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Jason Geeves-Booth
Shareholder Activism Editor

IN-DEPTH: Small-cap boards face rise in shareholder activism

March 18, 2024
0 min read
More small-cap companies are facing activism

The level of shareholder activism targeting smaller companies reached a five-year high in 2023 as perceived weak governance practices combined with stock market undervaluation drew attention from both established and newer activist investors.

According to DMI Activism data, 106 *small-cap companies were targeted worldwide by activists last year, up from 94 in 2022 and 97 in 2019, just before the onset of the COVID-19 pandemic.

By comparison, 60 *large-cap companies were targeted in 2023, down from 64 the prior year and 72 in 2019.

Valuation gap

Small-cap companies were hit especially hard by economic disruptions caused by COVID-19 and the subsequent rise in interest rates. “It's been a miserable time to be a small-cap company in the last number of years,” said Adam J. Epstein, a former institutional investor who advises boards through his firm Third Creek Advisors. “They've been wildly underperforming because whenever there is any broader macro consternation in capital markets, the first place where money leaks out of quickly is riskier names.”

While the Nasdaq has doubled in value over the past five years, the Russell 2000 index, which includes many smaller companies, is up only 35%. As of March 1, the Nasdaq had an average price-to-earnings ratio of 33, versus 23 for the S&P 500 and 27 for the Russell 2000 Index.

That creates opportunities, noted Patrick Sweeney, portfolio manager at Ancora Advisors, which targeted five small-cap companies in the U.S. and Canada in 2023, in campaigns that are all ongoing.

“There's just a much larger dislocation between current stock price and intrinsic value around earnings announcements, corporate events and mergers and acquisitions that you don't necessarily see in the large- or mega-cap space,” he told the recent DMI Proxy Season Preview conference in New York.

Some of the high-profile activism wins last year were at small-cap companies that had seen stock underperformance. Stadium Capital Management won two board seats at U.S. mattress maker Sleep Number Corp. in November last year after its stock had fallen from a high of $121 per share in 2021 to less than $20 by October 2023. U.S.-based shipping and mailing company Pitney Bowes appointed a new interim CEO last October and went on to add two new independent directors in February after facing pressure from activist investors Hestia Capital, Ancora Holdings and Bradley Radoff as its share price fell from a 2021 high of over $9 per share to around $4.40 at the end of 2023.


Demands made of smaller companies tend to be more focused on governance issues, with 23% of those brought forward in 2023 focusing on the topic, compared to 15% at larger companies.

“An awful lot of small-cap public companies in the United States are really private companies that happen to have ticker symbols,” commented Epstein.

At DMI’s Proxy Season Preview event, Chris Kiper, founder of Legion Partners, noted that at one of his earliest investments the CEO had placed his dentist on the board of directors despite a lack of any relevant experience. “The CEO just liked the guy and he put him on the board. I think you just see a lot of that stuff in these smaller companies.”

Asia saw the sharpest increase in governance demands at small-cap companies last year, especially in terms of board independence. This was evidenced in cases like Quarz Capital Management demanding board independence at Sabana Industrial REIT in regard to the Singaporean REIT’s internalization process and Dalton Investment’s call for a majority independent director requirement at Nitta Corporation.

New activists

An increase in the number of newly launched and typically smaller-scale activists is also considered to be driving more interest in smaller companies. Throughout 2023, 386 demands were initiated by first-time activists, largely in line with 2022 and a 7% jump when compared to 2021. Almost 50 such demands had been advanced by new activists by the end of February this year.

“I want to focus on smaller, truly under-the-radar companies, particularly those with market caps below $100 million,” noted Oleg Karmanov, who in late 2023 launched investment company Pillsbury Lake Capital after 12 years with boutique activist firm Cannell Capital. “For the long book, there is a lot of historical evidence that small-cap value outperformed large-cap and large-cap growth for multiple years following markets dislocation.”

Despite some perceived vulnerabilities, winning proxy fights at smaller companies has its challenges with only 25% of demands made at such targets in 2023 being at least partially successful for the activist, compared to 35% at large caps, DMI data show. Smaller activists were also more likely to withdraw demands.

Karmanov also noted that activists may have a harder time finding quality directors and executive candidates when targeting smaller companies. “People usually think that if you change the CEO, there'll be a line of candidates across the street, but sometimes these small-cap companies are just not the most attractive places to work.”

Looking ahead to 2024, Epstein observed that while some small caps may be cheaper on paper than large caps, their limited size and ongoing worries about the economy may make finding buyers difficult.

*Small cap defined by DMI as $250 million - $2 billion and large cap as >$10 billion.


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