Goldman analysts say these red flags could make activist investors attack your company

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 against Salesforce.

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 meeting.

With 65% of Russell 3000 companies planning their annual meetings during May, expect to hear more from these noisy investors.

Sheryl Estrada
[email protected]

Big deal

A recent Deloitte poll found that less than half of professionals (45.7%) say they are confident in their company's financial reporting teams to gather and report on environmental, social, and governance (ESG) financial metrics for regulatory compliance. About half say (48.8%) their company doesn't have plans to hire an ESG controller, and 16.4% say they have a designated ESG controller or equivalent. However, more than half of professionals say their finance teams have some level of organizational influence over ESG matters. Over 3,000 professionals were polled during a recent Deloitte Center for Controllership webcast on Feb. 23.

Going deeper

Shame typically isn't equated with anything positive, especially in the workplace. But a researcher is offering a different perspective. "How Shame Helps Build Office Culture," an article in Wharton's business journal, explores the research of Rebecca Schaumberg, a Wharton professor of operations, information, and decisions. Feelings of shame are so overwhelmingly negative that they act as a positive force for setting social norms and behavior, so managers should pay closer attention to shame, according to Schaumberg. 

Leaderboard

Jeff Farrow was named CFO and chief strategy officer at Tarsus Pharmaceuticals, Inc. (Nasdaq: TARS), a clinical-stage biopharmaceutical company, effective immediately. Farrow succeeds Leo Greenstein, who served as CFO since 2020 and is leaving Tarsus to pursue other professional interests. Most recently, Farrow served as CFO at Global Blood Therapeutics, Inc. Before that, he held other CFO roles at ZS Pharma and Hyperion Therapeutics, Inc.

Kevin Rhodes was named EVP and CFO at Extreme Networks, Inc. (Nasdaq: EXTR), a cloud networking company, effective May 30. Before Extreme, Rhodes was EVP and CFO at Duck Creek Technologies, a global vertical SaaS provider, where he played a significant role in leading the company to an acquisition by Vista Equity Partners. Before that, he held CFO roles at Finvi, Markforged, and Brightcove.

Overheard

“Their business will go to places that have good registries for wedding registries. It will go to places that have strong baby departments and baby registries. So it's going to go to the guys who are already big. It's going to go to Target, it's going to go to Walmart, it's going to go to Amazon.”

—Jerry Storch, Storch Advisors CEO and former Toys "R" Us CEO, talked with Yahoo Finance about who could benefit from Bed Bath & Beyond’s collapse. The company filed for Chapter 11 bankruptcy protection on Sunday following several attempts to save itself.