Insightia News Story | May 10, 2023

IN-DEPTH: Wolfpack activism

Wolfpack activism, where multiple activist investors circle the same target under a formal group agreement, has experienced a recent drop off at U.S.-based companies. According to Insightia’s Activism module, just one such campaign was recorded in the first quarter of this year. The team-focused approach saw five campaigns recorded in the same period in 2022, and five in the first quarter of 2021.

The “wolfpack” label commonly used in the world of proxy defence is often questioned by activists, and the solicitors who represent them, with an argument that the term is unfairly used to demonize a normal practice.

Pack mentality

The term “wolfpacking” was coined by proxy defense advisers to spread a narrative that activists are “ganging up on public companies,” said Andrew Freedman, chair of law firm Olshan Frome Wolosky’s shareholder activism practice, in a conversation with Insightia. “To me, it is largely a myth that has been contrived by the defense bar to further entrench public companies and make the activists look like they are the bad guys.”

Both Lawrence Elbaum, co-head of Vinson & Elkins shareholder activism practice, and Freedman agreed that a group agreement is the key distinguishing factor. The “joint filing and solicitation group” or “group agreement” commences the formation of an official group. In a June 2022 example, AB Value Management and Bradley Radoff collaborated under the same banner in a unified effort seeking board representation at Rocky Mountain Chocolate Factory.

The activist group, which held 17.6% of the confectioner’s shares, initially nominated six directors before settling to appoint former Dave & Buster’s operations chief Starlette Johnson to the board on March 8, 2023.

The single wolfpack campaign of the first quarter of 2023 targeted healthcare company Enhabit, which in March entered into a cooperation agreement with Cruiser Capital Advisors and Harbour Point Capital, increasing the size of its board from 11 to 13 directors.

A jungle out there

Wolfpack-styled campaigns targeting U.S. companies average a far greater rate of success than campaigns ran by solo-activists. In 2022, just one of the 12 activist situations involving multiple investors saw the activists fail to secure at least some of their demands. In contrast, over 37% of the solo activist campaigns recorded by Insightia at U.S.-based companies in 2022 ended with the activist involved achieving no success whatsoever.

However, despite the success rate of wolfpack campaigns, industry sources told Insightia that their unpopularity among the investor base is often due to “ego” and an “inability to get along.”

Freedman posed that while it may be easy to assume that activist investors who find themselves involved at the same company are fully aligned, this is not always the case. “When one activist is already involved at a company and they see another show up, they’re not necessarily high-fiving…the addition of another investor could dilute and complicate engagement, and make the prospect of a cooperation or settlement agreement more convoluted.”

This sentiment was echoed by Elbaum, who cautioned that in the era of the universal proxy, if the activists involved at a company each submit their own director nominees, there is the potential to “cannibalize each other’s votes.”

Swarming

Outside of the formal wolfpack, campaigns involving a phenomenon known as “swarming” where primary or partial focus activists are invested at the same time, often with their own goals, have remained relatively steady with 15 in the first quarter of 2023, compared to 19 in the same period last year.

According to Elbaum, the two phenomena should not be confused. “Where a company may call a group of activists communicating the same themes and thesis at the same time ‘wolfpacking,’ investors would just call it feedback,” he said. “Activists often make a big deal of what they view as a value-enhancement exercise being treated as a corporate crisis by companies. Well-prepared companies are able to clearly explain the distinction to their shareholders.”

One such swarming campaign unfolded at Salesforce where five hedge funds including Elliott Management, ValueAct Capital and Starboard Value were commonly invested as the company was being pushed for change. After declaring a 3.3% stake in January this year, Elliott later announced its plan to nominate a slate of directors without publicly outlining the nature of its concerns. A short time later, the CRM-provider unveiled a cooperation agreement with ValueAct, appointing CEO Mason Morfit to its board. Elliott shelved its contest in March this year after Salesforce delivered better than expected fourth quarter results and pledged to focus on profits.

© Diligent Corporation 2023