Description
We’ve seen a significant increase in shareholder activism in recent years, particularly from large institutional shareholders. One of these areas is that shareholders may now voice opinions on senior management compensation (though not a binding voice). However such activism extends much further to include proposed mergers, acquisitions or spinoffs. Provide some recent examples where shareholder activism has affected a companys performance or actions, and discuss the consequences of this.
student post 1:
This topic hits home for me on various levels. In the beginning I thought that shareholder activism made a lot of sense. In theory it does, but in practice it really hasnt lived up to my initial thoughts and beliefs around the practice. Dont get me wrong, Ive seen this practice done well but the overwhelming examples that Ive seen (either personally or in the news) coupled with other colleagues opinions in the industry on this type of practice has been for the most part negative (I completely understand that this may just be my own experience).
Probably the more commonly known shareholder activism comes from Private Equity. When talking to business appraisers, business intermediaries, and even business owners/employees in the space, the majority of the conversations revolve around pressure to perform. These transactions are most of the time purely financial. I think its very important to distinguish between financial and strategic transactions. When looking at a company as a purely financial acquisition, then it really is no different than buying a bond. You have expectations and they need to be met (whether management likes it or not). Especially when these transactions are highly leveraged, there is typically a pre-made laid out model specifying when the debt will be paid off and at the end (when financing is paid off and performance is met) the Private Equity group would sell the company off to obtain their built in returns. The LBO model is a common model used by Private Equity, but if they dont use that model specifically then they would have some kind of version of it.
Regarding my personal experience with Private Equity, I only speak to the individuals during annual conferences and Ive never had to deal with them directly. That being said, I have colleagues in the industry where the company they work in was taken from public to private by Private Equity. Also I have friends where their private company was taken over by Private Equity. The common themes that followed the acquisition in both cases were:
1. Strong budget cuts
2. Management clash with PE
3. PE implanting one of their team to assist management (none of them had any industry experience)
4. Deviation from core company competency in order to find new revenue streams
5. Unnecessary debt borrowing
A more public example that demonstrates some of the themes mentioned is Toys R Us and its experience with KKR, Bain Capital, and Vornado. In this public example the PE groups did little to no innovation when it came to the management of the companys operations while also extremely constricting it via the 5 billion dollar debt which was put on the companys balance sheet via the acquisition. Not only was there lack of innovation and financing constriction by outside debt, but also the PE firms racked up approximately 200 million in Advisory fees regardless of whether or not they even provided any advisory services. As stated in their agreement: no minimum number of hours is required to be devoted by any or all of the Advisors on a weekly, monthly, annual, or other basis. The fees and other compensation specified in this Agreement will be payable by the Company regardless of the extent of services requested by the Company pursuant to this Agreement, and regardless of whether or not the Company requests an Advisor to provide any such services (KKR, Bain Capital, Vornado Repeatedly Rewarded Themselves for Adding Debt to Toys R Us.).
This overpayment towards debt and Advisory services coupled with mismanagement in a quickly changing retail market has lead the company to filing bankruptcy, where it has shut down 180 stores and laid off 30,000 employees (liquidating all US stores in the process). The company now has 3 billion dollars of debt for refinancing purposes under the chapter 11 bankruptcy filing (Unglesbee, Ben). Currently, executives linked to the PE firms are being sued for breaches of fiduciary duty, fraudulent concealment and misrepresentation (Toys R Us Creditors Sue Former Bain Capital, KKR Execs.).
Some will put more weight towards industry changes when it comes to Toys R Uss failure, while others would put more weight towards the gross PE mismanagement that cared more about steady cash flows rather than a strategic approach. I think it has to do with the management, because similar companies in similar spaces have faced the same challenges but came on top (one great example is Dicks Sporting Goods). Again, most of the examples that i have seen and experianced during my time in the industry have been financial acquistions rather than strategic. I personnaly belive that sharholder activism should be approuched using a stretigic lense.
student post 2:
Shareholders’ activism is a major pervasive issue in the recent corporate landscape because many companies have continued to face new and sophisticated activism situations. According to Lazard Shareholder Advisory Group, about 46% of shareholders activist campaigns in 2019 were related to management issues because activist shareholders felt that senior management was mismanaging their affairs (Grossman & Alexander, 2019). Some of the recent examples of shareholder activism trends have been seen in Odey Asset Management and the Pretoria Portland Cement. In The activism, shareholders in the Odey Asset Management demanded the removal of the CEO and the Tungsten chairman (Swain, 2020). This led to the resignation of the company’s CEO. In the Pretoria Portland Cement, activist shareholders gave pressure to resign the company’s chairman to the board of directors due to increased differences with the company managers.
Shareholders’ activism in Pretoria Portland Cement and Odey Asset Management gave more say to the companies’ shareholders regarding management operations. The activism led to a change in management, which reduced company resources’ mismanagement and led to the improvement of shareholders’ returns (Swain, 2020). Besides, activism results in the improvement of employees’ relationships with the management. For instance, in Pretoria Portland Cement, shareholders activism led to the improvement of working relationships between level managers and the newly appointed chairman of the board of directors (Anthony Ball) (Mahlaka, 2018). The shareholders’ activism in the companies made the management more responsible. For instance, in Odey Asset Management, the new management focused on profitability and shareholders values rather than untimely acquisitions.