As I wrote last week, the highlight of the NIRI Southwest Regional Conference this year was a case study on how activist investors swoop in on a company that is experiencing operational and governance problems. That is not to say that the case study was the only thing we learned from. Damien Park, who runs a firm devoted to helping companies who find themselves in these types of situations called Hedge Fund Solutions, opened the conference with some interesting facts about activist investors. Here are some of his observations, mingled with my views on the situation.
Activist investors will have studied your company for an extended period of time – often a year or longer. This means that they are not acting on impulse but rather have thought through exactly what they want to do. The company, in the meantime, is often caught unawares, much like a deer in the headlights of an onrushing truck.
To this I would add that companies compound the time crunch by the committee structure to how they react in these situations. The CEO, COO and CFO get together and discuss the problem. Then they bring in their advisors – the general counsel, the investor relations officer, the corporate communications people and others and have another meeting. Then the Board of Directors schedules a meeting. All of this takes up that precious commodity, time.
As Damien pointed out, while the company is doing this, the activist has issued a press release and probably started giving interviews to the press. He probably is also saying that the company has not responded to his overtures. He may have already started to talk with other investors about how he thinks things can be improved at the target company. “Me too” hedge funds have started to buy up the company’s stock in anticipation of making a quick buck. Everything is designed to ratchet up the pressure on the company and the Board of Directors to force them to accede to the activist’s demands quickly.
The company, after an internal meeting or two (or three, or four) will come to the realization that they do not have the expertise in-house to deal on even terms with the activist and will start casting around for experts they can hire. This is one of the critical junctures of the process. Choose wisely and you may emerge unscathed; choose poorly and you may have a couple of directors on your board from the activist firm. Companies, especially the smaller capitalization companies that tend to be the focus of many of these types of attacks, generally don’t know the right people to call.
From what I can see, there are a limited number of firms that specialize in these types of situations and if you are a company under the gun, you want one of them. You don’t want your local outside counsel. You don’t want your normal public relations firm. This is like brain surgery – you want firms that have done this many times before and know exactly what the options are and are capable of acting quickly. Yes, they will probably be from New York and cost a lot of money, but now is not the time to be cheap.
One way to help prepare your company is to start to get to know the right firms before things go downhill. At a minimum you should have in your rolodex/contact list the following types of firms that work on activist shareholder defense situations: a law firm that specializes in this area, a proxy solicitation firm, a firm that is expert in the defense against activist investors, a public relations firm that has experience in proxy contests and shareholder activism and investment bankers that have M & A experience. There are a limited number of firms that have extensive experience in this area, so talking to all of them, selecting the ones that fit your company and you are comfortable with and maintaining a dialog is not that time intensive. And more crucially, when the time come that you need this type of advice, you will know the right people to call and save precious time.
Think of it as the Boy Scout defense: “Be prepared”.