Stock market prices show investors ‘like when activists target companies’: Professor

Boston College Professor of Finance Vyacheslav Fos joins Yahoo Finance Live to discuss the increase in activist investor campaigns, navigating the intersection of profit and purpose, market volatility, and the outlook for Salesforce.

Video transcript

- With stocks dropping last year, activists stepped in to try to juice performance. Asset management firm Lazard saw a 39% increase in activist campaigns over the past year. And then of course just over the past few days, we've heard about an uptick in activist activity at Salesforce. Let's talk more about this phenomenon. We're joined now by Slava Fos. He is Boston College professor of finance and Hillenbrand family faculty fellow. Thank you for being here, professor. Appreciate it. In your research when you have looked at activist campaigns, have they helped in terms of the stock price? And are you able to draw that direct connection between the activist campaign and the stock performance?

VYACHESLAV FOS: Yes. Hello. It's my pleasure to join the show. My research as well as other researchers have shown a very robust relationship between activist campaigns and valuation of companies. We know that when activist campaigns are announced, typically prices go up. It means that market participants like when activists target companies. And here we have in mind shareholders and all other participants who look at companies and try forecast how well these companies will be doing in the future.

- What types of defenses could a Disney or Salesforce-- what might we see from them? We've seen Disney come out here a little aggressively with the rhetoric. But Salesforce really has done nothing. What might we see from these companies?

VYACHESLAV FOS: Well, public aspect of defense is one thing. And maybe this is why we don't see many things happening. Typically, a lot of things are happening behind the scenes. This is where management and activists do negotiations and they try to come up with ideas of maybe representation for activists on boards of these companies. If such activist engagement leads to proxy contest where actually there is contested election of board members-- and we know that there are well-known tools that companies can use. For example, some companies impose voting restrictions. And they can say that we'll need a supermajority of shareholders to vote for candidates. And of course, companies can use their own resources to engage in public fights with artificial holders.

- There are now three big name activist investors in Salesforce. Have you seen something like that before in the past? And what does that say about the fundamentals of a company like that?

VYACHESLAV FOS: Typically, one of key drivers of companies being targeted in activities campaign is valuation. We know that when companies experience negative stock market performance, they are more likely to be targeted. That is probably what is common across many targets of activist campaigns. Now, the fact that three big companies are target of activists reflects the fact that probably there is a larger degree of consensus between shareholders that these companies need to change. These companies need to change something in the way they're doing and the way they are taking care of their financial.

- Salesforce is, I mean, if you're looking at some of the all time highs that they had back in late 2021, they're are about 48%, at least the share prices, off of those levels. What is the likelihood based on past instances that these activist campaigns will actually lead to the share price or the business performance reflecting that share price or getting back to some of those all-time highs? Has that been something that's been effective in the past?

VYACHESLAV FOS: Absolutely it has been. Now, it's hard to say in any specific situation what will happen. But we know that on average when activism campaigns are announced, prices appreciate by 5, 6 percentage points just on the announcement day, which is a very nice increase in valuation. And it creates a lot of value for shareholders. Now, in my own research, I have shown that these positive price reaction indeed reflects anticipation of future improvements in this company. In fact, about 75% of positive price reactions can be directly linked to future improvements in operating performance of these firms. So it's definitely good news for companies. It's definitely good news for shareholders of these firms.

- Professor, have we seen any big changes in activist campaigns over the past several decades? Have we seen an increase in their number, for example, or difference in the tactics that they use?

VYACHESLAV FOS: The number of activism campaigns is stable. I would say that, recently, more and more reached the larger targets experience activism campaigns. And I think it reflects probably a large degree of coordination on the side of activists. They probably feel that other investors are willing to support them. And, therefore, they go head even after very big target.

- Boston College Professor of Finance Slava Fos joining us this morning. Thanks so much for the time, the insights, and the analysis as well. Appreciate it.