Recently, Activist Insight released a report on activist short selling. Activist short selling is when investors publicly bet on a stock going down in value. Among other interesting trends, the report shows that Canada ranks number 3 in the world for activist short campaigns. The data suggest that Canadian companies should be on high alert about the possibility of an activist short play.
The global number of activist short campaigns is trending downward
2015 represented a high water mark for activist short selling, with 274 campaigns globally. Since 2015, numbers have trended downward, with 263 campaigns in 2016, 186 in 2017, and 40 in Q1 2018.
The reasons for this downward trend may have to do with more careful selection of targets. We have seen a similar phenomenon on the long side. The overall number of public proxy fights is generally trending downward. However, we see activists in the Canadian market being more picky about targets on the long side, and increasingly achieving settlements based on realistic potential outcomes in a proxy fight.
Nonetheless, Canada remains a hotspot for activist short campaigns
Canada saw 9 public short campaigns in 2017, placing it behind only China (12) and the United States (138). For funds in the US looking for new targets, Canada is a particularly attractive environment. Canada is geographically close and culturally familiar. It is also relatively easier for activist short sellers to take a large short position opposite a Canadian issuer, given the smaller average market caps of Canadian companies.
Activist short sellers are doing well particularly when they target smaller companies
For campaigns against companies with market capitalizations less than USD $50 million, the average one-year campaign return in 2017 was 57.8%. For companies with market capitalizations between $50 million and $250 million, that number was 34.4%. Strikingly, for companies larger than this, one-year returns on short campaigns were negative. For instance, for campaigns against companies with market caps over $10 billion, the average one-year return was -19.1%.
Because many activist short campaigns tend to be loud and splashy, and target high-profile companies, smaller issuers may not think of themselves as potential targets. This belief can be dangerous. The greater success of short sellers against smaller targets will likely encourage them to focus on smaller targets—which Canadian companies are more likely to be by US standards.
Advice for issuers
Even one tweet from an activist short seller can quickly and significantly depress the value of a company’s shares. Regardless of their performance, Canadian issuers should be prepared for the possibility of an activist short attack, and game out possible responses long before one occurs.
The authors would like to thank Bikaramjit Sandhu, summer law student, for his assistance in preparing this post.