Companies planning for M&A transactions in 2024 should beware of the impact of a market reset on investor appetite for deals, as opposition has increasingly been driven by more long-term shareholders who have grown impatient for returns.

According to Diligent Market Intelligence (DMI) data, the average holding period of an investor making an oppose sale demand has doubled from approximately three years in both 2019 and 2020 to six years in 2022 and 2023.

Investors have been stubborn in their pursuit of better-value outcomes, with the number of activists standing in the way of company buyouts holding steady at 40 in the 11-month period to the end of November this year, compared to 43 throughout the entirety of 2022.

The economic overhang
This consistent level of M&A opposition is, in part, attributed to an overhang of general economic conditions, which includes inflation, rising interest rates and stock market volatility. In 2022, various indexes, such as the S&P 500, delivered returns of nearly negative 20% to investors. Few companies managed to return to their pre-2022 stock prices in 2023, with the market driven mostly by a handful of technology giants.

“Market conditions always impact activism…but in 2023’s economic climate, we saw a real bifurcation in company performance relative to peers,” Okapi Partners’ CEO Bruce Goldfarb told DMI. This drew the attention of activists that campaigned for governance changes and redirections in corporate strategy, as well as pushing back on potentially “value-destructive” mergers, he said.

Rather than betting on take-privates for quick wins at companies valued at less than recent levels, at least some investors have been dissatisfied to see longer-term opportunities cut short by what they view as a poor deal.

“At companies where there has been a lot of recent trading volatility, and shareholders entered into the investment at significantly different prices, it’s not unusual for us to see strong differences of opinion on an appropriate sale price, among shareholders and board and management teams, when there is an offer on the table at a premium to the current trading price,” Ken Mantel, partner at Olshan Frome Wolosky, told DMI.

In October, U.S. fiber provider Consolidated Communications Holdings agreed a $4.70- per- share buyout offer with affiliates of Searchlight Capital Partners and British Columbia Investment Management Corporation (BCI). Wildcat Capital Management, which described itself as a “long- term investor”, came out against the deal and suggested a price hike of about 30%, arguing the deal “severely undervalued” the company.

A shortage of buyers isn’t helping win over skeptical shareholders after capital and financing markets dried up.

“A lot of M&A deals are equity deals with a thin premium paid to the seller using the shares of the buyer. Shareholders often claim they are long-suffering and deserve more consideration to induce them to sell. They then start agitating – privately, and then publicly – telling the selling companies’ boards ‘you can do better’,” Lawrence Elbaum, partner at Vinson & Elkins told DMI.

In May, special situations investor Flat Footed came out against a proposed all-share merger between Diversified Healthcare Trust (DHC) and Office Properties Income Trust (OPI). It argued that DHC shareholders would receive consideration worth 43% below the headline offer of $1.70 per share, which itself was a roughly 39% discount on the stock’s position a year earlier.

D.E. Shaw followed suit and said the deal offered DHC shareholders only a fraction of what the company was truly worth. The merger eventually fell through with the September vote canceled due to mounting investor criticism.

Since the COVID-19 pandemic, many industries have failed to perform on one-year, three-year and five-year bases, not delivering the expected returns for shareholders, as Elbaum explains. “If the acquisition finance markets free up, expect to see many currently capital constrained buyers of all types put capital in play to take under-performing companies private.”

And, if public market valuations have not rebounded with drops in interest rates, Elbaum expects shareholders will be “thirsty” for significant premiums. “It will be interesting to see how hungry newly capitalized buyers will be to sign up deals while keeping shareholders at bay.”