On October 7, 2020, Morgan Lewis Partner Christina Edling Melendi moderated a virtual panel discussion examining the impact of COVID-19 on shareholder activism in the retail industry. Panelists included professionals from some of the nation’s top legal and consulting firms. The panel’s focus was aimed squarely at helping retailers understand the threats they may face in the wake of the pandemic, as well as possible strategies to defend themselves against activist campaigns.
As companies scurry to maintain liquidity caused by the economic fallout of the coronavirus pandemic, many popular retailers have been forced to seek bankruptcy protection due to their depleted cash reserves. Of course, the retail industry had been plagued with stagnant or decreasing revenues for years leading up to the pandemic. But it is now government sanctioned, stay-at-home orders, and newly found consumer preferences for social distancing, rather than the continued expansion of e-commerce giants like Amazon, that most threatens retailers. Those retailers that managed to weather the storm in the early months of the pandemic, when revenues from physical operations all but disappeared from their balance sheets, might now face a new challenge in fending off campaigns by their shareholders. In their exploration of the current corporate landscape, the panel examined the glut of opportunities for shareholders looking to stage activist campaigns.
First, the panel cited a few factors which make activist investors specifically attracted to retail. Those factors include (i) many activists are familiar with retail and believe they understand the industry, (ii) the history of private equity buyouts in the industry make retailers seem like strong M&A targets, (iii) the recent surge in special purpose acquisition companies is likely to bolster activists’ interest in retail, and, (iv) the strong brand recognition of many retailers might help activists establish a track record that will eventually raise more capital for their fund. In the current economic climate, an investor activists’ penchant for the retail industry targets is likely being reinforced by an overall perception that retailers and their boards are more vulnerable, and therefore more likely to engage with an activist.
Although a particular investor’s endgame might range from an eventual sale of the company to increased board representation, the investor activist’s opening move is predicated on the perception that the company is a “sitting duck”. The panelists offered suggestions to retailers on how to combat this perception in an attempt to keep activist investors at bay. Aside from the more typical defensive maneuvers – such as reviewing shareholder profiles and preparing poison pills – the panel stressed the importance of maintaining robust investor relations and swift response preparedness to any rumors questioning the company’s ability to meet short-term debt obligations or rebound from COVID-19.
Despite the abundance of uncertainty, activist investors continue to show interest in retail companies. Since March 1, 2020, there have been nineteen high-impact campaigns launched by activist investors in the retail industry. As these campaigns play out, and more campaigns begin, we will likely see that those retailers who follow the advice of the panel weather the storm. However, retailers that legitimately squander opportunities to pivot the company into a more profitable position will likely continue to be preyed upon by investors with “better” ideas.
For more information, we encourage you to access the full webinar which can be found here.
Michael DiPietro (LAW ‘21) is a student-editor for the 10-Q