if you look at your company the way an activist does, what...

If you look at your company the way an activist does, what would you change?Our in-depth research shows where and how you can harness shareholder activists’ tactics for competitive advantage.

By Brad Kuntz, Pranab Panda, Tim Michaels

Notes: TSR for control sample from S&P Composite 1500 calculated using average initial campaign start dates for targeted companies; TSR has been calculated as per financial information updated 01/31/2017.Source: SharkRepellent, Capital IQ, Parthenon-EY analysis, target group (n=528), control group (n=632 [2009], n=673 [2010], n=629 [2011], n=644 [2012])

0

20

40

60

80

Post-campaign three-year TSR

Pre-campaign three-year TSR

2009

0.4%5.3%

Targeted companies Control

group

39.6%34.6%

Thre

e-ye

ar T

SR (%

)

Thre

e-ye

ar T

SR (%

)

0

20

40

60

80



2010

5.8% 5.8%

66.1% 64.0%

Targeted companies

Controlgroup

2012

65.0%68.6%

54.1%

31.8%Targeted

companies

Weightedcontrolgroup



Thre

e-ye

ar T

SR (%

)

0

20

40

60

80

Targeted companies

Targeted companies

Controlgroup

Controlgroup



0

20

40

60

80 2011

45.8% 46.8%

Targeted companies

Targeted companies

62.9%

44.3%

Thre

e-ye

ar T

SR (%

)

Controlgroup

Controlgroup

Three-year TSR pre- and post-campaign (2009–12)

2

If you look at your company the way an activist does, what would you change?

Parthenon-EY

Shareholder activism drives higher shareholder value Parthenon-EY looked at activist campaigns as reported by SharkRepellent from 2010-15 and analyzed before-and-after performance as measured by total shareholder return (TSR).

Key findings include:

1. The number of activist campaigns has nearly doubled over the past five years, with announced events growing from 181 in 2010 to 356 in 2015.

2. Activist investors tend to focus on large, asset-rich companies with revenues and margin growth that’s slower than their sector peers, which creates opportunity to extract value through capital restructuring and longer-term business portfolio change.

3. As shown in the charts below, shareholder value was created faster in targeted companies than their sector peers over the same time frame, indicating that actions driven by activists are unlocking value.

Note: Acquisitions include all transactions excluding divestitures and spinoffs; divestitures include transactions categorized as "divestitures" and "spinoffs."Source: SharkRepellent, Norton Rose Fulbright, Capital IQ, hedge fund research, ThomsonOne, EY Global Corporate Divestment Study 2016, Parthenon-EY analysis

3Parthenon-EY

Assets under management, hedge funds

Percentage of divestitures by value

Borrowing rate (LIBOR, 12-month)

Activist campaign trendsA rise in activist campaigns appears driven by a hangover effect following a robust transaction period; enabled by a significant increase in assets managed by hedge funds and easy access to capital, companies targeted by activists are seeking to sell non-core assets.

Divestitures and spin-offs as a proportion of all transaction value increased from 55% before 2010 to 75% since 2010; corporates’ key triggers for divestments are strategic and increasingly opportunistic, including a unit’s weak competitive position in the market and an asset being viewed as non-core.

0

50

100

$150b

2005 2010 2015

CAGR(2005—08)

1%

CAGR(2010—15)

22%

2.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2.9

1.4

3.2

2.1 2.1

1.2

1.5

0.8

1.6

1.31.5

1.31.5

1.1

1.41.2

2.3

1.9

100%

80

60

40

20

0

1.1

Valu

e of

acq

uisi

tions

/div

estit

ures

$4t

3

2

1

0

Percent of divestitures by value

0

2

4

6%

2005 2010 2015

CAGR(2005—08)

2%

CAGR(2010—15)

-7%

Value of transactions (acquisitions + divestitures)

Value of divestitures

% of divestitures by value

2.5%

5.6%

Three-year revenue CAGR0

2%

4%

6%

Targeted companies

Controlgroup

11.0%

-1.6%

Return on equity (ROE)-5%

0

5%

10%

15%

Targeted companies

Controlgroup

7.0%

5.1%

Three-year EBITDA CAGR0

2%

4%

6%

8%

Targeted companies

Controlgroup

Notes: 167 targeted companies have been removed from the S&P 1500. Data is from 2009-12 time frame. Averages are of the 20th and 80th percentiles. Metrics have been calculated as per financial information updated 01/31/2017.1. Target group: We extracted all shareholder activist campaigns announced during 2009-12 from SharkRepellent. Control group: Companies selected within each year’s

control group were determined based upon sector weights in target group, with companies selected from each of the S&P Composite 1500 sector indices. 2. Control group consists of companies constituting the S&P Composite 1500 during 2009-12, excluding those companies that were targets of activist investors during that

period.Source: Capital IQ, SharkRepellent, Parthenon-EY analysis, n=528 (targeted), n=1,333 (non-targeted).

For the three years prior to an activist event, targeted companies demonstrate only a 2.5% CAGR, compared with a more than double CAGR of 5.6% for the S&P Composite 1500 (minus these targeted companies), our control group.

Targeted companies exhibit a negative ROE for the three years prior to an activist event: -1.6%. ROE for the control group is a vastly greater 11%.

Targeted companies also underperform the control group in terms of three-year EBITDA CAGR: 5.1% versus 7%.

Revenue growth Return on equity EBITDA growth

Targeted1 vs. control group2 (S&P Composite 1500, excluding targeted companies)

4


Parthenon-EY

General company characteristics from activist campaignsActivist-targeted companies underperform compared with their relevant sector peers on revenue growth and key profitability metrics during the years leading up to an activist campaign.

Notes: 167 targeted companies have been removed from the S&P 1500. Data is from 2009-12 time frame. Averages are of the 20th and 80th percentiles. Metrics have been calculated as per financial information updated 01/31/2017.1. Target group: We extracted all shareholder activist campaigns announced during 2009-12 from SharkRepellent. Control group: Companies selected within each

year’s control group were determined based upon sector weights in target group, with companies selected from each of the S&P Composite 1500 sector indices. 2. Control group consists of companies constituting the S&P Composite 1500 during 2009-12, excluding those companies that were targets of activist investors during

that period.Source: Capital IQ, SharkRepellent, Parthenon-EY analysis, n=528 (targeted), n=1,333 (non-targeted).

For the three years prior to an activist event, targeted companies average a 14.4% increase in FCF, compared to only 12.5% for the control group.

0

2%

4%

6%

8%

10%

Targeted companies

Controlgroup

Controlgroup

Targeted companies

Real estate% of assets

Real estate% of revenue

7.6%

9.7%

5.8%

4.6%

The value of real estate under the control of targeted companies tends to be significantly greater than that of the control group. Consider these measures:

• As a percentage of total assets: targeted companies 7.6%; control group 4.6%

• As a percentage of revenue: targeted companies 9.7%; control group 5.8%

Targeted companies also tend to be noticeably more liquid than the control group. The percentage of cash and short-term investments over market capitalization at targets, 23.8%, is significantly more tempting to balance sheet activists than the control group’s ratio of only 14.9%.

Levered free cash flow (FCF) growth

Real estate holdings As a percentage of assets and revenue

Three-year levered FCF CAGR

14.4%

12.5%

0

5%

10%

15%

Targeted companies Control

group

Cash and short-term investments/market cap

23.8%

14.9%

0

10%

20%

30%

Targeted companies

Controlgroup

5Parthenon-EY

Targeted1 companies seem better able to manage their cash flow compared with the control group2 and had a significant amount of hard assets (cash and real estate).

Cash and short-term investments/market cap

2010 2011 2012 2013 2014

100%

53%

47%

52%

48%

63%

37%

66%

34%

64%

36%80

60

40

20

0

Short-termcampaign objectives

1. Capital structure2. Sale of target company

Long-termcampaign objectives

1. Business portfolio restructuring2. Governance3. Operational

15%

53%

27%

Pre-campaign three-year TSR*DescriptionCategory

Post-campaign three-year TSR*

76%

Short-term

Long-term

Investment horizon of shareholder activist objectives, 2010—14 (self-reported)

Note: *Calculations are based on 2011 activist-targeted companies.Source: SharkRepellent (n=1,677), Parthenon-EY analysis

6


Parthenon-EY

A shift to long-term, collaborative campaigns is increasing TSRAs the investment horizon of shareholder activists increases, the activist campaign objectives move to longer-term strategies through business portfolio restructuring, changes in governance and operational efficiencies.

7Parthenon-EY

Companies need to take on the role of activist and proactively execute changes around governance in order to create greater shareholder value.

Conclusion Activism requires changes in governance going forward in order to maximize shareholder value and keep activists at bay

Develop a 360-degree view of shareholder value and its key drivers

Become your own activist

Communicate frequently, consistently and transparently with key stakeholders

Executives and board members should communicate frequently and transparently with key stakeholders. Whether shareholders are active or quiet, knowing and utilizing activist strategies

will help you remain competitive and strengthen your business for the long-term.

Adopt governance practices to address likely activist goals

• Appoint a board member to act like an activist

• Support this individual’s efforts to make sure changes happen

• Take a rigorous, ongoing view of shareholder value from an investor’s perspective• Have a real-time view of capital allocation and business performance • Perform virtual carve-outs to understand the impact of value-eroding businesses• Analyze potential strategies for trapped cash• Evaluate debt structure and ability to increase leverage• Assess working capital improvement opportunities

• Review board composition and duration to achieve objectivity and a fresh perspective• Seek a level playing field on the board with appropriate voting and nomination rights• Align executive compensation and incentives with desired outcomes• Provide a structure that allows for information transparency• Review strategy and champion board efforts to create real and relevant change

EY | Assurance | Tax | Transactions | AdvisoryAbout EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

Parthenon-EY refers to the combined group of Ernst & Young LLP and other EY member firm professionals providing strategy services worldwide. Visit parthenon.ey.com for more information.

Some of the materials contained herein are copyright © 2016, S&P Capital IQ (S&P). Reproduction and distribution of referenced S&P data in any form is prohibited except with the prior written permission of S&P. Use of S&P information is intended for the recipient’s internal use purposes only. None of S&P, its affiliates or their suppliers (together, S&P parties) guarantee the accuracy, adequacy, completeness or availability of any information nor are responsible for any errors or omission, regardless of the cause or for the results obtained from the use of such information. In no event shall any S&P party be liable for any damages, costs, expenses, legal fees or losses (including lost income or profit or opportunity costs) in connection with any use of S&P information.

© 2017 Ernst & Young LLP. All Rights Reserved.

SCORE no. 00326-171US

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

ey.com

About Parthenon-EYParthenon joined Ernst & Young LLP on 29 August 2014. Parthenon-EY is a strategy consultancy, committed to bringing unconventional yet pragmatic thinking together with our clients’ smarts to deliver actionable strategies for real impact in today’s complex business landscape. Innovation has become a necessary ingredient for sustained success. Critical to unlocking opportunities is Parthenon-EY’s ideal balance of strengths — specialized experience with broad executional capabilities — to help you optimize your portfolio of businesses, uncover industry insights to make investment decisions, find effective paths for strategic growth opportunities and make acquisitions more rewarding. Our proven methodologies, along with a progressive spirit, can deliver intelligent services for our clients, amplify the impact of our strategies and make us the global advisor of choice for business leaders.

For more information about shareholder activism, please contact

Brad KuntzSenior Managing Director, Parthenon–EYErnst & Young LLPNew YorkTel: +1 212 773 6774Email: [email protected]

Tim MichaelsConsultant, Parthenon–EYErnst & Young LLPChicagoTel: +1 312 879 6613Email: [email protected]

Pranab PandaVice President, Parthenon–EYErnst & Young LLPChicagoTel: +1 312 879 2994Email: [email protected]

For more information on Parthenon-EY, please visit parthenon.ey.com.

if you look at your company the way an activist does, what...

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