels of engagement and responsiveness to shareholders to support positive voting results over time.

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