Sometimes a Company Just Needs a Kick in the Rear End

While less dramatic than a corporate raider from the 1980’s waltzing into a shareholder meeting, proclaiming that “greed is good”, and hurling threats to sell an underperforming company for a quick profit, many activist investors work quietly to change companies.

Activism is on the rise. In 2022, there were just about fifty activist campaigns in Canada, almost 18% more than in 2021. The U.S. saw 511 campaigns, up 11% from 2021. These are just the ones we know about. According to Kingsdale Advisors, two-thirds of activist battles unfold behind the scenes. It’s only when a board of directors snubs an activist shareholder that the campaign turns public.

Activist investors often get a bad rap. Management teams argue that an activist will demand immediate changes in order to boost the stock price – despite potentially disrupting a sound long-term strategy yet to play out – and then exit the scene after quick profits are made.

Sometimes complacent management teams need a good old-fashioned kick in the rear end. Many lose their direction and need to be brought back to reality.

Our mandate is to make our clients money, so we like activists.

Next week, Disney will face the music. Activist Nelson Peltz pushed for change at Disney in January 2023. He retreated the next month after CEO Bob Iger laid out a plan with several changes. Peltz returned in November, angry as ever, and wrote a 130-page manifesto. Peltz argued for an overhaul of the current board (which included adding himself, obviously); putting in place a succession plan for Bob Iger; and rearranging ESPN’s business model. Iger, who probably regrets returning from retirement, has received public support from several high-profile shareholders. However, he might step down if Peltz is successful next Tuesday.

Sometimes activists are unsuccessful.

In 2022, Elliot Investment Management acquired enough stock in Suncor to advocate change. Several months later, the company agreed to undertake a strategic review and consider selling off the gas stations that were acquired from Petro-Canada over a decade ago. The board came back with its report and said it wouldn’t sell any of them. Since then, other than Elliott appointing several directors, no material changes have been made.

Other times activists look to provide influence in the C-suite.

Canada’s Algonquin Power & Utilities, which was caught like a deer in the headlights when interest rates jumped, is trying to stave off Starboard, which owns almost 9% of the shares outstanding. The activist nominated 3 of its own favourites to the company’s 9-member board earlier this week. Algonquin is currently looking for a new CEO, not to mention sell off its renewable power division later this year. The company took on too much floating rate debt prior to the interest rate spike, which contributed to their decision to cut the dividend by 40%. Starboard will presumably hope to provide a voice in the CEO selection process.

We like seeing activist investors redirect a misguided management team. When a stock owned by our clients becomes the subject of an activist, we are more likely to add to our position than sell it.