The Best Defense Against Activist Investors –

Contractors in the aerospace and defense sector can fend off aggressive activist investors by adopting a capabilities-driven approach.

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No public company is too big and no sector too complex to be targeted. Consider that Icahn Enterprises in 2014 launched an activist campaign against Apple — the largest U.S. company by market capitalization — and ultimately convinced management to change its cash management strategy. At about US$750 billion, Apple’s market capitalization is bigger than that of the top 20 A&D companies combined. The ways that Aerospace & Defense companies (Because in the A&D sector meet their  criteria, several defense contractors have become prime targets for activist campaigns, including L-3 Communications, ITT, URS, and AeroVironment) and they are vulnerable to activists, and the choice they face now — either to proactively change strategies or to have new ones imposed on them by outsiders — provides valuable lessons.  Activist investors like Carl Icahn and Jana Partners have developed a well-tuned methodology for targeting publicly held companies they believe are underperforming. These activists buy a significant stock position, agitate for board seats, and attempt to force strategic and structural changes aimed at increasing shareholder value. Activists focus on companies that are cash-rich but whose stock prices lag the market average, have portfolios of businesses in which underperforming units might be worth more to other owners, and are in industries that are ripe for consolidation.  Companies shouldn’t be content to adopt a passive posture. It turns out that the best defense against activist investors for A&D companies — and other companies that may be similarly vulnerable to such campaigns — is a good offense. And a good offense starts with a strategy based on capabilities. Company leaders need to ask themselves whether they have the “right to win” in their current markets. It’s vital to be honest with the answer, because answering “yes” means managers are confident they have a clear strategy to significantly increase shareholder value in the short to medium term that will position the business above its peer group. Sustaining those types of returns is feasible only when a company relies on distinctive capabilities that competitors can’t match, with products and services that fit within that capabilities system.  A candid assessment of the company’s right to win will enable leaders to assess the fair value of each business, determine whether each business belongs in the company’s portfolio or would perform better within another entity, and then to optimize the overall portfolio’s value, through organic investment, acquisitions, or divestitures. Companies that pursue this kind of coherent portfolio strategy — like Disney, General Electric, Pfizer, or Raytheon — tend to achieve a “coherence premium” in the market.  By basing portfolio decisions on how well different businesses fit with a company’s capabilities system — a task where management has the advantage — leaders can proactively rationalize and optimize their business portfolios. Doing so, they will act as stewards of shareholder value, while co-opting the typical strategies that activists employ. They will both position their companies for growth and deprive activists of a key avenue of attack.

Excellent article for those industries and firms under assault from Activist Investors.

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