How Does Settling With an Activist Impact Shareholder Returns?
An examination of post-settlement stock price and M&A outcomes, as well as other implications Agreeing to a settlement ranks among one of the most consequential decisions a board can face. Settlements typically involve the addition of activist-supported directors, who often bring their own priorities into the boardroom. Increasingly, settlement agreements also call for the creation […]
Marco Castellani is the Senior Vice President, Patrick Ryan is the Executive Vice President, and Lex Suvanto is the CEO at Edelman Smithfield. This post is based on their Edelman memorandum.
An examination of post-settlement stock price and M&A outcomes, as well as other implications
Agreeing to a settlement ranks among one of the most consequential decisions a board can face. Settlements typically involve the addition of activist-supported directors, who often bring their own priorities into the boardroom. Increasingly, settlement agreements also call for the creation of special board committees with specific mandates, for example, to oversee a strategic review.
Despite the high stakes, settlements between activist investors and the companies they target appear to be occurring at an ever faster pace. This reflects several factors, including an eagerness on the part of boards and management teams to avoid a distracting and costly public fight. The implementation of the Universal Proxy Card, which many perceive as increasing reputational risk for individual directors facing contested votes, may also be a contributing factor. Activists are similarly motivated to reach quick settlements to minimize costs and the risk of alienating shareholders. Importantly, a settlement often allows activists to move from the negotiation table to the decision table (i.e., the boardroom) and exert influence from the inside.
A fundamental question for directors considering a settlement is how the proposed agreement is likely to impact shareholder value. To answer this question, we analyzed 634 settlements entered between U.S.-listed companies and activists from 2010 through the end of 2024. Specifically, we examined stock price performance during the three-year period following the settlement, also taking into consideration whether the company was eventually acquired or remained public.
The results of this analysis offer valuable quantitative insights to help boards more effectively evaluate the potential outcomes of entering into a settlement agreement with an activist.
