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This article first appeared on Diligent Market Intelligence's Activism newswire. To register for a demonstration and trial of the product, click here.
Shareholder activism is increasingly shaping the M&A landscape, influencing not only whether deals get done, but on what terms and at what cost. Earlier this month, DMI’s Editor-in-Chief Josh Black convened a timely discussion on M&A-driven activism, bringing together some of the leading practitioners at the forefront of such activity. Michael Fein is the founder and CEO of Campaign Management, a leading advisor to companies and activists seeking support in corporate elections. Shaun Mathew is a partner and leads the shareholder activism and hostile takeover defense practice at Kirkland & Ellis. David Rosewater is a managing director and the global head of the shareholder activism and corporate defense practice at Morgan Stanley. The panel explored how activists are redefining traditional deal dynamics and the evolving tactics being deployed by both investors and issuers. Drawing on real-world case studies and recent campaigns, the speakers offered practical insights into how activism is influencing transaction strategy in an increasingly complex environment. Below is an edited transcript of the webinar, highlighting some of the key themes and takeaways. Josh Black: Punxsutawney Phil may have seen his shadow, but activist investors are not going back into hibernation. If it feels like Groundhog Day, it’s because M&A activism now seems like a daily occurrence, with activists putting deals at the center of their playbook. DMI's latest data show M&A-driven activism is at a five-year high, with the number of U.S. companies facing “push to sell” demands up 29% year-on-year, which is nearly double the level we saw in 2021. Outside the U.S., we’re seeing a similar growing trend, especially in Europe, with a significant increase over the last few years in M&A-related demands – particularly pro-M&A or “push for sale” demands. On the oppose M&A side internationally, activity is at a much lower level than in the U.S., but it has been a relatively popular tactic in Asia, where minority protections are often built into deals. We see a lot of hold-up arbitrage campaigns, and this tactic has popped up in different regions at different times. Looking at outcomes of opposed M&A campaigns at U.S. companies, we saw an increase in at least partially successful outcomes last year. Activists are not overwhelmingly successful in most of these campaigns, but over a third achieved some kind of concession. That’s enough to sit up and take note. Why has “sell the company” become such a dominant and recurring thesis in activist campaigns? David Rosewater: For activists, selling the company is often the most direct way to realize the largest payoff. It’s a way to close the gap between intrinsic value and what the public markets are currently assigning as a valuation. It’s also the tactic with which they’ve historically been most successful. We did a study a number of years ago looking at well over a thousand campaigns. When activists were looking for some form of M&A, they generally made significant returns. But when they were looking for other types of change, their returns across all of those campaigns were relatively flat. So, M&A is simply the tactic that has worked best for them. Given that, I think you’re going to continue to see this trend because I believe M&A markets will remain robust. Financial sponsors are very much out there and while they’ve started to deploy capital, they still famously have a lot of dry powder. I think you’ll continue to see not only strategic buyers, but also private equity remaining active. The more M&A there is, the more activists will turn to it as part of their theses. Michael Fein: I’d add a couple of things. While M&A can be a compelling outcome for activists in terms of the biggest payout, it’s also often a quicker payout. Rather than having to wait for an entire operational or strategic thesis to play out over years, a sale offers a faster monetization. It can also mitigate operational and execution risk, as well as broader macro risk. You’re effectively choosing dollars certain today over the potential for some higher valuation if a lot of other things go right. The longer the time horizon, the more things can go off track. How should boards balance activists’ calls for a sale or liquidation against long-term value and their fiduciary duties? Michael Fein: That ties into another dynamic we’ve been seeing, especially in sectors like biotech. A few years back, I worked with a company called CymaBay Therapeutics, which faced clinical challenges in its FDA approval process. They came under pressure from an activist that was urging the company to liquidate and distribute what was then a relatively substantial cash balance back to shareholders. To the company’s credit, the board said, “That might be a reasonable path, but as a biotech we feel obligated to review the data.” They did that, were able to revive their clinical trials, and not too long after were acquired by Gilead Sciences at a very large multiple. So there’s real value when a company and a board truly believe there is substantial value to be realized and are able to communicate that to shareholders, instead of just defaulting to liquidation. Shaun Mathew: I think biotech is a perfect example of why this topic is so important. The example you just described happens all the time in biotech. It goes directly to why boards of directors are fiduciaries and not merely agents acting at the direction of shareholders. Ultimately, a board’s view has to be informed by what’s in the best interests of the company based on all the information it has and what the company’s purpose is. Of course, that’s inseparable from maximizing shareholder value, but in biotech that’s not always straightforward. When you have large swaths of short-term-focused shareholders who can effectively force the issue around liquidation, significant capital returns, or a quick sale of the company, you can end up abandoning the company’s long-term purpose — which, in biotech, is often about getting a therapy to patients. I think that’s a bad outcome as both a policy matter and as a fiduciary matter. If the board ultimately turns out to be wrong, shareholders can vote them out later but there is a very good reason why the fiduciary system exists in corporate America. Biotech activism is a perfect example of that rationale in action. David Rosewater: Often when an activist comes in with a “sell the company” plan, what’s really driving the thesis is a different timeframe and risk tolerance. If you run a sale process and either no deal materializes or the offers don’t reach an acceptable value, the company is left dealing with the aftermath — employee uncertainty, reputational issues, and the sense that the business is now “in play” without a clear path forward. Most boards are already thinking about the options activists raise — whether it’s portfolio moves, capital allocation, or a potential sale — and are typically willing to consider appropriate value if it’s achievable. But activists are rarely as focused on the long-term value drivers and consequences as boards have to be. That disconnect — on time horizon, risk tolerance and downside scenarios — is exactly what we’re talking about here. Why is “day one” communication so critical for contested or activism-sensitive deals? David Rosewater: When I’m advising companies, I stress the need to think through the messaging on those key issues — process, rationale, valuation — in advance. There’s so much going on when a company signs a transaction that the announcement communication often suffers. That’s a big missed opportunity. As Shaun said, ISS looks very closely at the stock performance on announcement day. That’s effectively a one-day test. Once it’s done, you can’t get it back. If the stock drops sharply on announcement because the market doesn’t understand the transaction or the company didn’t communicate clearly, you’re fighting uphill for the rest of the process. You need to be more front-footed — think about the issues ISS, Glass Lewis, and shareholders are going to focus on and make sure the information and rationale are out as early and as clearly as possible. How does Institutional Shareholder Services (ISS) and Glass Lewis assess contested or activist-influenced M&A, and what factors drive their recommendations? Shaun Mathew: In deals, ISS and Glass Lewis focus on three core issues: price, process, and governance. If you boil it down, what really matters to them is: Valuation. On the target side, they’re looking at whether the deal price fairly reflects the company’s standalone value and prospects. On the buyer side, where there’s stock consideration, they look at the strategic rationale and whether the combined entity makes sense and will generate long-term value. Market reaction. ISS, in particular, is heavily influenced by how the market reacts to a deal at announcement. This can feel circular from the advisor side, because stock prices can be influenced by short-term trading and narratives, but it’s a big factor in their analysis. If a stock trades above the deal price in a challenged take-private, for example, ISS is highly likely to recommend against the transaction. They’ll infer either that an interloper may emerge or that there’s an expectation of a bump. Process. They look at whether there are "defects in the process" — conflicts, inadequate outreach to potential buyers, or other issues that suggest the board did not run a process that was reasonably designed to get the best price. Bankers and companies generally know how to run processes. They don’t always need to reach out to 50 parties, put up a for-sale sign, and then run a 50-day go-shop. Often there’s a relatively small group of credible buyers, and the process is engineered to get the best outcome given the reality of the market. ISS and Glass Lewis can sometimes be susceptible to arguments like, “You reached out to 43 people but you should have reached out to 63.” That can have a disproportionate effect on outcomes, because — just as in director elections — their influence in deal-related votes is, at least for now, significant. Winning ISS and Glass Lewis over on the company side of a contested deal is almost always outcome-determinative in favor of the transaction. You can still prevail if ISS recommends against you, but it becomes a lot harder. On governance, their focus matters more where there is strategic stock consideration and where the combined entity’s governance profile will be a bigger factor in investor decisions. How much should board directors themselves be out there talking to shareholders once a deal is announced? We’re used to seeing directors front-and-center in some proxy contests, but what about deal-related M&A activism? David Rosewater: I definitely think there’s a role for directors in talking to shareholders once a deal has been announced. Ultimately, as we’ve said several times, it’s about both the process that was undertaken (on the buy side or the sell side), and the substance of why this particular transaction makes sense as a way to maximize shareholder value. If you’re on the buy side, for example, shareholders will want to know what other avenues you considered to create value; how you came to the conclusion that this transaction was the right path; and whether you have the experience and capability to integrate the acquired business successfully. Explaining all of that from the board’s perspective can be very important. ISS and many shareholders also care about the experience level of directors in evaluating and executing transactions. They want to be comfortable that the board members making the key judgments — on both valuation and integration — have the right backgrounds. So there’s definitely a place for boards to communicate directly with shareholders around acquisitions or sales. That doesn’t mean directors should be the only voices, or even the most prominent at all times, but they should be part of the overall communications strategy. For more on the topic, the full playback of the webinar is available here.
