Large activists generally target specific companies for one reason: economic opportunity. They think that through their involvement with a company, they’ll be able to generate outsized returns on their investment. Q4 quant team’s latest research revealed that, within a dataset of all companies with listed options in 2015, 42 percent had at least one top-50 activist holding some level of its shares.
Sectors targeted by activists
While the finance sector has generated the most activist interest, no sector is truly immune to activism. Here’s a breakdown of activism by industry.
Source: Q4’s Activism Alarm: How to Not Only Recognize, but Predict Activist Trading, 2017.
While companies that attract activism vary by sector, there are some shared characteristics between companies that are vulnerable to activism.
Relative returns: stocks that have underperformed their peers or industry over a prolonged period of time.
Price-to-sales ratio: activists tend to seek companies with a low ratio of its share price as compared to its revenues per share.
Loss of market share: year-over-year declining percentages of a company’s portion of sales overall, in the markets in which it competes.
Undervalued assets: an activist may target a company if management has been unable to extract or create value or return on assets.
Poor capital utilization: activists tend to seek companies who have too much cash on hand, too much/not enough leverage, poor dividend policy, company share buybacks, etc.
High expenses: if a company carries an unusually heavy expense burden, either as compared with sales, industry peers, or historic company fundamentals, an activist may feel they can change this.
Activists view these characteristics as problems that can be corrected with their involvement.
While many of these campaigns are settled amicably, there are a multitude of possible outcomes. The pie chart below demonstrates the breakdown of the outcomes we have seen.
Source: Deutsche Bank Global Quantitative Strategy March 2016 Report.
Shareholder activism is on the rise. Their reach is ever-growing and has massive impacts on corporate issuers, traders, bankers, consultants, and the entire equity marketplace. While activism remains inevitable, surveillance tools are bridging the gap between panicked reactions and strategic proactivity. Understanding activist trading patterns and recognizing risk are keys to staying ahead of the game.
Cory Todd is vice-president, quantitative analytics at Q4 Inc., where he leads the quant team who analyzes market data and trading patterns to generate capital market intelligence for the corporate and institutional worlds.