Operational changes and divestments were two areas of focus for activist investors in the third quarter of 2022 and these themes are likely continue in 2023, according to new research.
FTI Consulting’s Quarterly Activism Vulnerability report, based on its 2022 third quarter Activist Vulnerability Screen, found there were substantially more activist campaigns during the period compared to the previous year. Its data shows there were 119 campaigns in the third quarter against US and Canadian companies, versus 87 activist campaigns in the third quarter of 2021.
The report finds that the number of activist campaigns that pressured companies to make operational changes was markedly up year-on-year. There were 13 campaigns on this issue in the third quarter of 2022 versus just four in the third quarter of 2021. Divestitures were also in activist investors’ sights, with seven campaigns in the period versus five in 2021.
Investors are using market volatility as a leverage point to drive shareholder value, with divestments at the center of their campaigns. The report cites the tête-à-tête between Third Point and The Walt Disney Company that saw Disney appoint former Meta executive Carolyn Everson to its board of directors as an example.
Reports indicate Third Point demanded the diversified media company spin off sports cable company ESPN and acquire the remaining shares in streaming service Hulu it did not already own, as well as conduct a share buyback. A reported settlement resulted in Everson’s appointment.
Commenting on the likelihood of operational changes and divestments remaining a theme for activists in 2023, FTI Consulting’s activism and M&A solutions managing director Kurt Moeller said he expected activists to pull multiple levers to create value in 2023: ‘Improving operations and changing the mix of businesses that a company owns are two ways that can be done.’
COMPANIES IN FOCUS
The research shows a propensity for activist investors to target large-cap companies during the third quarter, a trend that is expected to persist in 2023.
‘Activists go where they see the best opportunities. Historically, rising [interest] rate environments such as the current one increase companies’ capital costs, with smaller companies being hurt worse,’ Moeller says.
‘Consistent with that, since 2022 began, the Russell 2000 has had a worse return than the S&P 500. Additionally, many smaller funds are increasing their activist profile, and smaller funds tend to target smaller-cap companies.’
Moeller says these factors suggest that, although activists will continue to target large-cap companies, in 2023 they will target proportionally more small-cap companies than in recent years.
On a sectoral perspective, the poor performance of the biotech sector across the period contributed to the doubling in the number of campaigns against healthcare and life sciences companies from 13 to 26 in the third quarters of 2022 versus 2021.
Tech stocks’ performance on bourses also prompted shareholders to rattle their doors in the third quarter of 2022. According to FTI Consulting’s research, there were 17 campaigns from activists against companies in this and the media and telcom sectors in the third quarter of 2022.
Moeller says technology should be a fertile ground for activists in the coming year, with the Nasdaq index having dramatically underperformed the S&P 500 over 2022.
‘Many technology companies have focused on revenue growth and paid less attention to profitability, in part due to plentiful financing for future growth. In an environment where capital costs for everyone are higher, there is likely to be more emphasis on profitability and free cashflow generation, meaning such a shift could be challenging for some managements,’ he says.
In terms of how companies can prepare for 2023, Moeller says the use of universal proxy cards, which began on September 1 in the US, makes it easier for shareholders to directly compare a company’s director nominees to those offered by an investor, such as an activist.
‘Directors with excessively long tenures, or whose skills and experience seem only minimally related to the company and its current situation, are now more vulnerable to challenges,’ he says. ‘Therefore, boards should proactively refresh themselves to decrease the number of vulnerable directors. Several clearly vulnerable directors could inspire an activist to launch a campaign.’
