IN-DEPTH: As vaccines arrive, immunity to activism wears off

The coronavirus pandemic in the United States is currently the worst it has ever been. COVID-19 hospitalizations peaked to end 2020 while cases and deaths remained near all-time highs according to the COVID Tracking Project.

“December and January and February are going to be rough times,” CDC director Robert Redfield said in a December 2 session with the U.S. Chamber of Commerce. “I actually believe they’re going to be the most difficult time in the public health history of this nation.”

Despite COVID-19 raging, activism is expected to take off at the start of 2021. Proven vaccine efficacy, opening director nomination windows, and the revealing nature of this pandemic on businesses has the potential to unleash a wave of activism at the beginning of the new year.

“I think the markets have incorporated COVID into what’s going on,” Ele Klein, who oversees law firm Schulte Roth & Zabel’s shareholder activism group, said. “Companies are going to be judged as they’ve been traditionally judged. If they’ve underperformed during COVID they’re going to have to answer for that.”

In the early spring, companies across many sectors were jittery as markets nosedived and investors gave companies time and space to deal with a pandemic unprecedented in modern times.

This shows up in the data, as more than 16% of resolved public activist demands in the United States were withdrawn in 2020, the highest level going back to 2014, according to Activist Insight Online. Meanwhile, activist campaigns in the first quarter of 2020 were down nearly 17% compared to the five-year average of for the same period, according to Activist Insight Online data. The total number of campaigns in 2020 finished at a five-year low driven almost entirely by a drop in campaigns in the first quarter.

“There was a big tonal shift in March and April because at that point activists were on the defensive, arguing why they needed to go forward with campaigns at that point,” Kai Liekefett, co-chair of Sidley Austin’s shareholder activism group, said. “ISS, Glass Lewis and institutional shareholders didn’t look favorably on giving management teams an activist campaign to deal with during an unprecedented health crisis.”

While activists may have been happy to give companies the benefit at the onset of a global health crisis, any grace period given to companies at the start of the pandemic is now over. The number of activist campaigns in the second, third and fourth quarters of 2020 snapped back to historical levels as markets digested vaccine news that put a concrete end date to the public health crisis in reach, while the pandemic itself has shown which businesses are resilient and which are brittle putting vulnerable companies back in activists’ sights.

“It’s not just that we know where we stand, it’s that the tectonic plates have shifted,” said Jim Rossman, head of shareholder advisory at Lazard. “There are new winners, new losers and serious disruptions taking place for business models. If you’re being too conservative in adapting to the new environment, you’re a target that maybe two years ago [you] would never have been.”

Activists have sorted through the technological issues of running a campaign virtually – a shift which has actually reduced the costs of running a campaign – and activists are going back on the offensive. The second and third quarters saw more campaigns than the average in the previous five years, while data for the fourth quarter showed a slightly below average dip in campaign volumes.

Darren Novak, the global head of activist defense at UBS, has seen activists get more aggressive in the letters they send to companies and in Schedule 13D filings. The defenses companies used against activists in the spring ring hollow now that we are so far into the pandemic.

“I think the opportunity to use COVID as a defense is rapidly diminishing,” Novak said. “Each situation is circumstance-specific, but just to be able to say we’re in the middle of a pandemic is not going to resonate as easily.”

While Novak doesn’t see a huge spike in campaigns coming down the pike in 2021 because dedicated activist investors can only juggle a finite number of campaigns at any given time, he expects overall volumes to return to recent levels, led by occasional and one-time activists.

Timing has also given activists another reason to shrug off an out-of-control pandemic. Rossman noted that two-thirds of director nomination windows in the U.S. are opening up in December and January — giving activists a narrow band to launch campaigns.

Meanwhile capital that has been on the sidelines since March is rearing to be invested now that market conditions have stabilized. Activists are flush with cash and only a handful were forced to close during 2020, while big names like Elliot and Starboard made a lot of money over the past several months, according to Liekefett.

All of these factors have combined to create conditions ripe for a groundswell of activism to kick off 2021. “It’s been a very disruptive time, and that time of disruption provides massive opportunities for investors to get ahead of trends,” Rossman said.