Recent, highly publicized corporate takeovers have brought to light a growing phenomenon: activist investors. Notables such as Carl Icahn have become notorious for taking companies that they see as undervalued and framing them as needing a serious management shakeup. Often, the driving factors are related to crucial moments in the lifecycle of a company, either when they are dealing with a negative issue, or conversely, when the development of an asset has reached a stage that could make the company an attractive takeover target, thereby resulting in quick gains for investors, but potentially forfeiting future innovation.
As shares and ownership increase in the company, activist investors seek to draw attention to corrupt or inefficient practices, leading to a proxy battle. Distrust in management leads to mistrust within the board and voting members, and provides the sway needed for these activist investors to effectively take over the company. They replace upper management and board members, sometimes slowly and other times all at once.
Just this week, Icahn reached a proxy battle resolution with my former employer, Cambridge-based biotechnology company, Genzyme. Following a number of unfortunate events, including contamination that forced the company to shut down plant production for months, Icahn blamed management and specifically, CEO Henri Termeer for these failures, and since has been campaigning to turn voters against current management. As of June 9th, two of Icahn’s board nominees were guaranteed to be elected as directors. While this may sound alarming that outsiders could infiltrate a company so quickly (most shares were bought after the June 2009 shutdown), Icahn has had numerous successes including Biogen Idec and AstraZeneca in the pharmaceutical field.
One could argue that Icahn actually does not have the company’s best interest in mind. Recently, Genzyme was forced to buy back $2 billion of its shares, a quick play to gain much-needed leverage in the proxy battle. This leverage was bought, however, at the cost of investing the capital into the repair of its issues and the advancement of its pharmaceutical platforms. When activist investing becomes about quick gains instead of the company’s future, shareholders ultimately lose.
While buildup of ownership in most cases is slow, keeping an eye out for companies and names that have recently been involved in proxy battles is always a safe practice. Sudden, heavy investing should be regarded as an alert. Successful management and board members will maintain some level of transparency to appease any possible suspicious shareholders. Most successful takeovers succeed due to mistrust that management could head the company in the most profitable direction, fueled by propaganda from the party wishing to take over. In an age of activist investing, companies need to closely monitor shareholder activity and be prepared to take action if necessary.
Donna LaVoie, President & CEO
