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What Are Activist Investors Looking For?

Summary:
Finally, there's the undeniable appeal of a company overflowing with cash, a tasty target for a campaign to initiate share buybacks or increase dividend payments. Which metric works best in identifying balance sheets that are attractive to activists? The ratio of a company's total cash relative to its market capitalization. The higher that ratio relative to one's peers, the more likely a company is to garner unwanted attention. When ValueAct Capital scored a seat on Microsoft's board of directors in 2013, the company's 77 billion dollars cash balance gave it a cash-to-market cap ratio more than double that of the industry median. A Satisfying Meal Taken together, all three factors – valuation, operational performance, and cash on the balance sheet – serve well to anticipate activist attention. The factors this paper identifies as important to activists are 76 percent more likely to identify a target of activists than random chance. Coming at it from the other direction, companies with strong operating performance, healthy valuations, and disciplined capital employment are less likely to become activist targets than those without them. "Like most disruptions in the marketplace," concludes the paper, "it all comes back to value creation in the end.

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Finally, there's the undeniable appeal of a company overflowing with cash, a tasty target for a campaign to initiate share buybacks or increase dividend payments. Which metric works best in identifying balance sheets that are attractive to activists? The ratio of a company's total cash relative to its market capitalization. The higher that ratio relative to one's peers, the more likely a company is to garner unwanted attention. When ValueAct Capital scored a seat on Microsoft's board of directors in 2013, the company's 77 billion dollars cash balance gave it a cash-to-market cap ratio more than double that of the industry median.

A Satisfying Meal

Taken together, all three factors – valuation, operational performance, and cash on the balance sheet – serve well to anticipate activist attention. The factors this paper identifies as important to activists are 76 percent more likely to identify a target of activists than random chance. Coming at it from the other direction, companies with strong operating performance, healthy valuations, and disciplined capital employment are less likely to become activist targets than those without them. "Like most disruptions in the marketplace," concludes the paper, "it all comes back to value creation in the end."

Ashley Kindergan
Ashley is an editor and writer at The Financialist. Previously, she worked as a national correspondent at The Daily, the first publication created exclusively for tablet devices, covering everything from municipal bonds to prisons. Before that, she spent five years reporting for daily newspapers in New Jersey.

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