Six companies profiled by the Diligent Market Intelligence (DMI) Vulnerability module since the start of 2022 saw activists take new positions in the second quarter. Two of those companies are already facing activist demands. DMI examines the factors that made these companies vulnerable and what type of activist demands their management teams might face going forward.

Hanesbrands

Primary-focus activist Barington Capital Group bought a toehold 0.29% stake in apparel company Hanesbrands during the second quarter.

On July 25, DMI had reported that Hanesbrands was vulnerable to activism due to slowing business momentum, rising costs and a debt load made more acute by higher interest rates. DMI also suggested that CEO Stephen Bratspies could be singled out for criticism given the stock had fallen over 60% during his three years on the job.

Despite having a relatively small stake, on August 8 Barrington sent a letter to the board of Hanesbrands urging the company to focus on reducing costs and debt and questioning the ability of current management to lead the business forward. Barrington argued that to create ‘‘sustainable’’ value for shareholders, Hanesbrands should immediately reduce overhead expenses by at least $300 million per year, cut its inventory levels, and optimize its facilities and improve operating processes to boost margins.

The stock, which was trading at $4.83 when DMI issued its report, rose more than 15% in the following two weeks, and closed at $5.05 per share on Tuesday.

NRG Energy

Elliott Management acquired a 1.2% stake in NRG Energy worth $103 million.

On May 12, DMI predicted that an activist could agitate for changes at NRG, including a refresh of the company’s leadership team. It was also stated that an activist could demand that NRG sell off any underperforming assets to raise capital.

Just three days later, Elliott issued a public letter calling on NRG to replace its CEO and launch a strategic review, saying the utility’s recently revealed plans to step up buybacks and cut costs were far from what it needs to unlock significant value for shareholders. The activist pointed to several operational setbacks, and labeled the utility’s $5.2-billion acquisition of Vivint Smart Home last year as a “strategic misstep.” Elliott said it had identified five ‘‘highly credible executives’’ for NRG‘s board and said the company should consider adding them.

The stock is up around 15% since Elliott revealed its stake.

Kratos Defense & Security Solutions

Engaged Capital acquired a new 0.67% stake in defense equipment maker Kratos Defense & Security Solutions.

In May 2022, DMI reported that Kratos was vulnerable due to ongoing M&A appetite in the aerospace sector, and that an activist could argue for a sale of the company, predicting a premium could be paid given the high-profile successes of military UAVs in the Ukraine war. The company’s wide collection of goods and services could also prompt calls to divest non-core assets. It added, however, that an activist could also argue that before asset sales can be properly valued, or attract serious buyers, the board needs to be refreshed with more independent directors, given that the CEO has been in his position for 18 years, and Chairman William Hoglund for 13 years.

Engaged has not yet made public demands at Kratos, but recent media reports suggest an M&A driven campaign might be in the works. It would not be the first time Engaged targeted a company cited as vulnerable by DMI. In May, the activist launched a proxy contest for three board seats at Shake Shack after amassing a 6.6% stake in the burger chain, which was profiled on DMI’s Vulnerability module in 2020.

FIS (formerly Fidelity National Information Services)

Third Point Partners acquired a 0.05% stake in financial technology firm FIS during the second quarter. The activist appears to have tested the water by taking a smaller stake in late 2022, but sold out in the first quarter before jumping back in.

In March 2022, DMI reported that FIS was increasingly vulnerable because its once high-flying stock had lost almost half its value due to COVID-19 disruption and rising competition. Such disappointments, combined with analyst calls for more M&A activity, signs of shareholder discontent and activist interest in the financial technology sector all added to the company’s vulnerability. DMI suggested that an activist might urge the company to spend its free cash flow on accelerating M&A rather than paying dividends, a view shared by several analysts.

The company has already faced activism, replacing its CEO and adding an independent board director following demands from Jana Partners in late 2022.

Third Point has not made demands to date. But in his second quarter investor letter, the firm’s founder Dan Loeb cited FIS as one of its portfolio companies that are “undervalued and have important upcoming catalysts such as spinoffs or operational turnarounds that should drive value in the near- to medium-term.”

Adobe

Corvex Management acquired a toehold stake in software giant Adobe.

In October 2022, DMI reported that investors were critical of Adobe’s purchase of web-based design platform Figma due to the $10 billion in equity it needed to raise to fund the deal. It predicted that Adobe boss Shantanu Narayen could face activist investor criticism for having overseen the dilutive deal. The report stated that a successful activist campaign would inevitably need to lay out an alternative strategy which could involve greater share repurchases. More fundamentally, it was argued that an activist could draw attention to Adobe’s high selling, general, and administrative (SG&A) costs, which at the time were more than double the S&P 500 index median.

Corvex has so far remained silent on its Adobe investment. However, in 2022 the dedicated activist mounted a campaign for board seats at software company Anaplan. It only withdrew the demands after Anaplan agreed to be acquired by private equity firm Thoma Bravo.

Digital Realty Trust

Corvex, among the most acquisitive activists in the second quarter, also took a toehold position in Digital Realty Trust.

In October 2022, DMI reported that the office property REIT was vulnerable due to management approving a $3.5-billion acquisition of a majority stake in South African data center operator Teraco just as the market was crashing. It predicted an activist may push for a board refresh with the objective of improving oversight of future transactions. It was also argued that a dissident could demand cost cutting measures to address high operating costs relative to peers and push for new ideas on how to hedge the business against current economic risks like rising energy costs and currency fluctuations, both of which had hurt earnings.

While Corvex has traditionally limited its activism to U.S. companies, it recently joined fellow activists Starboard Value and Ancora Holdings in a push for change at the Canadian power company Algonquin Power & Utilities Corp.