DealLawyers.com Blog

Alvarez & Marsal recently published the latest edition of its US Activist Alert, which highlights three market trends driving M&A-related activism. These trends are increasing M&A activity driven in part by rising foreign direct investment, an emphasis on portfolio optimization, and an enhanced focus on margin improvement and cost discipline.

The article highlights Elliott Management’s recent campaigns at Honeywell and Pepsico as examples of activists’ focus on portfolio optimization, and sets forth the following considerations for boards and management’s at companies that may be vulnerable to this type of activist campaign theme:

Clear and compelling total equity story: Companies must articulate how each business unit, segment, or product line contributes to strategic coherence and capital efficiency. Not all segments warrant standalone status, and in many cases, assets are stronger together. Management teams and boards that effectively articulate this to the market can build investor conviction in the company’s portfolio and longterm value creation narrative.

Continuous business simplification: Investors are evaluating whether structural complexity, at the segment or even SKU level, obscures value or dilutes management focus. While activists may at times “overshoot” by ignoring or failing to recognize real synergies, companies should proactively assess and explain the rationale for their structures to stay ahead of external pressure.

Disciplined product and segment rationalization: Defenses rooted in legacy synergies or historical strategic fit face heightened skepticism. Arguments for retaining certain assets or segments must be grounded in demonstrable strategic or operational advantages. Otherwise, such arguments may be interpreted as resistance to necessary portfolio discipline rather than evidence of structural advantage.

A&M goes on to say that activists are willing to challenge complexity in a companies’ portfolio of businesses without waiting for underperformance. Instead, they highlight “blurred strategic priorities” and capital misallocation. In this environment, companies need to simplify their business portfolios where appropriate in order to avoid having their strategic narrative coopted by an activist bent on “portfolio optimization” or – as we geriatrics used to call it – a bust-up.

– John Jenkins