CEOs who are serious about maximizing shareholder value can profit from studying the playbook that activist investors use. Generations of CEOs have been told they could maximize value by managing a portfolio of businesses. Some of these would be cash cows and others might be fast-growing stars, requiring investments and management attention. The growth-share matrix guided CEOs to divest dogs, milk cash cows, and invest in stars. This model worked well in a world where investors bought shares of publicly-traded companies and trusted management to deliver results over the long term. There was no need to worry about the valuation effects of running businesses that required different amounts of capital and management attention, or that had disparate rates of return.
This conventional wisdom no longer works well as markets today penalize companies that hold onto businesses with disparate growth, margins or capital intensity. This means that by milking a cash cow to invest in a star could reduce the value of the overall portfolio if those businesses require different amounts of capital and management attention, or have disparate rates of return. And it may not just be the dogs that need to be divested--some businesses may be candidates for divestiture, even if they are strong performers, simply because they are too different from the rest of the portfolio.1
An in-depth study of more than 1,400 activist campaigns by KPMG shows how these investors use portfolio actions—divestitures, acquisitions, etc.—as well as investments in performance and growth to beat the market. The most successful activists use multiple portfolio moves and multiple performance-improvement initiatives to realize gains of nearly 7 percent over the market.2 In this paper, we share our insights about the activist playbook and how it can be adapted for an “Activist CEO.”