"Four Years After Activist Campaign Success, Corporate Value Actually Declines"

Hankyung Association, Report on 'The Impact of Activist Campaigns on Corporate Value'

An analysis has revealed that if conditions conducive to the activation of activist funds, such as strengthened governance regulations, are established, the undervaluation of corporate value could worsen further.

The Korea Economic Association (KEA) announced this on the 21st through a report titled "The Impact of Activist Campaigns on Corporate Value."

Analyzing U.S. listed companies with a market capitalization and assets exceeding $1 billion (approximately 1.3 trillion KRW) that have experienced activist campaigns since 2000 (970 companies: 549 successful campaigns, 421 failed campaigns), the study found that companies with successful campaigns showed some short-term improvement in corporate value, but in the long term, corporate value actually declined compared to before the campaign's success.

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According to the analysis, activist campaigns tend to succeed mainly in companies whose corporate value is undervalued (16.1%). When campaigns succeed, corporate value improves by 1.4 percentage points within three years, partially alleviating undervaluation (from 16.1% to 14.7%).

However, four years after campaign success, corporate value worsens again by 2.4 percentage points (from 14.7% to 17.1%), deepening undervaluation. Ultimately, long-term corporate value after a successful activist campaign deteriorates by 1 percentage point compared to before the campaign (from 16.1% to 17.1%), resulting in a decline in corporate value.

One of the main reasons for the long-term decline in corporate value following a successful activist campaign is the weakening of corporate fundamentals due to reductions in employment and investment (capital expenditures).

The analysis showed that when activist campaigns succeed, employment decreases by an average of 3.0% and capital expenditures by 10.7% during the short term (two years from one year before to one year after the campaign success). In the long term, employment decreases by 5.6% and capital expenditures by 8.4%. Conversely, dividends increase by an average of 14.9% in the short term (two years from one year before to one year after campaign success) but decline back to pre-campaign levels in the long term.

KEA interpreted that while successful activist campaigns lead to short-term reductions in employment and investment and increases in dividends, corporate fundamentals deteriorate over the long term due to decreased employment and investment, intensifying undervaluation of corporate value.

Since activist campaigns damage corporate value in the long term, KEA argued that to enhance corporate value, it is necessary to avoid establishing conditions that could lead to a surge in activist campaigns, such as governance regulations (expansion of directors' fiduciary duties, mandatory cumulative voting, and expanded separate election of audit committee members).

In recent years, activist fund campaigns targeting domestic companies have sharply increased alongside the strengthening of governance regulatory policies. According to Insightia, a UK data analysis firm, the number of Korean companies targeted by activist funds was only three in 2017, but rose to eight in 2019 and 77 in 2023, a 9.6-fold increase over the past five years.

KEA forecasted that if governance regulatory bills currently under discussion in the National Assembly?such as expanding the scope of shareholders subject to directors' fiduciary duties, mandating cumulative voting, and expanding separate election of audit committee members?are enacted, the activation and success rate of activist campaigns will significantly increase, making it very difficult for companies to defend their management rights.

Lee Sang-ho, head of KEA's Economic and Industrial Headquarters, emphasized, "To enhance corporate value, companies should focus on investment and employment to fundamentally improve competitiveness. Legislative measures that create an environment favorable to activist funds, such as amendments to the Commercial Act, must be approached with great caution to prevent companies from wasting astronomical funds and resources on defending management rights and to allow them to concentrate on their core businesses."