The Activism Vulnerability Report
Introduction and Market Update
With Labor Day marking the unofficial end of summer, FTI Consulting’s Activism and M&A Solutions team welcomes readers to our eleventh edition of the quarterly Activism Vulnerability Report, which reports the results of our Activism Vulnerability Screener following 2Q22, plus other notable trends and themes in the world of shareholder activism.
During 2Q22, the U.S. stock markets experienced considerable volatility as inflation remained a concern for investors. In July 2022, the U.S. Federal Reserve enacted its second consecutive 75 basis point interest rate increase, following a similar increase in the previous month.1 These factors, when combined with an inverted yield curve, early signs of a softening labor market and a second consecutive quarterly decline in GDP, have exacerbated investors’ concerns of a looming recession.2,3
While the market has gained some ground from the lows of summer, as of September 1, 2022, the Dow Jones Industrial Average (“DJIA”) was down 12.9% year-to-date for 2022, the S&P 500 was lower by 16.8% and the Nasdaq Composite fell by 24.7%. Over the same period, the CBOE Volatility Index (“VIX”) was up over 30.2%.4
Year-to-Date Performance (2022)5
While viewing the IPO and SPAC markets as proxies of market health and the appetite for large, risky investments, a dramatic trend unfolded in 1H22. Following 2021’s record-setting pace of IPOs on U.S. exchanges, IPO activity dropped precipitously in 2Q22, down to just 35 new listings as compared to approximately 200 in the same period last year.6 Last quarter was the weakest single quarter of IPO activity since 2017.7 Last year’s SPAC activity, which was partly sponsored by activist investors, also dried up, with many SPACs unable to complete the required acquisitions of operating businesses within the 24-month window. This rapid decline is a direct result of waning investor exuberance for high growth, marginal EBITDA companies amid unfavorable market conditions; at the same time, the SEC is proposing enhanced regulation on SPACs.8 Further illustrating this weakness, the gross proceeds from IPOs during the quarter were only $3.0 billion, the smallest quarterly total since 2016.9 This negative capital formation trend could continue as multiples of high-growth companies remain challenged.
Excluding SPACs, companies that went public in the United States in 2021 have seen their market caps drop by 44% on a weighted average basis from their listing prices, significantly more than the broader market.10 We expect that investors, including activists, have been and will continue to look for opportunities. During this price discovery process, we would not be surprised if activists uncovered opportunities that might not have been as apparent before the correction, and for those companies that activists have been eyeing, potentially lower valuations may have created more attractive risk/reward scenarios.
A total of 321 campaigns involving U.S.-based companies were launched in 1H22, with 164 in 1Q22 and 157 in 2Q22.11 The number of campaigns in 1H22 was up 23% compared to 1H21, and 2Q22 campaigns increased 45% from 2Q21, when there were 108 campaigns initiated. Activists managed to gain 31 of the 71 (44%) board seats sought in 2Q22, compared to 14 of 43 (33%) in 2Q21.12 In 2Q22, seven activist campaigns reached the final vote stage of their proxy contests, compared to 10 proxy contests reaching a final vote in the same period last year.13
Technology, Media and Telecom (“TMT”) was the most targeted sector (of 10 total sectors) for shareholder activists in 1H22, representing 25% of all U.S. campaigns in the first half of the year, followed by Healthcare & Life Sciences (16%). The increase in activist campaigns against the Healthcare & Life Sciences industry may be, at least partially, driven by fluctuations in Biotechnology valuations. When compared to 1H21, Real Estate experienced the most notable decrease in activist attention, while the Agriculture sector saw the largest uptick, as determined by the percentage change in campaigns initiated.14
Activist Targets by Sector – First Half YoY Change15
Shareholder activists have continued to target large-cap companies (>$10 billion market-cap) at an increasing rate. In 1H22, large-cap companies represented 55% of all new U.S. activist campaigns, up from 50% of all campaigns in 1H21.16 Though high-profile activist funds remained active in 1H22, with firms like D.E. Shaw and Elliott Management launching notable campaigns at FedEx and Western Digital, respectively, a new trend has emerged that may transform the activism landscape.17
First-time activists accounted for a notable level (37%) of all campaigns initiated in 1H22, while some of the most familiar activist names (Elliott Management, Icahn Associates, Pershing Square Capital Management, Starboard Value and Third Point) accounted for only 23% of campaigns initiated during the six-month period, below concentration levels observed over the past five years.18,19 At their peak in 2012, the five funds noted above were particularly prominent in the world of shareholder activism and represented 39% of all proxy campaigns initiated.20 This may portend that activism is entering a new stage, evolving from the campaigns of the 2010s that often focused on cutting costs and returning cash to shareholders. This new stage is characterized by operational and strategic activism becoming fused with corporate governance and ESG. The current activism environment might be favorably positioned for first-time activists to be a driving force in shareholder activism and initiate more campaigns in the future. Despite prominent activists continuing to initiate larger-scale campaigns than their “first-timer” counterparts, we expect it will be more difficult for companies to predict activist playbooks and strategies in the future with so many new entrants in the field.
Prominent Activists as a % of Total Proxy Campaigns21
Continuing the trend from the end of 2021, and tracking with market volatility, many industries saw substantial changes in their vulnerability ranking in 2Q22 as six industries moved 10 or more spots. The Aviation & Airlines industry jumped 13 spots to the top of the list as the most vulnerable industry to activism, claiming the spot from the Biotechnology industry, which held the position for two consecutive quarters. Though the demand for air travel has returned as serious worries about the pandemic are subsiding, airlines have not been able to scale up operations accordingly.31 As a result, network fluidity has struggled and per unit costs remain elevated relative to airlines’ previous guidance, making the Aviation & Airlines industry more vulnerable this quarter.
Low-cost carrier Spirit Airlines was the subject of a successful hostile takeover bid earlier this year, which our team views as a form of corporate activism. Frontier Group and JetBlue Airways engaged in a four-month bidding war, with proxy advisors changing their recommendations based on the most recent bids. Spirit adjourned its shareholder meeting three times in an attempt to persuade shareholders to approve its proposed merger with Frontier. However, shareholders rejected that merger, resulting in Spirit finally agreeing to accept JetBlue’s unsolicited offer.32
The airline industry is heavily regulated, which will make getting approval from the DOJ for JetBlue’s hostile takeover more difficult but still feasible. The Savings Banks and Insurance industries are also highly regulated. Both of those became significantly more vulnerable in the most recent quarter and both rank among our 10 most vulnerable industries. Savings Banks is now the second-most susceptible industry. In future quarters, banks may benefit from higher short-term interest rates, but also may be hindered by slower loan growth and increased loan delinquencies.33
One notable campaign within the Savings Banks industry has been Driver Management’s attempt to add a new director at Philadelphia-based Republic First Bancorp. There has not yet been a vote on Driver Management’s nominee, but the company has replaced two directors, one of whom was its Chairman and CEO.34
The Insurance industry also reversed course, jumping 13 spots and moving into the top 10 after trending down the list for the two previous quarters. While share price performance has been solid over the past year, insurers have noted multiple pain points stemming from inflationary pressure, such as increased costs related to claims and wage inflation required to retain and recruit talent.35
Genworth Financial (“Genworth”), whose main business is life insurance, was the subject of a short-lived shareholder activism campaign earlier this year. Seven Corners Capital Management notified the company of its plan to nominate directors to Genworth’s Board, but later withdrew those nominations, instead urging shareholders to oppose four directors’ re-election and the company’s Say-on-Pay resolution.36 Shareholders approved all of Genworth’s nominees and resolutions at Genworth’s annual meeting.37
What This Means
Although market volatility, as measured by the VIX, has steadily declined since June 2022, much uncertainty remains within the market as participants attempt to decipher rapidly evolving economic data to forecast the trajectory of our economy.38 Such uncertainty undoubtedly generated a great deal of investment hesitation in the second quarter, but newly depressed valuations may be too good to pass up, opening the door to a surge in campaigns through the end of the year.39 Further, as the Federal Reserve continues its work in hopes of curtailing inflation, investors may begin to see some light breaking through the clouds, giving them the confidence to deploy some of the dry powder that has been on the sidelines for the first half of 2022.
FTI Consulting’s Activism Vulnerability Screener Methodology
- The Activism Vulnerability Screener is a proprietary model that measures the vulnerability of public companies in the United States and Canada to shareholder activism by collecting criteria relevant to activist investors and benchmarking to sector peers.
- The criteria are sorted into four categories, scored on a scale of 0-25, (1) Governance, (2) Total Shareholder Return, (3) Balance Sheet and (4) Operating Performance, which are aggregated to a final Composite Vulnerability Score, scored on a scale of 0-100.
By classifying the relevant attributes and performance metrics into broader categories, experts at FTI Consulting can quickly uncover where vulnerabilities are found, allowing for a more targeted response. FTI Consulting’s Activism and M&A Solutions team determined these criteria through research of historical activist campaigns in order to locate themes and characteristics frequently targeted by activist investors.
- The following is a selection of themes that are included for each category:
- The Activism and M&A Solutions team closely follows the latest trends and developments in the world of shareholder activism. Due to the constantly evolving activism landscape, FTI Consulting’s Activism and M&A Solutions team consistently reviews the criteria and their respective weightings to ensure the utmost accuracy and efficacy of Activism Screener.
1: Jonnelle Marte and Catarina Saraiva, Fed Hikes 75 Basis Points Second Time, Signals Third Is Possible, Bloomberg, (July 27, 2022), https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation.
2: United States Rates & Bonds, Bloomberg (accessed on Aug. 23, 2022), https://www.bloomberg.com/markets/rates-bonds/government-bonds/us.
3: Chelsea Bruce-Lockhart, Emma Lewis, and Tommy Stubbington, An inverted yield curve: why investors are watching closely, Financial Times, (April 6, 2022), https://ig.ft.com/the-yield-curve-explained/#:~:text=The%20gap%20between%20long%2Dterm,the%20harbinger%20of%20economic%20downturns.
4: FTI Consulting analysis of market performance. Data provided by FactSet.
6: Sara B. Potter, U.S. IPO Activity Drops Dramatically in the First Half of 2022, FactSet, (July 14, 2022), https://insight.factset.com/u.s.-ipo-activity-drops-dramatically-in-the-first-half-of-2022#:~:text=According%20to%20FactSet%20data%2C%201073,raising%20just%20under%20%249%20billion.
8: Matthew Goldstein, SPACs Were All the Rage. Now, Not So Much., New York Times, (June 2, 2022), https://www.nytimes.com/2022/06/02/business/spacs-inflation-regulation.html.
9: Sara B. Potter, U.S. IPO Activity Drops Dramatically in the First Half of 2022, FactSet, (July 14, 2022), https://insight.factset.com/u.s.-ipo-activity-drops-dramatically-in-the-first-half-of-2022#:~:text=According%20to%20FactSet%20data%2C%201073,raising%20just%20under%20%249%20billion.
10: Crystal Tse and Katie Roof, US IPOs Can’t Shake 2022 Slump After Thriving Through Pandemic, Bloomberg, (June 28, 2022), https://www.bloomberg.com/news/articles/2022-06-28/us-ipos-can-t-shake-2022-slump-after-thriving-through-pandemic.
11: FTI Consulting analysis of activist campaigns. Data provided by Insightia.
16: Insightia – Shareholder Activism in H1 2022, Insightia, (July 2022), https://www.insightia.com/agh12022/.
17: Lazard’s H1 2022 Review of Shareholder Activism, Lazard, (July 12, 2022), https://www.lazard.com/perspective/lazard-s-h1-2022-review-of-shareholder-activism/.
19: FTI Consulting analysis of activist campaigns. Data provided by Insightia.
20: FTI Consulting analysis of activist campaigns. Data provided by FactSet.
21: FTI Consulting analysis of activist campaigns. Data provided by Insightia.
22: Greg Neer, How Closed-End Fund Activism Can Offer Value For Shareholders, RVP, (accessed August 23, 2022), https://rvpllc.com/how-closed-end-fund-activism-can-offer-value-for-shareholders/.
23: FTI Consulting analysis of activist investors. Data provided by FactSet.
24: Ad Hoc Committee (the "Committee”) of Independent Investors in T1H, Trian 1, (July 13, 2022), https://ti1independentinvestors.com/wp-content/uploads/2022/07/Ad-Hoc-Committee-Response-to-Trian-Investors-1-Limited-Circular-130722.pdf.
25: Julie Steinberg, Shareholders Oust Chairman of Trian U.K. Fund, The Wall Street Journal, (August 8, 2022), https://www.wsj.com/livecoverage/stock-market-news-today-08-08-2022/card/shareholders-vote-to-oust-chairman-of-trian-u-k-fund-ZjHSVJKnPjQHUQwG34eN.
26: Carolyn Cohn, Peltz's Trian UK investment fund to close after campaign by activist investors, Reuters (September 2, 2022), https://www.reuters.com/business/finance/trian-uk-investment-fund-close-2022-09-02/.
28: FTI Consulting analysis of activist investors. Data provided by FactSet.
29: AVI Public Letter to TPIL Shareholders, Asset Value Investors Limited (November 11, 2021), https://www.assetvalueinvestors.com/content/uploads/2021/11/AVI-Public-Letter-to-TPIL-Shareholders-11-NOV-2021_1.pdf.
30: Third Point agrees truce with activist shareholders over UK fund, Financial Times, https://www.ft.com/content/3d773728-4d72-45ad-a042-0d2e3ef9d307.
31: Megan Cerullo, Why are airlines canceling so many flights?, CBS News, (June 20, 2022), https://www.cbsnews.com/news/airlines-flights-canceled-delayed-cancellations/.
32: Rajesh Kumar Singh and Abhijith Ganapavaram, JetBlue wins Spirit takeover battle with $3.8 billion deal, Reuters, (July 28, 2022), https://www.reuters.com/business/aerospace-defense/spirit-airlines-agrees-be-bought-by-jetblue-38-billion-deal-2022-07-28/.
33: Elizabeth Dilts Marshall, Big U.S. banks see loan growth slowing as outlook for demand, economy darkens, Reuters, (July 18, 2022), https://www.reuters.com/business/finance/big-us-banks-see-loan-growth-slowing-outlook-demand-economy-darkens-2022-07-18/.
34: Jeff Blumenthal, Activist investor nominates board candidate for Republic First Bancorp special election, Philadelphia Business Journals, (June 2, 2022), https://www.bizjournals.com/philadelphia/news/2022/06/02/activist-investor-nominates-board-candidate.html.
35: David Mamane and Marlene Dailey, Insurance industry outlook: Summer 2022, RSM website, (June 6, 2022), https://rsmus.com/insights/industries/insurance/insurance-outlook.html.
36: Proxy Statement of Seth Klarquist, United States Securities and Exchange Commission Schedule 14A, (April 7, 2022), https://www.sec.gov/Archives/edgar/data/0001276520/000176902222000031/gnwpreliminaryproxy472022.htm.
37: United States Securities and Exchange Commission Form 8-K, (May 19, 2022), https://www.sec.gov/ix?doc=/Archives/edgar/data/0001276520/000119312522155127/d291171d8k.htm.
38: FTI Consulting analysis of market performance. Data provided by FactSet.
© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.
September 13, 2022
Senior Managing Director
Senior Managing Director, Leader of Private Capital Advisory Services
Forensic & Litigation Consulting