Good morning,
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
sheryl.estrada@fortune.com
