by Jang Hyowon
Pubilshed 22 Oct.2024 14:42(KST)
Recently, there have been growing calls among companies to proactively prepare countermeasures against activist funds. This is due to the rapid increase in attacks by activist funds each year as shareholder activism spreads domestically.
An activist fund refers to a fund that goes beyond simple equity investment to actively influence the decision-making process of the companies in which it invests as a shareholder. It mainly demands improvements in corporate governance, expansion of dividends, and other measures to enhance shareholder value and improve management.
According to industry sources, 77 domestic companies were targeted by activist funds last year. In 2019, only 8 companies were targeted, meaning the number of companies targeted by activist funds nearly increased tenfold last year.
Considering the considerable activity of activist funds this year as well, it is expected that shareholder proposals and management disputes will surge during the regular shareholder meeting season in March next year.
Activist funds usually select target companies for their campaigns starting in October, keeping the shareholder meeting season in mind. In fact, recent movements by activist funds have begun, such as Align Partners Asset Management sending a shareholder letter to Doosan Bobcat.
Companies targeted by activist funds typically have a high Return on Invested Capital (ROIC), which indicates how much operating profit a company has generated from assets actually invested in business activities, and a low Return on Equity (ROE), as well as undervalued stock prices. These companies share the common characteristic of having great potential to significantly increase shareholder value if shareholder return policies are strengthened.
ROIC measures how effectively a company utilizes its capital; the higher the ROIC, the better the company is generating profits, and it is expected that shareholder value can be increased through future shareholder returns.
ROE is the ratio of net income to equity and, like ROIC, is an indicator of a company’s profitability. A low ROE indicates that the company is not generating sufficient returns desired by shareholders.
Companies with undervalued stock prices relative to their value are also targets. Activist funds believe that by demanding stronger shareholder return policies from such companies, they can induce stock price increases.
Recently, not only activist funds but also private equity funds, hedge funds, and general institutional investors have been using activist strategies as a means to improve returns, intensifying threats to the management rights of domestic companies.
A representative case is MBK Partners, the largest domestic private equity fund, which has been involved in the management dispute between Korea Zinc and Young Poong. Earlier, the management dispute between brothers at Hanmi Pharm also began with private equity fund La D?fense Partners playing an advisory role, sowing the seeds of controversy.
Industry experts emphasize that to effectively respond to pressure from activist funds, it is essential to hire proxy advisory firms in advance to prepare for shareholder proposals and management disputes. In particular, since proxy advisory firms have limited capacity to take on clients during the shareholder meeting season, it is very important to research and hire them early.
Locomotive, a specialized firm in proxy advisory and IR/PR services, pointed out that preparing countermeasures is essential to protect corporate value and secure shareholder trust.
The main countermeasures against activist funds can be summarized as ▲early hiring of proxy advisory firms ▲strengthening responses by the board of directors and management ▲enhancing shareholder communication ▲collaboration with legal and financial advisory firms.
Lee Taesung, CEO of Locomotive, stated, “Attacks by activist funds are becoming a burden for companies,” and added, “We recommend thorough preparation to protect management rights at shareholder meetings and to strengthen cooperative relationships with shareholders.”
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