DealLawyers.com Blog

I’ll start this blog by noting that perhaps this article is misquoting Warren Buffett or taking it out of context. The tone of the article is that Warren believes Wall Street bankers & lawyers are pitching strategies to stave off activist investors out of self-interest – and that well-run companies who engage their shareholders need not necessarily worry about activists. Here’s one of the quotes from the article:

It’s in Wall Street’s interest to scare managements about activists,” Buffett said. “They’re not dying to have an activist knock on your door, but it doesn’t cause them to break out in tears either, because you take them on and they get all involved in your strategy. And it’s their job, to some extent, to make you worry even more than you probably should.

Although I agree that companies should strive to perform well and that shareholder engagement is vital – and that advisors are working out of self-interest (as most of us do) – I don’t agree that is all you need to do. I don’t think Warren believes that’s all you need to do either as the article ends with this thought:

The trend has gotten so much momentum that now even decently run companies are being targeted, Buffett said Tuesday, without citing examples.

Here’s five reasons why you need to prepare for activists these days – even if you are doing all the right things:

1. Activists have loads of money and they’re gonna target someone. So even if every company was doing their job properly, someone is gonna be targeted.

2. Industry cycles impact even the most well run companies. If your company happens to be in an industry that is having a down year, your stock will be going down along with your peers – regardless of how you perform within your sector.

3. Your long-time loyal investors might have a bad year themselves and need to liquidate part of their portfolio – regardless of how they feel about your company.

4. Stuff happens. Not matter how well you perform in general, sometimes you take a risk – that is a pretty good risk to take – that doesn’t turn out the way you expect. Every company needs to be taking risks. That is life. So you might have a 20-year streak of performing well and suddenly have a bad year – and be vulnerable to activists.

5. Management will eventually turn over. CEOs don’t live forever. And good CEOs prepare for the future. So even if a CEO is managing a company well throughout her entire career, she needs to prepare her company for the worst – which may come up when she turns the key over to her successor. It’s much better to be prepared in advance rather than stave off an activist in the midst of a battle.

A better question might be: “Is a board negligent and not fulfilling its fiduciary duties if it’s not preparing for activist intrusion – even if its corporate strategy is sound and the company has excellent shareholder engagement?”