February 28, 2018

Tax Reform: Will More Cash Mean More Activism?

This Morrison & Foerster memo reviews how the inflow of cash that many corporations are receiving as a result of tax reform may prompt more investor activism. This excerpt says that the bottom line is that activists know companies are flush with cash – and they want a big slice of it:

Though all the effects of the Act will not be known for years, it is clear that the amount of cash on company balance sheets will substantially increase. Numerous companies have announced employee bonuses, 401(k) contributions, and other compensation increases. Others have announced significant growth initiatives. Even with these announcements, U.S. companies will face a high-class problem: What should they do with the extra cash?

Capital allocation—specifically the use of “surplus” cash—has always been a focus of activist investors, who typically encourage its return to shareholders. Indeed, capital allocation has been a campaign target of many activist campaigns. We therefore anticipate activist investor campaigns based on capital allocation to increase in the coming year.

In order to successfully deal with activist campaigns & preserve the flexibility to use this cash in support of corporate strategies, the memo says it’s essential for companies to align closely with their long-term institutional investors.  It also offers suggestions on how to accomplish that objective.

John Jenkins