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Alternative Market Briefing

Tech CEOs go on the defense against activists

Friday, February 26, 2016

Bailey McCann, Opalesque New York:

Technology companies have been a target for activist investors in recent years. As the growth drivers in technology change, businesses have adapted and that doesn't always equate with immediate shareholder value. This makes companies ripe for activist actions, and according to a new report from Boston Consulting Group - that's not always a bad thing. Researchers suggest that CEOs have absorbed this signal and should now think like an activist in order to create stronger companies.

BCG has identified a set of financial indicators that together signal the likelihood that a tech company will be targeted. The most common activist "flags" are low (or no) dividend payouts (characteristic among 89% of the companies BCG studied), high capital spending (in place at 63% of the companies), and low return on capital (present at 57% of the companies) -- characteristics that are traditionally found in slow-growth industrial companies. Other flags include low levels of debt on the balance sheet and high SG&A expenses.

The more of these flags that are present, the greater the likelihood of being targeted, according to the report. But assessing a company's vulnerability to activist overtures is just the first step.

Report authors suggest that CEOs will want to rally investor support and be unafraid to make bold moves in order to keep costs down if they want to avoid activists. By taking on this view, companies will emerge stronger ......................

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