Shareholder engagement and M&A

June 2024  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

June 2024 Issue

Today, organisations must actively communicate with their shareholders to exchange information and invite opinions on various aspects of the company’s operations, performance, governance and strategic decisions. Soliciting feedback from shareholders is part of any corporate governance and transparency programme.

Shareholders expect to be given a say on the development of corporate policies, practices and strategies. This engagement can take many forms, such as annual general meetings, investor relations, sustainability reporting, and direct dialogue between shareholders and company management, with the end goal being long-term sustainability and value creation.

It is common for investor relations teams to meet regularly with representatives of their large shareholders to build trust, credibility and support, as well as to identify and address any concerns or expectations.

M&A trends and related activism

One key trigger for shareholder engagement is M&A activity. Governance and M&A-related campaigns, among the most common areas of attention, have seen a resurgence that will persist if 2024 delivers the anticipated increase in dealmaking many have predicted.

Certainly, 2023 was a challenging year for global M&A. The total M&A market dropped 15 percent, to $3.2 trillion, the lowest level in a decade according to Bain & Company. Strategic M&A declined 6 percent overall as buyers and sellers disagreed over valuations, and strategic deal multiples were the lowest they have been in a decade. A combination of other factors, including high interest rates, varying macroeconomic conditions, increased regulatory scrutiny and ever-evolving geopolitical risks combined to drive down activity.

Dealmaking continues to account for a sizeable portion of overall activist campaigns. These range from instigating deal activity by pressing for divestitures and break-ups, to activists intervening in announced transactions by opposing transactions deemed to be too costly, known as breakitrage. Efforts to push for a price increase in announced deals – known as bumpitrage – have been less common in the subdued M&A market.

Activist funds such as Elliott Management, Icahn, Starboard Value, Third Point, Trian Partners and ValueAct have been at the forefront of many of the most high-profile activist campaigns seen in recent times.

The list of companies targeted by activist campaigns in 2023 and early 2024, or in which activists acquired a significant stake, spans sectors and includes large-cap companies such as Bayer, BP, Disney, Illumina, Macy’s, Salesforce, Shell and Starbucks.

More M&A, more activism

Though 2024 is shaping up to be a more productive year, the outlook is still challenging, with a mix of macroeconomic, geopolitical and sector-specific factors at work.

Dealmakers can expect continued scrutiny from investors. In the months ahead, activists are likely to advocate for business unit sales through portfolio rationalisation, as well as whole company sales.

Shareholder activism typically focuses on changing corporate strategy, governance or capital allocation, which can include sales. Armed with extensive financial analysis, activists may make the case that breaking up or selling off certain divisions or subsidiaries would create more value. Falling interest rates, curtailing inflation and a more favourable M&A environment could spur calls for divestitures.

Companies must engage constructively with these motivated activists. It is vital that they have adequate communication processes in place to gauge shareholder appetite for proposed transactions.

Breakitrage and bumpitrage will continue to play a role. As such, companies must ensure their M&A strategies are properly articulated, and the rationale for and merits of a transaction are made clear. Boards must be ready to pre-empt potential criticism of their strategies and have compelling explanations for their plans.

Companies will have to respond strategically to activist pressure and determine whether a proposed move is in shareholders’ best interests. Any announcement materials need to be carefully considered.

It is also important to consider the most effective way to make information accessible to shareholder groups. Investor meetings, roadshows, webcasts, surveys and advisory votes can be used to reach out to different segments of the shareholder base.

Companies should stay abreast of all key media platforms and branch out into other alternative forms of communication where necessary. Alongside conventional methods, some are offering online chat facilities in line with the preferences of younger or time-poor investors, for example.

Shareholder considerations must have a place in M&A decision making. After all, generating value for shareholders is one of the primary concerns for corporate boards. Accordingly, shareholders will continue to wield significant power when it comes to mergers, acquisitions and divestitures.

© Financier Worldwide

BY

Richard Summerfield