What does shareholder activism mean for tech companies?

A significant increase in shareholder activism has been causing a stir in the tech industry. According to this board of directors’ recap from BDO, 30% of companies targeted by shareholder activists so far in 2015 have been tech companies. While shareholder activism isn’t explicitly a good or bad thing, it is something that companies, and tech companies in particular, need to be prepared to handle.

What is shareholder activism?

Simply put, shareholder activism is when shareholders fiercely advocate for change within a company. Normally this is an integral part of running a publicly traded company, but the danger arises when someone buys up a large quantity of shares specifically for this purpose. Shareholder activists will usually attempt to either influence the board of directors or secure their own seat on the board. They then argue in favor of changes which might result in a short-term rise in stock prices.

Once stock prices have risen, they sell the stock for a large profit and move on to another company. Traditionally, activists have targeted medium-sized companies with depressed share values, but in the past few years they’ve become bolder. High-power shareholder activists have recently gone after huge companies such as GE and even Apple.

The Good, the Bad and the Ugly

An increase in stock prices is usually a good thing for the company, and in fact, shareholder activists can sometimes encourage changes that are a great benefit to everyone involved. This makes it difficult and even sometimes undesirable to fight shareholder activism. It’s also part of the reason why shareholder activists get what they want the vast majority of the time.

Other shareholders also want to see their stock rise in value, so changes recommended by activists often garner a lot of support. If an activist is suggesting something you know would be a bad move in the long run, you need to explain that to the other board members. Identify weaknesses in the plan. Even better, suggest a different plan that will have real long-term benefits for everyone.

Unfortunately, it isn’t all upside. Some changes that result in a short-term rise in stock prices can be detrimental for the company in the long term. After the activists take their money and run, dedicated investors may be left worse off than they were before. Building up a company is a long, slow, process.

In contrast, many shareholder activists seek to be in and out in less than a year. That’s the key difference between a shareholder activist and a long-term investor. Activists are only concerned with short-term gain, and usually won’t discuss long-term plans for the company much, if at all.

Finding solutions

How do you deal with shareholder activists? The most important thing is to be prepared. Identify weaknesses in your business plan and areas of potential profit that activists might target. Think about changes you would make if you were looking to increase share values as much as possible in the short term with no regard for the consequences.

Once you’ve identified target points, analyze each of them individually. If a potential change makes sense in the long term, why not just implement it yourself? If not, prepare a well-reasoned argument for why the change would be a bad idea.

Preparing for shareholder activists not only protects you from those who just want to make a quick buck, it can also help you find areas of real improvement you can work on. If you do run into an activist, just remember not to jump to conclusions. While some changes could hurt you in the long term, there might actually be some good ideas in there too.

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