No Shut-down for Activism

While activist activity was down a bit in the first quarter of 2020, compared with last year’s first quarter, according to Activist Insight’s “Shareholder Activism in Q1 2020” report, there were still plenty of shareholder demands made of public companies.

By sector, industrials was the largest group impacted by activism, followed by financial services and consumer cyclicals. Large cap companies were the most affected, with U.S.-based companies making up 70 percent of those subjected to activist demands.

Shareholder demands are still being made of public companies, according to Activist Insight’s “Shareholder Activism in Q1 2020” report.

Lazard’s 1Q 2020 activism review shows that the number of targeted companies in the first quarter of this year was roughly the same as in last year’s first quarter. On the other hand, Reuters, reporting on the Lazard review, noted that while 2020 began on a strong note, with activist firms pushing for change at 42 companies in the first two months of the year, new activist campaign launches fell by 38 percent in March, when the global economic shut-down began in earnest.  Further, Reuters reported that new activist campaigns were, “launched at the slowest pace since 2013 and corporate agitators put the smallest amount of money to work since 2016.”  

Even so, there are several high-profile campaigns looming. One getting some buzz, according to Bloomberg, is Standard General’s proxy fight with Tenga, Inc., a $2 billion media company. This contest will be the first-ever all-digital board fight. With Standard General seeking four board seats, Tenga’s virtual annual meeting on April 30 will be a test for activism, both digitally and in the world of COVID-19. 

While virtual annual meetings are nothing new, counting contested votes remotely is. Bloomberg noted that Broadridge Financial Solutions Inc., which prepares, ships and counts most of the proxies for U.S. companies, doesn’t currently have a specific platform to allow for remote voting in a contested situation.  According to a Broadridge representative, the company, “lacks the technology” to count virtual votes when there are competing director slates. 

Bob Marese, president at MacKenzie Partners Inc., a proxy solicitation firm, said that it could, “be more difficult for proxy solicitors get investors to switch their votes in the lead up to the meeting because many are not in the office, nor are the bankers or brokers they may need to change their vote.” Other potential pitfalls include the inability for shareholders to ask tough questions in a virtual meeting setting. According to the Financial Times (as reported by IR Magazine), investors have become concerned that virtual annual meetings could “shift the balance of power” away from shareholders, as companies have greater control over managing Q&A sessions virtually.

What does the future hold for activist activity? Since many companies have curtailed stock buyback activity in light of the COVID-19 crisis, Lazard believes that activists pressing for return of capital through buybacks will not be a focus. 

Jim Rossman, the head of shareholder advisory at Lazard, believes that, “lower M&A activity and companies focused on conserving cash will mean that activists are likely to increase their focus on operational performance and how management teams react to the crisis as the basis for new campaigns.” He went on to say that activists will likely want to avoid looking overly aggressive during the pandemic as to not offend other investors, “whose help they might need in pushing their case later.” 

Chris Young, managing director and global head of contested situations at Jefferies, also believes overly aggressive activists could face media backlash for seemingly profiting off the pandemic. Young further believes that, “having lived through the prior period of sky-high market volatility, we expect there will be a decline in activist campaigns in the near-term. Once volatility subsides and corporate valuations reset at new normal levels, however, we expect activists could have enough time to initiate new campaigns, including submitting director nominations for proxy season 2021.”

While COVID-19 may be changing the activist landscape in the near-term, the same best practices apply to help make sure your company is ready in the event of aggressive shareholder demands. Analyze your shareholder base and stay in-the-know about changes in ownership, especially during a period of extreme volatility when activists can build positions more cheaply; be open to proactively engaging with investors, even while you hunker down to focus on the impact of the current health crisis and economic downturn; and, think about adopting a “poison pill,” or at least having one at the ready. 

Laurie Berman, lberman@pondel.com

The Danger of High Flying Startups

WeWork, once a darling of Wall Street, even before its planned IPO, has been in the news a lot…and not because its stock price is flying high after going public.

In fact, as those in the investment community well know, WeWork recently pulled its IPO amidst investor doubts about the company’s valuation and concerns about corporate governance, according to the Wall Street Journal.

A follow-up WSJ story covered the incredible downfall of the company and its CEO, who has since been relieved of his duties, removing him from the company he started in 2010. According to an editorial in The Washington Post, “This might be the most spectacular implosion of a business in U.S. history. Other failures were bigger, in mere dollars. But WeWork has to be the most literally incredible. Profanity seems somehow inadequate. It’s just . . . holy wow.”

This spectacular implosion points to WeWork’s former CEO, Adam Neumann, whom The Atlantic called the “Most Talented Grifter of Our Time.” That’s saying a lot, given the downfall of Theranos due to its founder, Elizabeth Holmes, and the billions stolen by Bernie Madoff, pyramid schemer extraordinaire.

Looking at some of Neumann’s actions, it seems like the writing was on the wall.

For example, during a courting process by Nasdaq and the New York Stock Exchange, Neumann was said to have asked if the exchanges would ban meat or single-use plastic products in their cafeterias. A noble thought for sure, but one has to wonder what kind of power Neumann thought he could wield. While working on the company’s S-1 in preparation for the IPO, Neumann’s wife, also WeWork’s chief brand officer, insisted it be printed on recycled paper, but rejected early printings as not being up to snuff. This set the process back by days, because the original printer refused to work with them anymore. Earlier in his history, Neumann is reported to have claimed that he wanted to become “leader of the world, amassing more than $1 trillion in wealth.” While a successful CEO needs to have a healthy ego, these vignettes point to someone whose ego passed healthy, all the way to downright irrational.

SoftBank Group eventually bailed WeWork out through a $10 billion+ takeover, which, according to Reuters, gave Neumann a $1.7 billion payoff. That’s a lot more than the company’s currently estimated $8 billion valuation, but not even close to the $47 billion valuation it supposedly held in January.

Can the WeWork story provide insight for future start-ups and for venture capitalists who fund them?

For one, the financials, operations and inner workings of a company matter. When a high-profile unicorn, with a tremendous pre-IPO valuation files an S-1, the details become public and scrutinized by a lot of very smart investors. If a company is not on solid ground, with a strategic plan that can be effectively implemented, it’s probably not ready to go public. Additionally, when a CEO of a high-profile unicorn, with a tremendous pre-IPO valuation has delusions of grandeur, it’s probably not a great idea to back him or her, unless they have proven their worth.

While there’s no cookie cutter mold for determining which companies and CEOs will ultimately be successful, quality should be the rule, among many other warning signs that should be heeded.

Laurie Berman, lberman@pondel.com

The Best Donut in Los Angeles

WARNING:  You have to read this entire blog post to know where to find the best donut in Los Angeles.

With third-quarter earnings season nearing its sunset, the year is practically over.  OK, OK, let’s not get too far ahead of ourselves.  But seriously, what does 2019 hold for capital markets?  Um, uh, well, that’s hard to say.  A few preliminary ideas from the IR observation deck:  Investors will care even more about diversity at the board level, cash preservation or lack thereof will weigh heavily on investors’ minds, and public companies will feel more pressure to perform on a quarterly basis to justify high stock valuations.

Indeed, these variables have already surfaced in 2018, particularly in California.  A California law passed in September that requires all publicly held companies based in the state to have at least one female board member by the end of 2019.  The law goes further by also requiring companies with at least five directors to have two or three female directors by 2021.

At the same time, continued volatility in the market and rising interest rates are influencing companies and investors alike to carry more cash on their balance sheet.  This trend will likely persist as the Fed partakes in gradual interest-rate increases in 2019.  That being said, investors don’t necessarily have the patience to watch a lot of cash sit idle on a balance sheet, so use it wisely.

Speaking of patience, high U.S. stock valuations will require companies to prove their pudding is still the best pudding around, and the onus will be on IR professionals to ensure that stellar financial performance is communicated effectively.

There are a number of other IR-related topics to consider for 2019, such as the continued effects of MiFID II, how artificial intelligence will influence IR, and the best place to eat a donut in Los Angeles when you’re on an NDR.  But for now, let’s just get through earnings season.

— Evan Pondel, epondel@pondel.com

Class Action Litigation on the Rise: How Safe are Safe Harbor Statements?

History has a way of repeating itself. With 2017 statistics of all kinds starting to be compiled, one offered by the Stanford Securities Class Action Clearinghouse should make public company management teams and their boards take notice: the number of securities class-action lawsuits is on the rise … in a startling way.

 

The clearinghouse reported that the number of annoying and costly public company securities class action lawsuits increased to 413 in 2017, up from 213 in 2016, and up from an average of 190 in the years 2002 through 2015.                        

                                            

classaction_law

Law firm Wilson Sonsini Goodrich & Rosati recently issued a paper highlighting the trend, which can impact companies of all sizes, from micro- to mega-cap. The three biggest reasons for the suits are material misstatements or omissions in registration statements and prospectuses for IPOs; challenges to merger and acquisition transactions, many if not most of which defense lawyers say are boilerplate in nature and meritless; and greater scrutiny by the SEC to disclosures being made by private companies.

 

Disclosures, or lack thereof, in press releases, which are totally in management’s control, often play a role in such lawsuits. While most companies are careful about including safe harbor statements in their press releases, which offer some legal protection, many companies do not use those statements properly. Often, they fail to customize those paragraphs to include the actual forward-looking statements mentioned in the press release. Worse yet, sometimes the safe harbor paragraphs are being included as boilerplate, even when there are no forward-looking statements at all.

 

Remember the term, “You’ve been Lerached?” A couple of decades ago, class action securities lawsuits were rampant, with a San Diego-based law firm, long since shuttered its doors, leading the pack in filing them. The firm’s principal ultimately went to jail for fabricating many such suits, looking for plaintiffs to buy a few shares of a given company, allegedly based on a CEO’s statement about future performance, then at the first sign of non-performance, voila, the company was “Lerached,” with the term affectionately named after lawyer Bill Lerach. Copycats followed.

 

Many of those lawsuits were legit, and they ultimately gave birth to the Private Securities Litigation Reform Act of 1995 and the safe harbor statements in press releases, followed by Reg FD in 2002. But despite the safe harbor protection, a case involving guidance issued in a press release by Quality Systems last July may signal a frightening change: The U.S. Court of Appeals for the Ninth Circuit, which governs California, reversed the district court’s dismissal of a securities fraud suit, saying various aspects of the safe harbor were “hostile in tone and application, when compared to many prior forecasting decisions.”  

 

What does all this mean?  Maybe nothing, but today more than ever, it pays to listen carefully to your SEC lawyer and to your investor relations advisor on all corporate communications matters. It also may be a good idea to place close attention to those safe harbor statements, and be sure to stay tuned as to whether those statements turn out to be not so safe as hoped.

— Roger Pondel, rpondel@pondel.com

 

 

 

Read Any Good Books Lately?

I really enjoyed McKinsey & Company’s piece on what CEOs are reading in 2017, which is a continuation of an annual list going back several years.  Not only did it provide interesting recommendations about what to add to my Kindle library, but seeing what’s in the minds of leaders makes them a bit more relatable.  Not surprisingly, the list is overwhelmingly non-fiction, however, I’d recommend more fiction for a bit of escapism, which is likely needed given CEOs daily demands, and because there are some lessons to be learned from non-fiction storytelling.

Some of this year’s titles include:

  • Serial Innovators: Firms That Change the World by Claudio Feser
  • Sun Tzu: The Art of War for Managers: 50 Strategic Rules Updated for Today’s Business by Gerald A. Michaelson and Steven W. Michaelson
  • Good to Great: Why Some Companies Make the Leap . . . and Others Don’t by Jim Collins.  CEOs surveyed by Fortune named this book “the best business or management book they had ever read.”
  • Zen and the Art of Motorcycle Maintenance: An Inquiry into Values by Robert M. Pirsig

I suppose I’m not alone in my interest in lists like these, as several media outlets have reported on CEO reading over the years.  Business Insider noted books like The Remains of the Day by Kazuo Ishiguro as being a favorite of Jeff Bezos who once said that he “learns more from fiction than non-fiction” (I’d note here that I pointed that out earlier in this post before I even saw that Jeff Bezos said it).

Tim Cook took the non-fiction path with Competing Against Time: How Time-Based Competition is Reshaping Global Markets by George Stalk, Jr., and Thomas M. Hout, which he is said to distribute to new Apple employees and colleagues.  The Road to Character byDavid Brooks was cited by Pepsi’s CEO, Indra Nooyi, as providing an understanding that “building inner character is just as important as building a career.”

Rounding out the recommendations, Forbes recently listed Shoe Dog, by Phil Knight, Competing Against Luck: The Story of Innovation and Customer Choice by Clayton M. Christensen, and Who Says Elephants Can’t Dance? by Louis Gerstner, Jr. as popular CEO choices.

Have you read any of these books?  Others you’d like to recommend?  Let us know in the comments section below.

— Laurie Berman, lberman@pondel.com

Cocktail Party Talk

What do you say when you’re at a cocktail party, summer BBQ, or some other social gathering where you’re sure to meet new people who will invariably ask what you do for a living? If you’re a doctor, lawyer, accountant, musician (or one of a host of other professions) the answer is quite easy.  What do you say, however, if you’ve been practicing investor relations for more than 25 years?  Does anybody not in the business understand what that means?  If you generalize and say, “I’m in public relations,” most would probably confuse you for a publicist, with a glitzy lifestyle keeping the latest celebrity in the news and out of trouble.

At PondelWilkinson, we practice both investor relations and strategic public relations, so I asked some of my colleagues how they describe what we do (I’m always looking for ways to be more entertaining at parties). Here is a summary of their answers:

  • We offer strategic counsel to a host of clients with wide-ranging needs. We help clients with financial and general business messaging, maintain positive relationships with investors and communicate with key stakeholders to drive positive business results.
  • PondelWilkinson is a specialized public relations firm, concentrating on corporate matters, from public company issues such as investor communications, to liaison on behalf of public or private companies with the business/financial news media, to crisis communications.
  • We help people/organizations communicate with their key audiences, whether it’s other businesses, consumers or shareholders.
  • PondelWilkinson represents publicly traded companies by interfacing with shareholders, analysts and investors on behalf of clients. We pitch media, plan events and write press releases. Basically, we help companies raise their reputations and build support for the client.
  • We help companies tell their stories to key audiences, including investors, media, employees and customers.
  • We help public and private companies communicate.

Not one of my peers used the words investor relations in describing how we spend our professional time (although one did use public relations). I generally don’t either.  My usual answer is that “We are a consulting firm helping companies, both publicly traded and private, communicate with key audiences.”

How do you describe what you do? We’d love to hear from you.

— Laurie Berman, lberman@pondel.com

Small Talk at Annual Shareholders’ Meetings

We’re nearing the end of the season with respect to annual shareholders’ meetings, and taking a constructive look at what went right or wrong is always helpful in anticipation of next year.

Perhaps one of the most daunting aspects of annual shareholders’ meetings is when investors and management teams are mingling outside of the formal meeting session. How should management navigate small talk with investors?

Following are tips to keep in mind:

  • Be mindful of selective disclosure. If you think you’ve disclosed previously undisclosed material information, consult your CEO, CFO, general counsel or IR representative.
  • Proactively engaging in conversation with investors is OK, and actually encouraged.
  • It’s fine to say, “I don’t know.”
  • Talk in plain English. Keep it simple by avoiding company or industry jargon and acronyms.
  • Respond to questions in a direct, concise manner. Try not to wander off on tangents.
  • Do not make future projections.
  • Remain courteous, even if an attendee isn’t. Of course, if a conversation escalates to an unreasonable level, engaging security or even law enforcement is always an option.
  • Do not wander outside of your area of expertise. If you’re not sure about something, refer the question to the appropriate person.
  • Collect business cards or contact information of every investor you spoke with, and pass along to your IR representative.
  • Introduce investors to IR representatives if a follow-up is appropriate.

— Evan Pondel, epondel@pondel.com

The Protocols of Selling a Story

Everyone is selling something.  It doesn’t matter if you’re in business, education, or politics, we’re all trying to sell a widget, a way of thinking, a party affiliation.  The difference is the method in which something is sold.

For example, are solid facts used to back up a thesis about why a consumer should buy something?  Does an educator emote and use theatrics to explain a concept to students?  How authentic is a politician when she or he attempts to relate to the needs and wants of constituents?

The IR world is no different in that most public companies are creating investor theses to sell a company’s story.  There are a lot of variables that influence the efficacy of a pitch to investors.  But in the spirit of writing a pithy blog post in 500 words or less, following is an abridged guide to what’s hot and what’s not when selling a company’s story in today’s market:

What’s Hot

  • Financial Performance – Nothing beats a solid track record of financial performance when trying to attract investors
  • Transparency – The easier it is for investors to understand a company’s model, P&L, and balance sheet, the more likely an investor will be inclined to take a calculated risk and invest
  • Management Relevance – There is a distinction between relevance and years of experience. Relevance is demonstrating why an executive is the best person for the job today, not a decade ago
  • Long-Term Competitive Advantage – The company must present a compelling thesis in terms of why it has built one of the greatest mouse traps that goes the distance when up against competitors
  • Consistent Communication – Somewhat self-serving here, but if all of the aforementioned items are firing on all cylinders and there is no communication … <insert that sucking sound>

What’s Not

  • Hyperbole – Adjectives such as “leading,” “best,” “greatest,” often instill more skepticism than confidence
  • Homogenous Board – In the age of activism, boards of directors are easy targets, especially if they lack independence and diversity
  • Compensation that Isn’t Tied to Performance – Speaks for itself
  • Press Release Overload – Some companies are prolific and have an endless stream of news to relay to investors, although it becomes rather obvious when companies are simply issuing press releases for the sake of “looking” productive
  • Revolving Door in C-Suite – Too much turnover at the top doesn’t curry favor with most investors

— Evan Pondel, epondel@pondel.com

Beware of Lurking Wolves

Sometimes, I pick up my own phone at the office. Last week, a friendly caller caught me off guard. The conversation went something like this:

Caller: Hello, Roger, how are you?

Roger: Fine, thanks, how ‘bout yourself?

Caller: I am also fine, thank you for asking. I am calling to let you know that our analysts have started recommending the stocks of several conservative, dividend-paying, major oil companies They are very safe investments, and I would like to start a relationship with you.

Roger: Pardon me?

Caller:  I also want you to know that from time to time we come across the stocks of some smaller companies that our analysts research thoroughly. And within the next week or so, there is one that we will be formally recommending, because of some announcements we believe the company will we making in the next two months.

Roger: Who is this?

Caller: I will give you my full contact information in a minute, but please let me finish.

Roger: May I have your name and the name of your company?

Caller: Now Roger, no one can predict what will happen to the price when those announcements start to flow, but I would like to call you at the right time, so that as a client, you may take advantage of our knowledge. Buying a few shares of a major oil company can establish the account, then we can move quickly on the smaller companies at the right time.

I never got the fellow’s name, since I hung up on him. But his pitch was familiar. It was reminiscent of cold calls that came in prior to the 2013 release of The Wolf of Wall Street.

Almost comedic, but perhaps disturbing, the call was the second one I received—with precisely the same script—in the past couple of weeks. Could the wolves be coming back? Have their prison terms ended? Perhaps it’s the perceived frothy Dow. Or maybe the fake news mantra. Or the newswire upstarts that make it ridiculously inexpensive, and often without traditional controls, to transmit press releases from virtually any source.

Most readers of this blog know better and would not fall for such scam calls. But beware, nevertheless. Hopefully, history is not repeating itself.

Roger Pondel, rpondel@pondel.com

Trump’s Effect on IR

There has been a heap of stories written about President-elect Donald J. Trump’s effect on trade relations and health care, but nary a peep about how his presidency is going to affect our world, meaning investor relations.

Granted, it would be unusual for media to report on how our country’s new chief executive officer will influence investor relations because, um, IR isn’t necessarily something bandied about in the Oval Office.

But consider this: The American people are like investors, and how you treat them in good times and bad will affect the valuation of the country. And depending on how Trump executes his policies, many publicly traded companies and their investors will have to adapt to changing market conditions.

Following is a prognosticator of sorts on how Trump will affect the world of investor relations from an industry perspective. The analysis is based on discussions with the Street and analyst notes.

  • Consumer – Investor relations executives in this sector may experience an increase in inbound calls based on exposure to manufacturing overseas, particularly in China. Trade issues may thwart valuations and likely raise a lot of questions if a company has manufacturing exposure in foreign countries.
  • Construction – Generally, investors should have optimism regarding this sector’s near-term future.  At the same time, more dollars flowing to infrastructure could prompt greater scrutiny of infrastructure companies that aren’t performing.
  • Renewables – This sector has received bipartisan support in recent years, and there is no reason to expect otherwise during the next presidential term. The biggest conundrum for IROs in this space is selling the value proposition of renewable technologies and how soon they can be realized under the incoming administration.
  • Healthcare – With a lot of questions surrounding the future of the Affordable Care Act, many investors and investor relations professionals are likely unsure of where certain business models will stand under the new administration.
  • Technology/media – Hard to say what challenges may surface in this sector. Social media companies may come under fire for alleged fake news practices, as well as influencing the presidential outcome, which could certainly keep IR pros on their toes.
  • Banking – Investors are expecting interest rates to rise, which could bode well for the bottom line in this sector. Loosening up on regulations could also help move more financial services stocks into the black. IR executives will likely have to speak to how banks will enhance their net interest margins once the new administration is in full swing.
  • Aerospace/Defense – With a lot of suppliers in foreign countries, there could be a backlash with respect to manufacturing costs. Even though a Republican administration generally bodes well for this sector, optimism may soon fade if trade relations continue to slide.

— Evan Pondel, epondel@pondel.com