Raid Defense: Preparing Outside of Proxy Season
While “proxy season” may be past us, with most companies’ annual meetings dates set and nomination windows closed, it’s fair for Boards and C-Suite executives to breathe a sigh of relief. However, with interest rates stabilizing, equity capital markets strengthening and CEO confidence hitting 2021 highs, Boards and CEOs must now prepare for activism of a different kind: unsolicited bids.
2023 saw a rise in unsolicited bid activity, and key factors in 2024 will only fuel its growth. Choice Hotels’ pursuit of Wyndham, JetBlue’s proposed acquisition of Spirit, and a four-way dance in the 3D printing space between Stratasys, Nano Dimension, 3D Systems, and Desktop Metal are only a select few of the extremely high profile “hostile M&A” fights we saw in 2023, with Choice and Wyndham even dragging into 2024 unresolved.
We see two main contributors to the dynamic: first, a significant valuation gap opening, often between companies that are well-capitalized and profitable, and those that are not. Over the past year, amidst increasing interest rates, the market has begun to reward profitability and has abandoned the “growth at all costs” ethos that permeated the 2010s after a decade of essentially free borrowing. Well-run companies are suddenly in a strong position to acquire, though those perceived as “sellers” don’t feel ready to sell. Companies that have seen valuation erosion over the past year still believe in their strategy and don’t want to accept premium offers if they are at a discount to all-time highs, despite a potentially large premium from where they sit today. With a market where buyers need to do something with their cash (that isn’t a share buyback at all-time highs), and sellers are reluctant to sell at “fair prices” it’s safe to assume there may be more unsolicited bids on the horizon.
The second is a PE market that is flush with cash at the top of the interest rate cycle. You can debate if the Fed will cut rates this year, but at the very least, it looks as though rate hikes are being left in 2023. More expensive debt slowed the pace of private equity deals over the past two years, but the waiting game is over as rumors are circulating about more deal activity in 2024. As PE comes back onto the M&A field, strategics will have more competition for assets, which is fueling an urgency to act with speed.
Corporates across the board, but especially those that have seen valuations drop from their 2021 and 2022 peaks, should be asking themselves: am I prepared for an unsolicited bid? Have I stress tested our standalone plan and valuation? Is my Board prepared?
Below are six key takeaways that will help corporate Boards and management teams to be ready in the event a peer or a private equity firm decides to “go hostile.”
Engage a Rapid Response, or Raid Defense, Team:
The right response team will have experience in dealing with these sorts of situations on a daily basis. For some, even those who have been executives for decades, this could be the first instance of hostile deal activity. Though a bidder may seem friendly at first, do not wait until they publish an open letter to your shareholders to engage a team of advisors.
Honestly Assess Your Vulnerabilities:
These exercises are never enjoyable, particularly for C-suite executives and Boards, but in order to properly prepare a defense, a company needs to understand first, if they are prone to an attack, and second, what a bidder’s argument might be. Sometimes it is as simple as adding scale, other times bidders might attack a company’s governance, cost structure, or strategy. Understanding your own vulnerabilities is the first step in ensuring that you have the right defense messaging in hand if and when you need to leverage it.
Develop a Rapid Response Communications Plan:
A successful response to any unsolicited bid begins with months of preparation. These are stressful, fast-moving situations. Having a response plan already in place that properly reflects the company’s story and go-forward strategy will be crucial in ensuring you are prepared for every type of response. If a bidder goes public and you’re able to respond quickly, shareholders will be comforted by the quick and well-articulated response, while your employees and other stakeholders will appreciate additional bespoke communications, as many of them will be unfamiliar with and unsettled by a process like this.
Articulate Your Value-Creation Strategy Routinely on Earnings:
An unsolicited bid is usually accompanied by significant turnover in a company’s shareholder base. Existing investors may “sell the news” to collect on the bump in stock price that generally comes with a premium offer and new investors will pour into the stock, including merger arbs. All of the new investors will need to quickly get up to speed on the company’s equity narrative and its credible value creation strategy. That story and strategy cannot be locked away in a three-year-old analyst day presentation.
Know Bidders and Their Vulnerabilities:
More recently, we have seen companies use non-economic arguments to fight unsolicited and hostile bids. Knowing who your bidders might be, and the legitimate challenges to a regulatory review or long-term value impairment, will be important factors in a Board’s review of value creation and in articulating a public defense.
Get Retail to Vote in Peacetime:
There’s no better way to win a contested vote – if it comes to that – than having your shareholders by your side, particularly the ones that may be perceived as “harder to reach,” such as retail investors. Retail investors have a habit of voting with management in contested situations, but ensuring that you have a strategy to reach them in the right channels with digestible content, can offer a leg up if and when it comes to any contested vote, especially if voting with management becomes habitual in peacetime.
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