Financial Downturn Gives Rise to Activist “Swarming”

After two years of reduced activism in 2020 and 2021, the concept of “swarming” has returned and is expected to continue to gain strength, according to research from Lazard Capital Markets Advisory Group. Swarming takes place when a company draws at least two activists in a year and typically occurs when investors see an opportunity for a “quick and potentially meaningful upside,” said the head of capital markets at Lazard. Firms can be ripe for the picking when these investors, who are mounting increasingly large investments, want to capitalize during periods of slow growth and underperformance by purchasing significant equity stakes over a period of time in an attempt to ratchet up their equity position and launch a campaign to influence the direction of the company.

Companies and boards should be prepared to respond to activist requests and to anticipate which activists might target them, according to PwC’s recent Guide to Shareholder Activism. Understanding activists’ goals and tactics and understanding “red flags” that might attract a campaign, can help companies head off an activist or, if that is not feasible, survive the encounter with as little disruption as possible.

This week, Third Point, who has previously launched a campaign against Disney, joined a myriad of well-known stock activists targeting tech giant Salesforce. This is the fifth activist shareholder showing interest in propelling Salesforce’s turnaround after the company was plagued by executive turnover, slumping returns, criticism over its acquisition strategy and questions around cost structure. It is unclear what Third Point’s goals for the firm include and whether they align with the interests of the other four activists.

Board seats are among the most visible ways to demonstrate the success of an activist’s campaign. Salesforce, under immense pressure to engage with activists, recently announced the appointment of three new independent directors including Mason Morfit, CEO of ValueAct. Elliot Investment Management, known for advocating on governance changes and M&A activity, also holds a large share of Salesforce securities and appears to be seeking board refreshment through a proxy fight while Starboard Value is focused on the company’s growth and profitability strategies but has not publicly commented on specific recommendations.

The SEC proposed an amendment in February 2022 to beneficial ownership rules that could potentially make it more difficult for activists to pursue equity ownership. The rules are intended to improve transparency by accelerating the timing by which an investor must notify the public that it has exceeded the 5% ownership threshold. The proposed rulemaking would require a Schedule 13D form to be filed within 5 days from the current 10-day period. Because the filing of the 13D can have a material impact on a company’s stock price, activist investors are perceived to have an advantage with non-public information that can move the market. These new rules are anticipated to be adopted in the next couple of months.