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Value Creation Strategy and Shareholder Activism Defense

A sharp value creation strategy not only ensures that a great business is a great stock—but it also helps deter activist attacks.

A linear approach to strategy—first defining a business strategy, then developing a supporting financial strategy, and finally selling that package to investors—may seem logical, but it’s often not optimal.

The approach falls short because of the many interdependencies among business, financial, and investor strategies. Only by developing all three iteratively and in parallel—exploring multiple scenarios—can an organization maximize its total shareholder return (TSR).

In our value creation strategy work for clients, we:

  • Assess the shareholder value creation potential of current corporate and business strategies. What is the future cash flow from each of the corporation’s businesses likely to be—and how does it ladder up to an estimate of the company’s future multiple and TSR? What strategic options exist to enhance performance?
  • Determine the optimal capital structure and best use for excess cash. When it comes to funding investments, what is the right mix of free cash flow, equity, and debt? And since most financially healthy companies generate cash well in excess of their reinvestment needs, how much of that cash should remain on the balance sheet versus being returned to investors via dividends and buybacks? Finally, how does the capital structure change under different strategic assumptions?
  • Evaluate and optimize the match between the strategy and the investor base. Do investors see the strategy as credible and consistent with their investment priorities? If not, what needs to change: the strategy, the shareholders, or both?

Spotlight: Defending Against Shareholder Activism

Shareholder activism is on the rise. From 2005 through 2019, the number of activist attacks globally grew from 54 to 191—a rate of more than 9% per year. And it’s not just subpar performers that are targeted. Nearly one-third of companies attacked from 2016 through October 2020 were delivering three-year total shareholder returns above the S&P Global 1200 median as of the month prior to the attack—and more than half of those also had a forward price-earnings ratio above the S&P Global 1200 median.

Defending against an activist attack is costly—and not just in dollar terms. Management time that could be spent building medium-term advantage is diverted to the short-term crisis. Asking one question can help build immunity to activists: how to create value that beats peers?

BCG is the only major consulting firm that has an explicit policy against working for shareholder activists. We only support our corporate clients in preparing for and responding to activist demands. Using our proven proprietary toolkit, we rapidly identify the ways to unlock value and the transformational moves that mitigate activism risk.

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BCG’s Client Work in Value Creation and Activism Defense

Whether your organization is seeking to ignite a new wave of value creation, justify a high multiple, guard against an activist attack, or overcome a new activist campaign, BCG has the relevant experience. For example, we helped:

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Perspectives on Strategy and Value: Insights on creating sustainable value in an uncertain world.

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Perspectives on Strategy and Value: Insights on creating sustainable value in an uncertain world.