Barbarians at the gate?

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Stock prices that keep flashing negative can become a beacon for activist investors: don’t be surprised when the activists come knocking. While it’s understandable that a board’s first instincts are to hunker down and keep the activists out, there’s a lot to be gained by at least listening to what these investors have to say. Their insights aren’t always right, but they’re likely giving voice to what many shareholders are already thinking—and perhaps what some company leaders are contemplating, too.

A prepared board should already be a step ahead, learning to think like an activist investor and taking an unvarnished look at their company’s performance, just as an outsider would do. That doesn’t mean reflexively adopting an activist’s standard action items (including major cost reductions and divestitures), but it should encourage managers to scrutinize company strategy, priorities, and operations to identify opportunities for significant improvement.

Still, activists almost invariably arrive before a company is fully prepared. What does that bode for company performance? In most cases, good news: activist announcements correlate with value creation (exhibit).

Activist campaigns tend to generate a sustained increase in shareholder returns.

While excess TSR created by activist campaigns isn’t massive, it’s more than just a short-term blip. Activist campaigns tend to stop a long downward trajectory in company performance and then correspond with excess returns that persist for at least 36 months. Whether that pattern will hold in what’s predicted to be turbulent times ahead remains to be seen. But the historical results are consistent: activists, in their way, can be an impetus for value creation.

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