Sudden pivots in strategy brought on by economic uncertainty have made U.S.-listed companies more vulnerable to public dissent from investors who do not see themselves as traditional activists.
According to Insightia’s Activism module, there was a 26% rise in the number of U.S. campaigns with occasional activist involvement last year with 303 recorded, a level not experienced since a peak in 2019.
Data also show that just over 31.5% of investors subjecting U.S.-based companies to demands last year were considered occasional, with partial focus activists and primary focus activists representing 13.2% and 9.6% of demands, respectively.
As occasional, rather than proactively targeting underperforming companies with the goal of improving shareholder value, this otherwise typically passive investor group often reacts instead with demands for change to the underperformance of portfolio companies, in a bid to protect its existing investments.
Why the change of heart?
Lauren Gojkovich, founder of LDG Advisory, which has seen many in-bounds from occasional activist investors over the past six months, told Insightia that “occasional activist” is often seen as the shorthand used to describe long-term investors who have reached an impasse with a company. “Where differences of opinion on strategy and performance have become so challenged that the investor makes the hard decision to protect their investment by going public with their concerns.”
Gojkovich explained that this investor group often diverts from its normal course due to some specific, event-driven trigger. “Such events often arise around disagreements over capital allocation decision-making – including when the heretofore long-term investor views an acquisition bid from private equity or a strategic acquiror to be ‘opportunistically timed’ or if the company is moving forward with an M&A strategy that the investor views as a high-risk to their initial investment thesis.”
In December, Hoak & Co. urged Natural Gas Services Group (NGS) to weigh its options, including a sale, and add new directors with financial exposure to the stock. It also worked to campaign against U.S. pulp and paper manufacturer Verso’s sale to Swedish peer BillerudKorsnäs with concerns over the timing of the transaction, arguing the business would generate “significant” cash flow in subsequent years.
In February, fellow occasional activist Indaba Capital Management made its concerns public after it urged ON24’s board to return at least $150 million to shareholders, arguing the company did not have a “clear and credible” investment plan to create value and distributing the cash to shareholders was the right step to address its sluggish share price. The tech company later responded with a $100-million capital return program.
Last September, Indaba also claimed victory at Tabula Rasa HealthCare after the company parted ways with its top two executives and named two new board members, including Indaba Capital Management founder Derek Schrier, following a settlement deal.
Many previously silent investors now see activism as a new platform on which to generate opportunities for value creation and opt to adopt this new approach, as Ken Mantel, partner at Olshan Frome Wolosky, told Insightia. “Activism is a toolset, something becoming more widely understood as a legitimate and really helpful way for shareholders to make sure that the board and management understand and take their concerns into account.”
The universal proxy card, with its lower thresholds for nominating directors, has also drummed up interest in potential campaigns. “Although it’s certainly not a magic bullet, and we haven’t even started to see the true impact of this technology on the activism playbook, the universal proxy card does seem to provide all investors a more even playing field for supporting who they believe should represent owners in the boardroom,” said Gojkovich.
The new rules have also created a certain “curiosity” about activism, Mantel explains. “Adoption of universal proxy will make some campaigns, especially minority board campaigns, something that investors may feel would be more successful. Universal proxy will help activists who are pursuing the addition of one or two directors to the board.”
A change in tack
Industry experts expect continued strength in activism overall in 2023 as market sentiment begins to improve. An upward trend is already evident with occasional activists involved in 16 campaigns at U.S.-based companies in the first seven weeks of 2023, a 77% increase on the same short period in 2022.
One of the most recent of such demands came from Connecticut-based Discerene, which owns 3.6% of IAA and chose to go public on its opposition to its proposed sale to Ritchie Bros. Auctioneers. “In our nearly 13 years of existence, we have yet to write a public letter like this one, but we feel compelled to do so here to protect the interests of IAA shareholders,” wrote the activist, in a solid example of why the investor community is likely to continue to see stockholders change tack and act.