Yogi Berra was right. Those of us who’ve been in the financial markets for a number of years have seen Wall Street prices rise and fall periodically. I can’t predict exactly when they’ll rise or fall but I’m certain they will.
Therefore, when stock prices fall across the board, I don’t panic. I know it’s a cycle; prices will rise again eventually.
Also, experience has taught me that when stock prices fall, public companies should once again pull out and dust off for consideration of certain time tested corporate actions.
It’s kind of like pulling out the snow gear this time of year. It’s a ritual.
What kind of corporate actions are appropriate to consider when stock prices drop?
Stock Buyback Programs
First, I would say is stock buybacks. In another post, I cited a McKinsey Quarterly article reporting that companies don’t actually buy back stock when stock prices are low. My point is that public companies should consider a buyback program and, if appropriate, follow through.
Review Takeover Defenses
Next, not to be paranoid, public companies should review their takeover defenses. Particularly now when big companies are awash in cash and their organic growth has slowed, big companies may see acquisitions as a smart means to get growth by putting their cash to work. Heaven knows, cash earns nothing sitting in the bank.
There’re a number of common takeover defenses, some which vary depending upon the state of incorporation. Common defenses include poison pills, staggered boards, shareholder vote submission and vote threshold provisions.
What I’m recommending here is that a company review, with its Board, attorneys and investment bankers, just what’s appropriate for the company given its circumstances.
Proactive M&A Evaluation
Third, be proactive about M&A. Rather than sit back and wait for a suitor to call, go ahead, evaluate your competition and all the adjacent players, those companies which are not direct competitors but are nearby. Make sure your analysis includes all the global players too. It’s a very small world now.
For companies operating in several businesses, you really must evaluate each business independently. Who knows, this might even lead to a split-off like that of ITT (ITT) or Sara Lee (SLE).
The goal of this analysis is to determine where there are good fits with your company, where one plus one equals three or more. Even if you don’t immediately act on the analysis, you’re better off knowing the landscape if a suitor calls.
While you’re looking at alternatives, you should consider whether a “go private” or “go dark” transaction makes sense for your company. Unfortunately, for many companies, the cost of being public outweighs the benefits.
Dennis McCarthy specializes in helping companies to consider all the actions described above in response to a lower stock price in a timely and cost efficient manner. He can be contacted here for more information.