Goldman analysts say these red flags could make activist
investors attack your company
April 25, 2023 at 7:06 AM EDT
CAIAIMAGE/PAUL BRADBURY FOR GETTY IMAGES
What increases the likelihood of becoming a target of an activist
investor? A new analysis by Goldman Sachs provides some insight.
The analysts were trying to better understand how activist investors
seek to create value through fundamental changes in a company. The
report examines 2,142 shareholder activism campaigns launched since
2006 with a corporate valuation demand against Russell 3000 companies.
They identified four financial variables representing potential
sources of vulnerability that might prompt an activist attack: slower
trailing sales growth; lower trailing EV/sales multiple (lower
valuations); weaker trailing net margin; and trailing two-year
underperformance (lower excess returns).
Sales growth has been the most important variable in determining an
activist target, followed by EV/sales valuation, according to the
analysts. A probit model, which in most cases is used to predict
whether something will or won’t happen, was used to analyze the
performance and fundamental characteristics most associated with
companies targeted by activist investors.
As a result, the report identifies
116 stocks in the Russell 3000 index that could be
susceptible to an activist investor campaign. “These firms have a
market cap greater than $5 billion, at least one source of
vulnerability based on our model, and experienced at least 10 pp lower
realized sales growth relative to its sector median during the
trailing 12 months,” according to the report.
Another key finding: The top three most frequent demands of activist
investor campaigns since 2006 have been for companies to separate
their business (28%), review strategic alternatives (19%), and return
cash to shareholders (12%). Specific demands such as realizing net
asset value (NAV), creating a real estate investment trust (REIT), or
changing investment strategy are less common, along with operational
changes and a general discussion of strategy.
During 2022, investors launched 148 campaigns against 120 distinct
public U.S. companies, a roughly 20% year-over-year increase,
according to the report. Goldman analysts expect shareholder activism
to remain popular this year as investors adapt to regulatory changes
and the macroenvironment. In Q1 2023, activists launched 27 campaigns
against 26 companies.
In the first quarter, big companies like Walt Disney and Salesforce
were targeted by activists. Following Disney’s announcement of new
operating initiatives, Trian
Partners withdrew its Disney board nominations. After the
board elected a director from ValueAct, Elliott Management ended its campaign
Most recently, Ken Lui, leader of the “Spin Off HSBC Asia Concern
Group,” has hired Alliance Advisors to assist in identifying and
contacting HSBC Holdings PLC investors, Bloomberg
reports. Lu is lobbying in favor of a proposal to
restructure the lender’s business on May 5 at its annual general
With 65% of Russell 3000 companies planning their annual meetings
during May, expect to hear more from these noisy investors.
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