Marc Cooper and Jeff Jacobs Outline How Boards Can Enhance Long-Term Shareholder Value
Navigating Activists And Hostile Takeovers: When To Engage, When To Defend
by CEO Marc Cooper & Head of M&A Jeff Jacobs
When sprawling conglomerates dominated the economic landscape in the 1980s and early 1990s, corporate raiders such as Carl Icahn and T. Boone Pickens launched debt-fueled, hostile takeovers in search of greater efficiency and unrealized value.
While those swashbuckling days are largely over, boards of directors and CEOs still need to be prepared for activist proposals and unsolicited takeover bids. Shareholder activists have evolved over the years, from a niche group of daring individuals to a sophisticated and well-funded class of investors that boards must take seriously.
And while the Covid-19 pandemic pushed the number of new activist campaigns to a five-year low, activism has since returned, with more than 350 campaigns launched since the start of 2023.
With any unexpected approach, corporate boards must navigate a delicate balancing act—advocating for the best interests of their shareholders, while also fending off unwanted advances. Advising a company in these situations is a complex exercise that involves tactical strategy, proactive communication and defensive measures. And the activist playbook is ever-evolving.
Once content to simply push for increased capital returns through dividends or buybacks, activists now increasingly demand detailed strategic reviews and governance changes. In 2023, activist demands for strategic alternatives (e.g., selling a non-core or underperforming division) were sought out nearly four times as often as buybacks or increased dividend demands.
While the types of unsolicited threats have evolved, the north star for boards remains the same. First and foremost is a fiduciary duty to shareholders. Any credible overture must be taken seriously, whether from an activist investor seeking changes in strategy or from a potential acquirer seeking full control.
A company’s primary obligation is to maximize value for its shareholders. Companies cannot afford to adopt a protectionist mindset when faced with a credible proposal. Instead, they must objectively assess the situation and determine whether it is in the best interests of their investors and aligns with the company’s long-term strategic goals.
Good corporate governance means that boards and management teams should not wait for unsolicited interest to prompt tactical moves. Activists typically only show up at your door when some aspect of a business has underperformed. Corporate leaders and their boards should conduct regular operational and strategic reviews, often with the support and guidance of financial advisors, to assess whether they are operating efficiently and maximizing shareholder value.
Boards should challenge themselves with the tough questions about their business: Are they focused on the right markets? Would the business be better positioned by divesting certain assets or acquiring new ones? Is the business maintaining an optimal capital structure?
Working in partnership with an investment bank can provide an unbiased perspective about whether the company is operating efficiently and capitalizing on market opportunities. Most importantly, by proactively conducting annual reviews in this manner, boards can help ensure they are not caught off guard by an activist or unsolicited bidder.
Some decisions are easy for a board to defend. If a board sees promise in a new investment that will ultimately increase shareholder value, then it may be worth forgoing distributions today for higher expected future equity value. But other initiatives may be more nuanced.
For example, activist Bluebell has accused BP, the oil and gas giant, of wasting capital and hurting shareholders with its commitment to clean energy. Bluebell is pushing BP to abandon its energy transition strategy and refocus on its legacy oil and gas business. When activists challenge complex strategic decisions like these, a company’s defense may be more difficult to articulate, especially when the company’s performance lags its peers.
That said, activists are not necessarily industry experts. They may not fully understand or appreciate the industry dynamics or competitive challenges. In these situations, the company’s board will often push back and take defensive measures to protect against a path they believe is not in their shareholders’ best interest.
Historically, boards relied on structural defenses, such as a “poison pill,” which dilutes the value of shares for a hostile bidder. However, these structural defenses are on the decline. Fewer than 2% of companies in the S&P 500 have a poison pill in place today.
Today, boards often make their case directly to shareholders. A robust investor relations strategy is critical to help companies make a persuasive, fact-based case for why an unsolicited proposal should be rejected.
Proxy fights can be brutal, but these days, they are the exception rather than the rule. To date in 2024, less than 20% of activist campaigns went to a proxy fight. More often, boards and activists find middle ground to reach a settlement.
Often, the most difficult position a board may encounter is when faced with an unsolicited offer to buy the business. Boards have a responsibility to engage with bidders where offers are credible, and shareholders would realize higher value than could otherwise be achieved through the company’s current plan. To be clear, engagement does not mean a board should necessarily accept an offer. But they should give these proposals appropriate consideration. The answer may ultimately be to stay the course.
However, it is also within a board’s purview to evaluate the situation and perhaps choose to negotiate a higher value, better terms or even consider testing the market to see if other offers emerge. Creating competitive tension in this way can lead to improved outcomes for shareholders.
The bottom line is that a successful defense requires a delicate balance of patience and strategy. Corporate leaders are human, with egos, emotions and legacies on the line. Effective advisors help counsel CEOs and board members to navigate the emotional challenges of an unsolicited bid, while staying focused on the end goal: What is best for shareholders.
In some cases, the decision to accept or reject a bid is clear-cut. In other instances, it’s a close call indeed, where experience, industry expertise and business judgment make all the difference. When the outcome is uncertain, the board and its financial advisors need to leave no stone unturned as they decide what is best for shareholders.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. This article originally appeared on Forbes.com.
