Fight or Compromise: Activism Unfiltered
By Michael R. Levin, Contributing Author / May 5, 2024
We recently corresponded for the first time in many months with an investor we know, and the conversation went like this:
Are you working on any activist things lately?
I am not doing hostile deals anymore, only friendly ones, I learned the hard way that companies have too much of a home court advantage in Delaware.
So, no more activist investing?
I still do activist investing, just on a friendly basis. Will only invest in boards that are willing to work with me.
Then it’s just really “investing", right? Pretty much the same as a Private Equity fund that conditions an investment on Board of Director seats and business changes?
I think it’s still a form of active investing, just on friendly terms.
A few thoughts occurred to us as we considered this.
"Friendly" Activism
Our correspondent defines it as investing solely in companies with a board that will "work with" them. "Work with" connotes to us conveying to the board of directors a plan for the company, and then the board understanding, agreeing with, and adopting all or most of that plan.
Many activists pride themselves on their friendly, cooperative spirit. When it sought board seats at Disney in 2023 and 2024, Trian Partners promoted CEO Nelson Peltz’s ability to work with other board members at numerous portfolio companies, contrary to the perception that he and his investment company would disrupt more than they would build. Many other activists similarly emphasize their desire and ability to work constructively with boards.
Yet, these investors seem "active" in the sense that they actively design a plan for a company and then require the board to adopt all or most of it. They study the company and its industry, create a thesis and preferred path forward for the company, and identify gaps between what the company says it does and what investors want it to do. They might look for the company to return cash when the board wants to keep it, invest in a deal that will likely cost more than it should, or resist cutting costs that investors agree are unnecessary.
Here, “active” contrasts active with passive. The latter requires merely picking stocks and allocating capital, without regard to what changes in the company that investor would like to see. Most portfolio managers remain passive, content to analyze financial statements and competitors and then buy shares.
Sure, a passive investor could merely think about and hope for changes in company strategy and operations. It might go as far as writing up its thesis and plan for the company in a slick, detailed presentation document or an angry letter to the board. It could even share that thesis and plan with the company. For our purposes, active investing ends there, since the investor won't seek to compel the company to adopt the plan. That's where activist investing begins.
Let’s suppose after it sees the presentation or the letter, the board does not agree to adopt that plan, or enough of it. The investor will then ... what, not invest in the company? Or suppose the board agrees with the thesis and begins to adopt the investor’s plan, but stops short of adopting all of it, or doesn't adopt it fast enough for the investor’s needs or desires. Does the investor sell their position? Or at least maintain it, now in a company that refuses to adopt the plan on which the investment thesis depends?
Constructivist Investing
Our exchange with our friend reminds us of the idea from a few years ago of some activists calling themselves "constructivist". Years ago, a number of activist investors claimed that title, looking to “maintain an active and constructive dialogue” with the board.
It's not that, either. As we observed then, "...all activist investing is by definition constructive." Friendly activism can be constructive, in the sense that it seeks to build rather than destroy value. This distinguishes activists from so-callled activist short sellers. These investors seek to profit from declining share price, which they then encourage through their public pronouncements. Still, it's not activism.
What Friendly Looks Like
Activism can be friendly, civil, and cordial. We need not yell or swear at each other, although that happens. Activists can even become friends with company leadership, as Nelson Peltz has learned to his immense benefit. Yet, becoming friends would likely occur only after an activist situation works out.
We activists can begin with a friendly, understanding attitude toward leadership. We can disagree without being disagreeable. When that disagreement, though, delays urgently needed changes to the business, we escalate.
True activists have the willingness and resolve to confront a portfolio company. We can start quietly, encouraging company leadership to adopt a new course. We read frequently about activists such as Starboard Value or Third Point that settle with a company without any initial public dispute or disagreement. Yet too often that leadership resists us, so we next try to compel leadership to that course, one that it would not want to and will not do on their own.
Activists have only a few ways to escalate, too. We can threaten directors with losing their board position, and litigate if we have the time, money, energy, and a case. We can try public shame. This leads to the common perception that activists prefer to fight rather than to compromise. Unfortunately for too many companies, a board that will protect a failing executive team probably doesn't care too much about what shareholders think, though.
Friendly Can Work
A friendly approach has its benefits. It costs less than activism and causes less stress. It likely returns less than activism. Most of all, it's not activism. Thinking about it this way reminds us of what activism requires.
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Also, Delaware? Companies have an advantage there? While we tend to think they do, lately Elon Musk, Mark Zuckerberg, and a few others disagree.