Listen: IR in Focus | Season 2 Ep. 3 – The Impact of Investor Activism

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Carmen Lilly

Hi, everyone, and welcome to our podcast IR in Focus. I am your host, Carmen Lilly. And on deck today, we'll take a deeper dive into investor activism trends and themes with insights from John Karageorge, Executive Director here at S&P Global; and Craig Wadler, Managing Director at Moelis & Company. Welcome to the podcast, guys.

Craig Wadler

Thanks for having me, Carmen.

John Karageorge

Thanks for having me as well, Carmen.

Carmen Lilly

No problem. Thanks for being here. Now before we begin, I'd like to introduce you guys to our audience. And starting with John, so John Karageorge heads the activist defense surveillance practice here at S&P Global. With over 30 years of experience, John has in-depth knowledge of DTC custodial relationships and activist trading patterns and enables him to accurately monitor shareholder trading activity and to identify potential activist accumulations prior to any disclosures in the market.

Also with me today is Craig Wadler. Craig Wadler is Managing Director at Moelis & Company, where he specializes in shareholder advisory and activist defense. Craig has more than 26 years of investment-making experience, providing strategic advice to corporations faced with activist investors and other contested shareholder-related matters. Prior to joining Moelis & Company, he was a Managing Director at Credit Suisse and a founding member of the Hedge Fund Advisory business. Previously, Craig worked at UBS Investment Bank, where he founded the Hedge Fund coverage business.

All right. So let's get to it. I'm excited to have both of you on to share your insights, but I wanted to start with the lay of the land and just put some groundwork out there in terms of what we're seeing in the market in terms of numbers and activity.

So looking back at 2023, there were 929 campaigns launched against U.S. companies, which was up about 12% as compared to 2022. Now the top 3 most impacted sectors were financials, health care and consumer discretionary. And year-to-date, we're looking at 277 campaigns launched thus far against U.S. companies. And the top 3 sectors right now that we're looking at our financials, health care and industrials.

So I just wanted to start with thinking about your experiences in the past year and what you observed in 2023. And I just would like both of you just kind of opine on how you felt 2023 went.

Craig Wadler

Well, John, I'll start and then you jump in. So 2023 was a very interesting year in the world of activism. I think people thought heading into the beginning of 2023 with the advent of the universal proxy card that the activity levels were going to be significantly higher than 2022. And while the -- Carmen, the numbers you stated showed some growth over 2022, I think the year was actually probably not as busy as most thought it would have been. And I would put that into, from a reasoning standpoint, really an economic environment that was pretty unsure.

You had rising interest rates such that M&A from a product and a successful outcome for an activist was not as available to them. And as a result, until the economy started to stabilize and buyers, financial sponsors and corporate buyers thought there was some stability in the economy and interest rates, the activity level was -- frankly, was not as busy as most thought.

And having said that, there certainly were campaigns. There was quite a bit of activism going on. As we head into 2024 -- I know you want to start in '23, but in 2024, it's feeling like there's going to be a significant amount of activism as those factors I said have seemed to stabilize, meaning the economy seems to feel better. Interest rates are at a place now where it's not going up, it's going down, and the M&A activity level has increased.

John Karageorge

Yes. I would agree with Craig on that, for sure. I think when you were going over the numbers, and financial sector specifically, when we're talking about 2023 and 2024, thus far, obviously, it's a little bit skewed with SABA is doing with some of the closed-end funds out there. So that potentially is obviously skewing some of the numbers slightly.

As far as some of the trends, it was kind of really interesting taking a look back at 2023 and how that compared to 2022. And so one of the couple of interesting stats that I saw out there that was curious was CEO departures was up 74% from 2022. So that was pretty glaring to see that so many CEOs felt that much pressure and had to step aside as CEO.

The other interesting stat that I saw out there is the public unsolicited offers increased also 46%, where you had companies out there making unsolicited offers to acquire other companies. So that was kind of interesting. Even though it was kind of a down-market, at least in the first half when we're looking at kind of where interest rates were in M&A activity, it was interesting to see that there were so many unsolicited offers happening in 2023 given that.

And the other interesting stat that I looked at for 2023 was the average days for campaigns since they launched to settle decreased by 53% in 2023, down to 42 days. So that was pretty interesting that companies were, and activists for that matter, were quick to settle or were more quickly to settle than they had in the past. So those are my kind of 3 big takeaways from 2023, and we're seeing that trend continue into 2024.

Carmen Lilly

Right. That is an interesting stat. So what you're saying is that perhaps that the campaigns themselves were just a pressure mechanism. So they were -- like you said, you had CEOs stepping aside as well as it was just folks or corporations were just quicker to settle those campaigns, right?

John Karageorge

Yes. Absolutely. I think activists have gotten better at nominating Board representation. So companies kind of felt that pressure to quickly settle or want to settle and not get drawn out in a proxy fight, especially given kind of the changes that we saw in 2023 with the universal proxy card.

Carmen Lilly

Right, right.

Craig Wadler

Yes. And John, I think that's the -- probably the leading factor causing potentially negotiations to happen more efficiently is that, as you mentioned, the activists seem to be able to get at least one high-qualified candidate on their slate. And two, if faced with the universal proxy card and that candidate being on the slate, there might be a more of an inclination to avoid the fight and settle if need be.

John Karageorge

Absolutely.

Carmen Lilly

Thank you for your insights on that. And then also continuing thinking about 2023, Craig, can you share any notable examples of activist campaigns that you were involved in or had witnessed? And what were the lessons learned there?

Craig Wadler

Yes. I'm going to keep the names confidential, but I'll share one recent engagement we had towards the end of 2023 that if I peel the onion back, I think what made it most interesting was the company's foresight into that they might be vulnerable.

And so their desire to really engage with us as advisers, and not just financial but legal and others as well, to understand their vulnerability, understand the plan or the preparedness process with which to be ready in case somebody shows up, and then lo and behold, they show up, and putting into action the plans that were put in place became an important element and factor as we think about how a company best faces off with an activist.

And so from our perspective, there was not a lot of surprise as to what we heard from the activist. And I think even if we take one step back from this campaign, I think, Carmen, as you went through my background, I've been around the activist space going back to 2005, so a long time at this point.

And I think the one thing that Boards and companies, and frankly the activists, have all gotten comfortable with is that this is an asset class that's not going away. So all the parties or the constituencies who are involved here understand how to operate in order to put themselves in a position for success.

And so if I go back to that example, the company had the foresight, put together a really, I think, a great team around them. And so when the activist showed up, it was really going through the process that had been laid out. There were not a lot of surprises. And then it just becomes an assessment of judgment as to whether or not a fight or a settlement or some other alternative is the best course of action.

And so the lessons learned from my perspective on something like that were -- and what we talk about here at Moelis is be in front of your clients when there's blue, sunny skies and there's nothing going on and there's not a reason in sight as to why an activist might show up. It's the best time to be talking to clients about activism. And I think most companies at this point have incorporated into their Board process as well as their sort of the cadence of activism at least a once-a-year discussion on the topic so that there are no surprises. They're updated.

And so the lesson learned there is, for us, be in front of our clients and talk about activism and vulnerability and preparedness and process and what's driving it. And I think the other lesson learned is, in some ways, the power of the universal proxy card and the real understanding of directors who could be targeted and the way with which they might be targeted and how do you best mitigate a protracted campaign, a personal campaign and one that might result in unintended consequences and disruption in an election versus if you can figure out how to effectively negotiate a resolution.

Carmen Lilly

Yes. Absolutely. I like your point on being proactive about it rather than reactive. And sitting in that reactive space, you don't want to be caught on your heels. You don't want to be caught off guard, and you definitely want to be prepared for those activist investors and having open conversations with them.

So for those companies, though, just thinking about it, okay, in the future, yes, we want to be prepared for activists. We want to more communication around this. But what would be your advice for companies who are currently facing activist pressure?

Craig Wadler

Well, my advice for companies that are engaged with an activist currently, is, first off, engage with the activist, right, as a company. Again, the world has changed over the last 20 years of activism here in the U.S. And so, in fact, 20 years ago, there wasn't necessarily a lot of engagement with shareholders, and companies relied on that as a defense tactic.

Today, with BlackRock, Vanguard, State Street owning as much as they do of companies and the process by which shareholders have a lens into the activist engagement, broadly speaking, that a company imparts on, it's important for companies to engage and to understand what shareholders, what the protagonist shareholder is focused on, what their ideas and plans might be, who their director candidates, if they get that far, might -- who they might be and sort of be open to understanding the objectives of the other side.

That doesn't mean doing what the other side suggests. It means carefully analyzing and thinking about the implications on the company. And I think that's where advisers come in to play to help a management team, a Board of Directors understand the implications of the change being proposed and how to evaluate that change and how to better communicate with your shareholders the plans that are underway in order to accomplish those changes and give people a sense that there's not entrenchment, that there's not a view that shareholders can't be right.

It's a discussion around what's the best way to operate a company. And that's where, I think, a strong management team, a well-informed Board, have an ability to really convince shareholders that they are the right players to be executing on that. So I think engagement is the one bit of advice that I'd give that, I think, probably most appropriately informs the company and the other shareholders out there as to what's the best path forward.

John Karageorge

I totally agree with Craig. And just to kind of add to that, as far as kind of engagement, it's know who your shareholders are, speaking to them on a regular basis, right, not just when an activist enters the stock or something else happens in the stock and having that regular dialogue, whether you're seeing them on road shows or you're having conversations or doing private one-on-ones, especially with your top shareholders.

But even today, it's getting more important. I mean we're seeing your traditional investors out there, not necessarily activist, Neuberger Berman and T. Rowe Price come to mind, where they're getting a little bit more vocal. And I think one of the trends we're going to see is other institutional investors also get a little more vocal and make their feelings known about certain issues at the company. So I think that's also very important to keep that engagement going throughout the year and not just around troubling times.

Carmen Lilly

Right. Exactly. And so when we take that advice and those insights in terms of engagement and preparing, let's take a little time to focus in on 2024. We mentioned interest rates playing a factor on activist campaigns and activity. We are expecting Fed to start cutting rates maybe as early as this summer. So thinking about that in tandem with what you saw in 2023, what do you think is in store for 2024? And how would you advise corporations going forward?

Craig Wadler

Well, from our perspective, 2024 sets up as a very interesting year in the world of activism because of this pent-up demand for M&A and for transaction activity. And so I think if you look at activism and how they evaluate companies to invest in and engage with, they go through what we -- I'll share with you how we sort of look at the various ways that they identify a target, which is around stock price performance and valuation and hitting numbers and what they do around capital allocation and how do they manage their portfolio of businesses, so a sum-of-the-parts-type discussion, M&A and then who's in their shareholder registry.

And so if you look at how companies have performed in every sector, there are those companies that trail performance, whether it's 1, 3 and 5 years around stock price performance or the valuation isn't quite where they'd like it to be or where analysts expect it to be. And there's different components of the business that might make valuing the whole company more difficult, and you've got this pent-up M&A.

I think the way activists look at it, they can pick the right targets that check a lot of boxes, which cause companies to have to react and engage. And I think if you're running an activist hedge fund and you spent a few years in an environment where there's been not much M&A and takeouts and the ability to get that quick, short-term-oriented premium that so many people talk about, I think we're potentially leaning into a cycle where the activists are saying, "Okay, it's time for companies to transact." And so they'll figure out the targets, and they'll go after them.

If you think about 2022, 2023, again, not the most robust M&A years that have been on record. There's plenty of positions or activist holdings in companies where they've been sitting there for a couple of years. And so their desire to see companies transact after having been in the boardroom them as principles or their nominees, I think you might see some of that as well, which is getting some old positions off the book so that they can find new ones to go after.

Carmen Lilly

And John, your thoughts?

John Karageorge

Yes. So I think in 2024, we're definitely going to, I think, see just along the lines with what Craig was saying about M&A picking up and, Carmen, as you mentioned, potentially interest rates being cut this summer or maybe potentially even in the fall. We're going to see, I think, more private equity and activists teaming up and really kind of driving some of that M&A activity.

One of the other interesting trends that I've been also looking at is that we're seeing AI, and that's been a hot topic across tech. But also when it comes to activist investors and kind of monitoring sentiment out there, so what some activists are doing and they're engaging with AI to kind of read the sentiment, whether it's off conference call transcripts to kind of gauge how investors are kind of viewing the stock. Are they happy, indifferent, are they angry and what have you.

So it's kind of interesting that AI is kind of playing a role and they're -- and how they're using AI to kind of form their opinions on investor sentiment and a particular stock again. So that's kind of interesting.

We're also using AI on our side to kind of identify -- when we couple that with kind of traditional tracking and looking at custodial flow and potential activist situation, we're adding an AI component to that so we can kind of better identify potentially not just personable trends that are showing activists but also where a potential client might be vulnerable, whether it's the total return or ESG scores.

So we're looking at, I think, 110 different investment criteria or fundamentals and overlaying that with custodial flow to kind of put together this AI vulnerability report that's pretty insightful and actionable, and we're pretty excited about that as well.

Craig Wadler

The one thing I would add as we think about 2024 as well is the advent of new activists who are out there. And there's quite a few people who have spun out of very successful firms, who have significant reputations for activism. These were people who were part of their teams and have now found their way into their own firm.

And so I fully expect those folks who are interested not only in investment returns but in asset gathering will lean hard into 2024 to put new positions in place, put companies in play, try and demonstrate their importance and relevance in the system as an activist player.

Especially as some of the longer-term activists maybe phase their businesses out a little bit and there's this space for new blood, they'll be motivated to associate themselves with very successful, good companies who may transact or may need change. And so I expect we'll see more new firms participating in 2024 than we did in 2023 and 2022 likely.

John Karageorge

And just to add to that, that's a great point, Craig, is that I think in 2023, we saw the most first-time activist campaigns out there. I think there were 77 filers out there who launched activist campaigns who had never done so in the past. So that's definitely a mix of new activist investors being created out there and making their mark.

Carmen Lilly

Oh, I didn't know that fact. Thank you for sharing that. Not only is it easier to launch a campaign, but there's a larger pool of folks that -- in 2024 who could be participating in launching campaigns. It's interesting.

So we are just about at time now. And I do like to close out these podcasts with just a piece of actionable advice for our listeners. So if you just kind of glossed over everything else, what is one thing -- one actionable piece of advice that you would share as a takeaway? I will start with you, John, and then we'll move to you, Craig.

John Karageorge

I think Craig made a great point and -- earlier when he was talking about what companies should be looking at their activist defense when there's blue skies out there. And what I mean by that is not just activist defense. They should be looking at their company bylaws. And the last thing you want to do as a company is try enact a change around your bylaw because there's an activist who's announced or been rumored to be in your stock. So you want to make sure that if you're making any kind of changes, you're doing it on a day where it's a vanilla day, if you will. And there's no impetus to change, you're just being proactive with that.

Craig Wadler

So if I had to give one bit of advice to a company who's thinking about activism, my advice would be do a real honest vulnerability assessment based on the criteria that activists truly look at. And again, I went through it earlier in terms of performance and capital allocation and the like; and really understand why you might be vulnerable, what you can do to diminish the sum of vulnerability; and how might you communicate with your shareholders, broadly speaking, to give them confidence that you're focused on areas of the business where people might poke holes.

Now what I'm not saying, and I just want to be clear, is -- what I'm not saying is you don't run your business in fear of activists, okay? But what you should do, because of the distraction part of it, is you should really understand how they might view you and what are the internal activist things you can do to avoid as best you can anybody showing up.

And I think in addition to that assessment, which, again, I think a third party, somebody like an investment banker like us at Moelis doing something like that, I think, gives a real fair and almost provocative view into it. And I think then it's about if you're a management team and you are at all concerned about this, I think the most important thing you can do is get organized and ensure that your Board has the confidence in the management team that it's prepared and ready in case something happens.

One of the lines I like to use, and people are probably stick with me saying it is, a lot of activists don't let the facts get in the way of a good story. And that good story can create a lot of distraction. And so you want to make sure your house is in order, you're on your front foot and you're ready to engage successfully when somebody might show up.

And at this point, as I said at the start, the asset class has been institutionalized. The activists are not going away. As John suggested, you might see some of the long-onlies even go deeper into being a vocal-type shareholder. And with the shareholder concentration issues and risks that are out there as a result of BlackRock, Vanguard and State Street, things can move rather quickly if somebody shows up.

John Karageorge

Great points, Craig. If I can add just a couple of points to what -- yes. Just -- so in thinking about how you can be kind of proactive, 2 things stand out, obviously. One is knowing your shareholder base, know who your top shareholders are, especially if you're a pretty liquid stock and there's been a lot of volume in your stock and having that information more real time vis-à-vis than what's available on 13F reports, I think, is important, especially if you deem yourself to be vulnerable to an activist potentially.

And second is the idea of maybe doing a perception study and reaching out to the buy side -- or having an independent party, I should say, reach out to the buy side. And you kind of get an honest opinion of what their thoughts are on the company, what their thoughts are about management. And having that intel and that knowledge before an activist potentially would launch a bit, I think, is extremely important.

Carmen Lilly

Perfect. Yes. Thank you so much, John, and thank you so much, Craig, for your insights here. That is all the time we have for today. Thank you, listeners, and a special thank you to my guests today, John Karageorge and Craig Wadler. If you like this content, please subscribe and check out our past episodes. I'll be back next month with new content. I've been thinking about taking a deeper dive into the new SEC climate disclosure rulings but always open to hear your ideas. So let me know. Until then, happy listening.