It is primarily a developed market phenomenon. In countries where financial markets play a dominant role, shareholder activism makes an impact. These are minority shareholders who punch above their weight to enforce good corporate governance. Now, that may sound a bit complicated if you are new to the world of investing. But as small shareholders in the stock market, it is worth taking a note.
The recent announcement by Zee Entertainment to merge with Sony Pictures Entertainment, an Indian arm of the Japanese conglomerate Sony is a case in point. The largest activist shareholder nudges a listed large entertainment company to merge with a stronger player.
It is perhaps a first in India. A minority shareholder Invesco Developing Markets, a fund owning 18% of the company, called an extraordinary general meeting of shareholders to remove chief executive officer Punit Goenka and two other independent directors last week. The share price of Zee Entertainment jumped 40%.
A few days later, the company announced a merger with Sony Pictures Entertainment. The company said that the Japanese conglomerate would own a majority stake in the merged entity in a release. However, Punit Goenka would continue to be the head of the combined entity.
The share price of the company has remained firm since the two dramatic announcements. Invesco, the single largest shareholder in the company, has publicly endorsed the deal with Sony. They seem to be okay with Goenka at the company’s helm, with Sony holding a majority stake and appointed most of the board of directors.
Most companies that value corporate governance would watch this development closely. The outcome could turn into a model for many more such corporate actions. Activist shareholders are usually hedge funds and groups of smaller shareholders or proxy advisory institutions. Then there are other institutional investors like pension funds or long-term index funds.
In the US, hedge funds are actively seeking reforms in businesses. However, their vision is relatively short-term in comparison to other activist shareholders. The small shareholders, their proxy institutions, usually focus on corporate policies on stakeholders and not just shareholders. They and other long-term investors usually insert clauses in shareholder meetings. These could be about the CEO compensation or voting for or against proposals for corporate actions like mergers and acquisitions. Corporate boards must listen to minority shareholders.
Large institutions like BlackRock, Vanguard and State Street Capital together owned nearly a fifth of the S&P 500 in 2020, according to an article published on lexology.com, a US-based legal information website. S&P 500 market cap is close to $40 trillion. They play a role too in keeping corporate boards on their toes.
What it means to you As institutional investors make their presence in India, that is good news for ordinary shareholders of Zee. The share price has responded with an over 30% jump in two days. According to analyst estimates, the estimated value of the combined entity could be around Rs 50,000 crore compared to the current market cap of Zee Entertainment of Rs 32,000 crore.
From the point of view of a small shareholder, you need to ensure that the company’s share price remains stable and your profits are protected. It does not matter whether the founding family stays in control or a new independent board takes over.
If your investment is protected, then you remain invested. When companies go through such boardroom battles for control through mergers and acquisitions, there are finer details that you need to keep track of. Non-finance people can’t do so regularly. If you are a mutual fund investor, read up about special situation funds. These types of mutual funds invest in companies that are likely to go through corporate action. There is always a scope for prices to move either way in a special situation.
Fund managers of such funds analyse developments better than individuals. They can take an informed decision to enter or exit such a company. Like any other equity investment, you must remember that equity investing is for the long term. Special situations could lead to profits or losses based on the outcome of the boardroom battle.
(The author is editor-in-chief at www.moneyminute.in)