September 2012
Three factors can make a company more vulnerable to shareholder activism: Lots of cash on hand, conflicting opinions about business strategy, and the heightened visibility that comes from a position in the Fortune 500. So it wasn't a surprise when a prominent activist hedge fund based in California began accumulating the company's shares and asking to meet with management.
The good news: This wasn't your stereotypical angry activist pounding his fist on the table on CNBC or demanding to know how much cash the company had, where it was and how he could get it. Instead, this particular activist became the company's most knowledgeable shareholder, asking insightful questions about the company's far-flung operations and markets. Over the course of about a year, the company's investor relations team, CFO and CEO met repeatedly with the firm's principal and his colleagues to conduct "a normal dialogue." While the activist sometimes became frustrated about a perceived lack of information, the IR team didn't dodge meetings and worked hard to avoid a defensive tone – so the investor relationship never became adversarial or hostile.
Our story has a surprising ending: The CEO recommended that the nominating committee offer the activist CEO a seat on the company's board. At the time, the activist firm was among the top three shareholders, so this required specialized legal agreements to preserve confidentiality of the company's information and prevent the activist from trading on inside information. The activist became a "very constructive, engaged board member" and a key player in formulating the company's strategy.