The potential for companies to be targeted by activist investors is real and growing. But are CFOs particularly prepared from a risk management standpoint? Perhaps not, judging from the results of a recent study by Bain.
According to the survey of 146 CFOs at companies with more than $1 billion in revenue, 23% of them have already been the target of activist campaigns. And more than a quarter (27%) expect activists to target their company in the next two years.
As Bain noted in its report, size is no protection against being targeted. Among the surveyed companies that were targeted last year, half had a market cap greater than $10 billion. Bain also noted there are now 70 times more activist campaigns compared with 20 years ago.
Still, fewer than half of the surveyed finance chiefs reported having various defensive tactics in place. Only half said they even have an action plan. That is likely to be a costly mistake.
“Most CFOs who already have experienced activist campaigns say they wish in retrospect that they had prepared more, and 89% of targeted companies strengthened their defense strategies after the campaign ended,” Bain wrote. “Among the handful of CFOs who say they were prepared when activists came knocking, all said that preparation had proved to be a good investment of time and resources.”
There is a “flip side” to the discussion, however. Bain stressed that more than half (57%) of the surveyed CFOs conceded that activists play a valuable role in the market and ultimately improve shareholder value.
The best way to defend against an activist, according to Bain, is to think like an investor. The key point: roughly a third of the activist demands CFOs reported focused on strategic reform and revised portfolio strategy.
“CFOs who proactively adopt the perspective of an active or long-term investor are less likely to attract unwanted attention and more likely to be ready to respond if activists come knocking,” Bain wrote.
Other items in activists’ sights include improved operational execution, changes in governance, ESG concerns, increased dividends, increased share buybacks and changes in capital structure.
Bain advised that to think like a long-term investor, CFOs should understand whether their investors are growth, value or income investors. Also, “are they drawn to your market positioning or leadership in your industries, confident you can outperform competitors, or making a macro bet on your end market?”
