What makes a good target for activism? Which activist strategies tend to result in increased value for shareholders? What are typical management responses to campaigns, and how do investors fare in the dynamic between activists and management?
The fundamental weakness that make a company susceptible to activism is underperformance of its stock relative to a basket of comparable peers. Although such raw numeric assessments doesn’t tell the whole story, it’s a performance benchmark that’s easy to communicate to other shareholders and is often central to campaigns. The bottom line for shareholders, after all, is the share price.
Beyond the low price, however, correctly identifying the reason for poor performance is crucial to formulating a compelling story and getting management and other shareholders on board. Not all causes of an undervalued stock translate equally well into potential activism; some proposals tend to be received better by management and the market, and therefore lead to smoother campaigns and better outcomes.
According to the J.P. Morgan note, the two by far most commonly successful core demands made over the last five years were (1) to seek a sale, merger, or liquidation, and (2) to review strategic alternatives.