How to: Be Your Own Activist
Did you ever watch a football team go into defensive mode when ahead late in the game? Inevitably, by not trying to score, they end up getting scored upon and losing the game. As in sports, when dealing with activists, the best defense is a good offense.
Consider this activist checklist:
- What are investor expectations for growth and return, and how does this compare to internal plans? Are there gaps, indicating potential up-side you are not pursuing?
- Is a business unit performing poorly, consuming resources and distracting management? Can it improve? Is it core? Should it be sold?
- Is cost excessive or is too much capital invested in low-return, undifferentiated businesses?
- How does growth compare to peers? Is growth investment adequate including capital, marketing, advertising and research and development?
- Are resources allocated based on economic merits or internal politics? Are investors concerned about reinvestment risk?
- Is performance sustainable or are there patents and brands that are losing value? Are they worth investing in or should the cash flows be harvested?
- Are there corporate governance concerns?
- Is the behavior motivated by compensation well aligned with owners to “incentivize” a balance of long and short term, and risk and reward?
Consider each potential issue that could attract an activist and categorize each as:
A) No problem
B) A problem, but the solution would be worse
C) A problem, and we should act now
Long before an activist arrives, know the A and B items and prepare responses in advance. For example, suppose an activist demands the sale of a business unit but the tax consequences would transfer the value creation to the government. A quick comprehensive public explanation of the flaw in the suggestions will encourage the activist to move on. The response must be quick, accurate and head on, not a deflection.
For C items, carefully and thoughtfully develop and execute a strategy that creates value. That is, Be Your Own Activist. These actions can at times be unpleasant, which is often why they have not been done already, but it will be decidedly more unpleasant if an activist forces these actions upon you.
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