Think Like an Activist

It’s easy to view activist investors as little more than bullies with calculators: They hunt in packs, force disruptive and risky changes, and use simplistic benchmarks as a call to action. And yet, executives can learn a lot from the ways that activists view their business. They also can borrow a page directly from the activist’s playbook. With a little do-it-yourself activism, senior management can make a company less vulnerable to activist pressure.

How? By making it more attractive to long-term shareholders.

Five Steps to Do-It-Yourself Activism

  1. Develop an investment thesis. Activists focus on value per share, and they reconstruct a company’s value per share as a sum of its parts. Management should do the same. To allocate capital effectively, senior executives need a clear investment thesis that differentiates priorities by business.
  2. Acknowledge and close significant performance gaps. When performance benchmarking raises red flags on key measures, activists are attracted like sharks to blood. To protect the business, close the gaps in categories such as valuation discounts, historical TSR, cash and operating margins, financial policies, and balance sheet profiles.
  3. Use your balance sheet wisely. Actively manage the trade-off between reinvesting cash to drive profitable growth and distributing cash to provide cash flow yield to shareholders.
  4. Have candid conversations with top investors. Listen to their views of the company’s key value creation strategies. Not only do they have some good ideas, but activists also are less likely to intervene and succeed if they lack the support of major shareholders.
  5. Build an ownership culture. How can you make good on the company’s investment theses? By building a strong, properly compensated management team and creating governance that adds value through performance assessment and meaningful rewards.
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