Activist Investors Shaping M&A Deals

M&A Deals and Activism

M&A deals are increasingly being shaped by activist investors. From influencing the structure of a deal to sweetening it, activists are using new and inventive tactics.

Despite economic worries and lower deal volumes, activism is still on the rise. This quarter saw 133 new campaigns globally, well above the four-year average.

Deal activism

Activists often target companies they believe are undervalued and pressure them to raise their share prices through governance tactics like demanding board seats, replacing CEOs, and advocating specific business strategies. They use a variety of tools including public letters, 13D filings, and proxy contests to communicate their positions, but most campaigns have one major goal: to get management to make a change.

Investors can also engage in deal activism, which is targeted at a company that is in the process of being acquired. This type of activism can have significant impact, and the resulting deal may result in a higher share price or increased consideration for shareholders.

Despite the recent slowdown in M&A, activists should be aware that they can still influence deals. M&A participants should prepare for activism by putting in place a strategy to anticipate and manage activist attacks. This includes developing a communication plan to keep stakeholders informed and identifying the tools and accumulation strategies that activists might use.

Competitor activism

The emergence of activist funds has given rise to competition between activists. This can lead to conflicts of interest and a lack of transparency, which can undermine the effectiveness of the movement. Moreover, the current slowdown in M&A activity and tight lending markets may discourage investors from funding activism.

The concept of activism has evolved from its original left-right political classification to a more global one. Activism encompasses a broad range of social movements and can be found in countries that do not traditionally consider themselves activists. For example, in a country with free speech, an e-mail complaining about the government is an act of activism.

To prepare for activist campaigns, companies should evaluate their strategic position and anticipate potential arguments for spinoffs, share buybacks, increased leverage or dividend increases. They should also prepare for a possible attack on their capital allocation, portfolio of businesses, margins and corporate sustainability and DEI strategies. Directors should also be prepared to receive requests for discussions with third parties and should refer any activist approach to the CEO.

Hostile takeovers

Hostile takeovers can be a lucrative business for activist investors, but they can also have negative implications for the corporate community. They can result in a host of ethical issues, and can even lead to the breakup of the company or its acquisition by a larger player. Moreover, the tactics used by HTs are often similar to those of corporate warfare, with shareholders and management having little control over the outcome.

The most common strategy employed by activists is attempting to force companies to sell themselves. This allows them to earn a quick buck but denies long-term shareholders the benefits of a standalone strategy. Nevertheless, this strategy has proven to be a powerful tool for gaining political power in the boardroom.

However, market conditions have dampened the activists’ appetite for M&A-related campaigns in recent times. Tight credit markets and inflation fears have made it difficult for them to pursue deals. Nevertheless, many of them have shifted their focus overseas.

Strategic alliances

Strategic alliances allow companies to pool their resources and work toward a mutually beneficial goal while retaining their independence. For example, a company that produces solar panels can partner with another company to increase its market share in a particular region. Similarly, a company that sells software can team up with another to provide additional services. Strategic partnerships can also help a company avoid import barriers and tariffs.

While ESG activists have not yet gained a large foothold in the M&A space, it is likely that they will continue to exert pressure on companies with depressed stock prices and those that have been “de-SPACed.” This strategy could become even more prevalent due to changes in voting rules and policies at institutional investors. In addition, more activists may adopt private equity-style strategies by offering to buy their targets. This could include a spinoff or divestiture of a division. The success of these alliances depends on open communication and shared commitment to goals.

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