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Treasury Management

Activists Push Longer Term Strategies for Targets

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January 02, 2019

Activist demands will likely result in less work for treasury as campaigns look further out the horizon

football x's and o'sAn increased concentration of shareholders with longer-term goals may lessen the need for major capital-structure changes driven by activist investors, at least in the short to medium term. This could give corporate treasury some long-awaited breathing room.

In recent years, activist investors have played a major role in restructuring corporate America, pushing for mergers, divestitures, share repurchases, and more. Most of the list for actions have resulted in treasury executives spending long days in the office hashing out the details. Research by analysts at Fitch Ratings suggests a growing concentration of investors with longer-term investment goals may be changing those dynamics.

“Increased shareholder concentration resulting from the rise in passive investment vehicles and growth in Environmental, Social and Governance (ESG) investing suggest a larger group of diverse shareholders could assert themselves to engage management teams about long-term value creation,” Fitch says in a report titled, “US Firms Settle with Activists, Creditors Re-Evaluate Risk.”

The report notes that shareholder activism has prompted corporate decisions involving short-term distribution of cash flows, asset sales or leveraged recapitalizations, creating event risk for creditors.

“However, a trend toward increasing shareholder engagement around long-term value-creation themes should better align with creditors’ interests,” Fitch says.

Despite instances such as activists scuttling Xerox Corp.’s merger with its Fuji Xerox joint venture, which Fitch described as its most credible plan for achieving growth and shifting the company away from its once conservative financial policies, activists’ impact on corporate credit profiles is often benign and sometimes positive. Fitch notes that among the 775 public demands made by activists up to December of 2018, according to Activist Insight, a smaller percentage of resolved demands were fully or partially satisfied so far this year compared to five years ago—43% vs. 50%.

In addition, the percentage settled rose to 3% through December compared to 1% historically, helping to avoid or end proxy contests. The report lists several recent settlements, including those between Campbell Soup and Third Point Management, and Newell Brands and Starboard Value, that facilitated the end to contentious proxy battles. However, Fitch says, the event risk for creditors—and the long days for treasurers—persists longer term as activists gain board seats and a platform to influence the company’s business strategy.

“Near-term event risk associated with proxy battles may decline with settlement and embedded standstill agreements,” the report says. “However, it is not uncommon for strategy or capital structure changes to occur once these agreements expire.”

Campbell Soup, for example, recently reached a 12-month standstill agreement with Third Point that ended a five-month battle of the company’s strategy and the activist’s demand that it sell itself to a third party. To placate Third Point, the food company will increase the size of its board to 14 members from 12, adding two independent directors from the activist’s proposed slate, and consult with it on a third addition to the board by May 2019. It will also consult Third Point on its CEO search and allow it to formally present its views regarding the company’s ongoing strategy.

Campbell may have avoided selling itself in the near term, however the Fitch report implies that after the terms of the standstill are met, the activist will be in a much stronger position to push its demands.

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