Responding to an activist campaign
It is always interesting to see how a company reacts to aggressive activist investor approaches.
The immediate ‘gut’ reaction from the executive team is to call an activist “opportunistic” and “short- termist,” without offering anything of substance. That invariably means round one goes to the activist.
Activists spend months and sometimes years poring through every element of a company’s balance sheet and annual reports, working and developing through multiple scenario analysis. This is all they do - they cannot afford a misplaced assumption, or an incorrect zero, so they make absolutely certain that the numbers stack-up when they go public.
Activists also get to choose their timings for going public – Third Point chose the day before Royal Dutch Shell announced disappointing Q3 numbers, not the quietest day in the investor calendar, particularly when the numbers fell short.
The demands the activist sets out will make sense, or certainly should, on paper - generally disappointing performance and underwhelming, incoherent or incorrect strategy - but whether the route they put forward is right for the company is an important question that at this stage is unanswered.
Unfortunately for any company under fire from activists, journalists love these types of campaigns. They also tend to be long and often dirty.
Consequently, a journalist will rarely turn away a call from an activist or their representative. Activist campaigns are an open door to write easy stories. You saw this with GSK, firstly with Elliott’s letter and then the far smaller activist Bluebell, all of which generated huge quantities of coverage.
…a journalist will rarely turn away a call from an activist or their representative.
In the face of such public onslaught, a company is damned if they complain about the approach and they are damned if they stand back and ignore it.
To take an aggressive and personal approach, such as calling activists “locusts” makes it personal, which looks bitter and adds nothing. This is one of the main reasons that the Deutsche Börse CEO Werner Seifert was successfully removed by TCI in 2005 – he even wrote a book called ‘Invasion of the Locusts.’ I remember it well, DB was one of my clients.
Ultimately a company has a duty to respond. You must be seen to be actively engaging with an investor, rather than shying away. This is the right course of action. The target company will naturally not agree with what it is laid out, or at least most of what is set out, but that is understandable.
Ultimately a company has a duty to respond. You must be seen to be actively engaging with an investor…
Shell’s immediate response to Third Point was sensible to say that they welcome ‘open dialogue’ with investors and there have already been discussions.
Further down the line, there does need to be a more measured and substantive response, relating to the firm’s strategy. This should set out why the proposal doesn’t work and where potentially there is agreement. It is about getting in front of the activist’s strategy and to be simple to understand and robust enough to stand up to scrutiny, as well as make sense of the existing strategy and position of the company.
However, to offer a line-by-line rebuttal is a route to self destruction, for it just adds paragraphs, not always complimentary, to the press coverage.
A public company has a responsibility to be prepared for such a campaign. The IR team should, as a matter of course, be closely monitoring the shareholder register - Third Point’s Shell holding is, according to reports, $750 million, so you would certainly hope there was no surprise. Public campaigns also rarely come completely out of left field, with most activists seeking some level of backdoor engagement beforehand.
For a company to sit back and offer nothing is raising the white flag in the eyes of the investor. The CEO’s heart may sink when they receive the letter, but they must acknowledge the approach, respond and build the rebuttal.