Activist Campaigns Fall, but Poison Pill Adoption Surges

Shareholder activists have hit the pause button in the midst of the coronavirus crisis, with campaigns in the first quarter falling to their lowest levels since 2014. 

But advisers expect these investors to come roaring back when the dust settles — and companies are adopting more poison pills than they have in a decade, according to new research from data provider Activist Insight. 

Activists launched 166 campaigns in the U.S. during the first quarter, down from 192 in the first quarter of 2019 and 224 during the same period in 2018. It’s also the lowest number since the first quarter of 2014, when activist investors launched 144 campaigns. 

This year, however, companies adopted 23 so-called poison pills — also known as shareholder rights plans, which are intended to fend off activists — through the beginning of April, including 17 in March alone. That’s compared with 19 for the entire previous year.

Researchers from Duke University and Ohio State University found that public companies have launched a total of 49 campaigns through April 23, according to a paper entitled “The Return of Poison Pills: A First Look at ‘Crisis Pills.’”

The uptick in poison pill adoption coincided with the downward slope in activist campaigns, a trend that started last year as the market rose — making value investment opportunities difficult to find, according to an Activist Insight report. 

“Last year you had high valuations, a reasonable amount of M&A, and activism was slowing down a bit — and corona came along right in the middle of proxy season, right when activists were having to decide when to take campaigns forward,” said Josh Black, editor-in-chief of Activist Insight, in a phone interview. 

Activists may be worried that the optics of launching a campaign during a time of bruising market and job losses are less than desirable, according to the report. The Standard & Poor’s 500 index lost 20 percent in the first quarter, and more than 26 million Americans have filed jobless claims as businesses shuttered.

“Returning cash to shareholders or changing managers is likely to look less appealing in the current climate, while underwater shareholders may rue lowball bids from strategic [acquirers] or private equity sponsors unless there is a desperate business need,” according to the report. “Preserving value, more than creating it, will likely be the priority for this year.”

Still, companies are steeling themselves for activists to pounce at the first opportunity, implementing pills that appear to be “preemptive,” according to the report, given that the companies are not facing imminent threats of hostile takeover bids and the poison pills are not subject to shareholder votes. 

[II Deep Dive: This Crisis Will Unleash an Activist War]

“The rush to put up defenses may give activists additional ammunition for proxy fights in 2021,” according to Activist Insight.

The Duke and Ohio State researchers pointed out that as stock prices plunged amid the global pandemic, corporations have become “particularly vulnerable to takeovers and interventions by hedge fund activists,” according to the paper. “Companies whose operations have stalled, such as airlines and brick-and-mortar retailers, are likely to suffer from suppressed revenues, cash flow problems, and potential default.”

Furthermore, companies may be looking to activist trends that immediately followed the great financial crisis of 2008 as an indicator of what’s to come. 

“While 2008 was quiet, activism came back strongly in the immediate aftermath of the crisis as a stabilizing market left many companies exposed, both in terms of performance and governance,” the Activist Insight report said. 

The report further noted that firms including Engaged Capital and Land & Buildings are reportedly fundraising to take advantage of current conditions. 

“Small wonder that 14 poison pills have been implemented at S&P 500 or Russell 3000 companies year-to-date [through March 27],” according to the report. “Opportunity does not self-isolate.”