A few weeks ago, Chesapeake Energy Corp. announced Oklahoma City icon Aubrey McClendon's retirement, the latest twist in a highly public campaign by “activist” shareholders to bring about changes at Chesapeake.
A different group of activist investors has taken a position in SandRidge Energy Inc., also calling for change. Targeting Chesapeake and SandRidge has certainly attracted the attention of shareholders. It should also command the thoughtful concern of Oklahomans.
Activist shareholders — like ordinary investors — take a position in a public company hoping to make a profit. Unlike ordinary shareholders, though, activists buy stock intending to push for changes in the company that they think will make its stock price go higher.
They use a variety of tactics, such as private negotiations, publicity campaigns, litigation and proxy battles to get management to accede to their demands, even taking over the board of directors sometimes.
As a general matter, it is important to realize that activists have the right as shareholders — owners of the company — to do these things. And it's safe to assume that many activist grievances about companies and management are legitimate.
But that doesn't make it less potentially painful for Oklahoma City should shareholder activism lead to layoffs, restructuring or even a sale — it doesn't take a long memory to recall the dislocation caused by Anadarko Petroleum's acquisition of Kerr-McGee Corporation in 2006, which the Greater Oklahoma City Chamber of Commerce at the time estimated would cost the local economy almost $247 million annually.
And it doesn't make less ugly the spectacle of a company people feel like they know having to justify to people they don't know (the activists and other shareholders) its corporate actions and strategies, and even its existence, through the prism of its stock price.
Taking a step back, then, how does one fairly and dispassionately assess what activist investors do?
Hostile takeovers, about which much has been written, provide a useful framework for thinking about activist investing. Although the two are not the same, they are functionally similar in that they involve corporate overtures that are unwelcome by the target company, and the same controversial defensive tactics sanctioned by law, such as poison pills and staggered boards, come into play.
A poison pill is so called because the acquirer's declaration of its intent acts as a trigger to give new rights to existing shareholders. Having staggered boards means that directors are elected — and can only be removed — a few at a time. Both of these make takeovers, and activist investing, more difficult and expensive.