How Activist Investors Target Companies in a Choppy Market
The pace of activist campaigns has cooled against the challenging macroeconomic backdrop of 2023, but companies should remain vigilant to avoid ending up in an activist’s crosshairs.
That’s because market slumps and economic downturns can expose weaknesses at specific companies, handing activists blueprints to plot changes. In more-robust economic times, companies may have an easier time masking their troubles with surging cash flows. When the tide goes out, however, it’s harder to hide blemishes—especially if a company fails to keep up with peers.
Typically, activists seize upon companies that are underperforming in four areas: sales growth, valuation, net margin, and two-year stock performance, according to new analysis from Goldman Sachs, which examined component companies in the Russell 3000 index over a 17-year period. In a report, the bank identified 116 companies with market capitalizations of more than $5 billion that could attract activist attention, including retailer Best Buy BBY +1.35% (ticker: BBY), trading app Robinhood Markets HOOD +0.34% (HOOD), and industrial giant 3M MMM +0.84% (MMM).
There were 27 campaigns launched during the first quarter of this year, according to Goldman’s tally. That marks a 24% drop from the fourth quarter of 2022, and it also lags behind the pace of campaigns for all of last year, which totaled 148.
Despite fewer campaigns this year, activists have certainly been bold, targeting large-cap companies such as Walt Disney (DIS) and Salesforce (CRM). It’s all the more reason for companies to be wary.