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This Crisis Will Unleash an Activist War

Investors are warning management teams that they need to prepare for funds to target their companies, says BCG survey.

Although some have opined that shareholder activism appears unseemly during a global pandemic, a new survey shows that investors think this mindset won’t last for long. 

A recent survey by Boston Consulting Group found that 59 percent of the investors it polled think activists are coming for companies amid the devastation caused by the spread of Covid-19 — and that management should do more than sit and wait.

These investors also think companies should "take proactive steps to mitigate activism risk by strengthening their businesses’ near- and medium-term fundamentals,” according to the survey, entitled “Investor Pulse on the COVID-19 Crisis.”

“A lot of people expect activism to both resume — now it’s quiet — and to be much more active once the crisis stabilizes,” said Hady Farag, partner and associate director at BCG, in an interview. “We don’t see big shouting matches in the media right now, as it’s not the time to do that. But activists sit on tons of cash, and on average stocks are 20 percent cheaper over the last month, so it’s a buying opportunity.” 

Farag added that BCG asked survey participants whether companies need to prepare for campaigns by making the right business and financial choices. 

“We’re not talking about companies having to arm up and use some of the tougher, more structural things like staggered boards,” he said. “But investors want companies to think about the long term and be prepared for when people will challenge their positions. It’s about ‘make your mid-term plans activist proof.’ This [approach] is just reinforced by the fact that people expect to see more activism given such low valuations in the market.”

BCG is collecting data to assess changes in investor perceptions and the behavioral changes they’re making during the global pandemic. The first set of data was gathered between March 20th and March 22nd. 

Fifty-eight percent of survey respondents — largely portfolio managers and senior analysts making investment decisions — also indicated that they think companies should seek out acquisitions that will help strengthen their businesses. Respondents included a broad style range of investors, including deep value, income, core growth, quantitative, and special situations.

“Given today's low valuations, investors expect management to explore potential acquisitions as well as to prepare for increased activism risk for financially healthy companies,” added the survey’s authors. 

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BCG also found that investors want financially healthy companies to make moves to strengthen their balance sheets to weather the crisis. “They even support some typically unconventional near-term moves that would previously have been ‘off-the-table,’” according to BCG.

Seventy-three percent of investors say companies should focus on preserving liquidity, even if that means they can’t pour money into areas that would give them a competitive advantage; 61 percent think companies should avoid aggressively repurchasing shares despite low stock valuations; and 59 percent of investors say they would support dividend cuts in the near term. 

BCG found that 79 percent of investors surveyed want companies to provide revised earnings guidance for the current fiscal year within the next three months. Only 56 percent of investors think it’s important for financial healthy companies to meet the expectations of Wall Street analysts for the year.

The vast majority, 89 percent, want management to start preparing for the eventual turnaround in the economy and build strong businesses that can create growth, even if that means the companies will miss earnings estimates or have to provide lower earnings estimates. 

Despite the enormous uncertainty posed by the spread of the coronavirus, the majority of investors are surprisingly bullish when they think only a year or two down the line. Fifty-five percent of respondents were either “bullish” or “extremely bullish” about the market in 2021. Sixty-three percent felt that way about 2022.

Investors are deeply gloomy, however, about the market’s near-term prospects. Eighty-five percent are either bearish or neutral on the remainder of the year.

“Investors expect Covid-19 to ‘severely’ impact the US economy through Q3 or even Q4 2020, with a return to S&P 500 earnings growth in Q4 2020 or 1H 2021,” according to BCG.

“Most people think that the health care crisis and the implications on the economy won’t continue for years and years,” said Farag. “The main question is at what point in time does some sense of normalcy come back? Investors were pretty realistic. You don’t just turn a switch on.” 

Although there’s some optimism about the return to good times, survey respondents said the recovery won’t look like the much-desired V shape—a quick down market, followed by a steep rise. 

“87 percent of investors expect the shape of economic recovery to be ‘U,’ ‘W,’ or ‘L’ … and not ‘V,” said BCG. 

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