Activism investment as the key to unlocking value in regional firms
An activist investor is an individual or group that has investment /purchases a significant portion of a company’s shares and tries to obtain seats on the company’s board with the goal of effecting or enabling a major transformation in the company. A company can become a target for activist investors if it is mismanaged, has excessive costs, can be run more profitably or has another problem that the activist investor believes can be fixed to make the company more valuable.
Fuelled by performance pressures and a growing expectation of low, inadequate and increasingly questionable returns from traditional investment avenues, investors are increasingly seeking higher returns and diversification by allocating a growing portion of their investment funds to less liquid but more promising alternatives through venture capital firms, private equity and hedge funds.
The challenge in assessing the attractiveness of asset classes targeted by such activist investors lies in the inadequacy of financial statements to capture all elements affecting their value since business models can be disrupted, inventories can grow obsolete and receivables uncollectible; liabilities are sometimes unrecorded and property values over or understated. Growth companies on the other hand have multiple opportunities to expand their business models into other rapid-growth markets. However, most of the companies under this category have not been able to realise their full potential owing to inadequate capital, inconsistent performance, lack of properly established structures and lack of a clearly defined growth strategy that would-be investors find essential in assessing a company’s overall investment attractiveness.
Apart from a company’s future prospects, other factors considered by these investors might include; return on assets, liquidity, leverage ratio, annual sales growth rate, dividend yields, price-to-book values and price-to-earnings ratios. These provide a tried and tested approach to identifying attractive companies in high growth industries with sustainable competitive advantages. However, unquoted companies that cannot observe the above financial ratios due to lack of adequate capital structures might not attract as many investors and thus continue to register sub-optimal returns.
Choosing where to focus
The key to successfully improving value chains and operations performance is to focus on those areas that are not only under-performing but also, those that are aligned with the overall product and service innovation strategy. The challenge lies in having a cost-effective operation but not necessarily competing on cost. By instituting innovation and mapping constant value chain performance gap analysis programs, activist investors and management teams can use their findings to compare these key performance indicators with competitors and achieve this objective.
Secondly, by mapping out value chains on mobility applications accessible via hand-held devices such as tablets and mobile phones, management teams all over the world now have digital assistants that enables them to monitor production process and identify bottlenecks in real time.
Activist investors can therefore benefit greatly from enhanced visibility by coming up with an internal and industry monitoring standard in collaboration with management teams. Such frameworks allow for seamless scalability of process excellence across similar portfolio companies and greatly enhance the performance of an investor’s portfolio.
The monitoring and evaluation standard should have key performance indicators which addresses the current performance and future desired performance of elements such as product selection, forecasting and procurement, warehousing, inventory management and distribution based on quality, response time, costs and productivity.
Such a dynamic system provides an objective assessment of the performance of the business relative to industry and provides both the management teams and investors with the agility and transparency that they need in order focus on their core business of managing and allocating capital respectively, without leading to unnecessary conflicts of interest due to the overlap of functions.