Understanding shareholder activism and its impact – the New Indian Express
Express news service
It is above all a phenomenon of the developed market. In countries where financial markets play a major role, shareholder activism has an impact. These are minority shareholders who do their utmost to uphold good corporate governance. Now that might seem a bit complicated if you are new to the world of investing. But as small shareholders in the stock market, it’s worth taking note.
Zee Entertainment’s recent announcement to merge with Sony Pictures Entertainment, an Indian branch of Japanese conglomerate Sony, is a case in point. Largest activist shareholder is pushing a large, publicly traded entertainment company to merge with a stronger player.
This may be a first in India. A minority shareholder Invesco Developing Markets, a fund holding 18% of the company, called an extraordinary general meeting of shareholders last week to remove chief executive Punit Goenka and two other independent directors. Zee Entertainment’s share price jumped 40%.
A few days later, the company announced a merger with Sony Pictures Entertainment. The company said the Japanese conglomerate would hold a controlling stake in the merged entity in a statement. However, Punit Goenka would continue to be the head of the combined entity.
The company’s share price has remained firm since the two dramatic announcements. Invesco, the company’s largest shareholder, has publicly approved the deal with Sony. They seem to agree with Goenka as the head of the company, with Sony holding a majority stake and appointing most of the board members.
Most companies that value corporate governance would watch this development closely. The result could become a model for many other such corporate actions. Activist shareholders are typically hedge funds and small shareholder groups or proxy advisory institutions. Then there are other institutional investors like pension funds or long term index funds.
In the United States, hedge funds actively seek reform in companies. However, their vision is relatively short-term compared to other activist shareholders. Small shareholders, their proxy institutions, typically focus on corporate policies regarding stakeholders and not just shareholders. They and other long-term investors usually insert clauses at shareholder meetings. This could be CEO compensation or voting for or against proposed corporate actions such as mergers and acquisitions. Boards of directors must listen to minority shareholders.
Large institutions like BlackRock, Vanguard and State Street Capital together held nearly a fifth of the S&P 500 in 2020, according to an article published on lexology.com, a US-based legal information site. The market capitalization of the S&P 500 is around $ 40 trillion. They also play a role in keeping boards on their toes.
What this means for you As institutional investors gain a foothold in India, this is good news for Zee common shareholders. The share price reacted with a jump of more than 30% in two days. According to analysts’ estimates, the estimated value of the combined entity could be around Rs 50,000 crore compared to Zee Entertainment’s current market capitalization of Rs 32,000 crore.
From a small shareholder perspective, you need to make sure that the company’s stock price remains stable and your profits are protected. It doesn’t matter whether the founding family retains control or whether a new independent board of directors takes over.
If your investment is protected, you stay invested. When companies engage in such battles on the board for control through mergers and acquisitions, you need to keep track of the finer details. Non-financiers cannot do it on a regular basis. If you are a mutual fund investor, learn about special funds. These types of mutual funds invest in companies that are susceptible to securities trading. There is always a possibility that prices will change one way or the other in a particular situation.
The fund managers of these funds analyze developments better than individuals. They can make an informed decision to enter or exit such a business. Like any other investment in stocks, you must remember that investing in stocks is for the long term. Special situations could result in profit or loss depending on the outcome of the battle in the boardroom.
(The author is editor-in-chief at www.moneyminute.in)