VICTORIA GEDDES, ECECUTIVE DIRECTOR
Those who have been on the receiving end of a short attack describe the process as akin to being at war, or being pursued by a pack of wolves, with the company’s very destruction their opponent’s goal.
A short or bear attack, to make the distinction clear, is not the same as a strategy that involves short selling as a legitimate tactic to deliver portfolio performance.
The attacker is taking direct aim at the company’s revenue stream, the regulators and the providers of capital with the objective of inflicting maximum damage in order to deliver a profit on their strategy. It is a game with extremely high stakes so there are valuable lessons to be learned from those who have lived through such an experience.
In the US, where these types of attacks are more prevalent than in Australia, the analysis suggests these characteristics make companies vulnerable:
– shares tend to be closely held
– highly valued relative to peers
– operates in a highly regulated industry
– history of making acquisitions or specialises in complex strategies
Before a shorter approaches its target, it will have already marshalled allied forces with the necessary fire power to inflict damage – most typically hedge funds. They will then start to seed doubts about the company’s management, performance, credit-worthiness and strategy through the media, including social media, the ratings agencies and analysts. White papers may be written and websites set up to prosecute their argument but more often than not it is simply rumour mongering. A common tactic is making false claims about senior management and directors, sowing the seeds of doubt in the minds of investors and shareholders about their competency and integrity. The toll on individuals can be very real and companies need to be prepared for the fact that these strategies often play out over months, rather than weeks.
There can be tell-tale early signs of a short attack but companies must be tuned into what the market is saying about them. Current and former employees are often contacted by the attacker, as are customers, shareholders, vendors and brokers. They are likely to ring the alarm bell by asking the company questions that are atypical. Monitoring the equities and options markets closely to identify potential short seller activity should also be part of the company’s regular reporting protocol.
Response Strategy for Short Attacks
Companies need to defend themselves against such attacks with the same level of organisation that they would apply to a hostile takeover. This includes bringing in additional resources including external advisers – typically IR firms and legal counsel with experience in these situations. This ensures that management are not distracted from running the company, as a key objective in the short attack strategy is undermining the company’s operational performance.
The development and execution of a communications and IR engagement strategy is critical to managing the company’s defence. Indeed constant, targeted communication with key stakeholders, excluding the attacker, is really the only effective defence. Useful tips include:
Pick Your Targets
The consensus of those who have been through this experience is that there is no point trying to talk to the shorter. They are not open to persuasion or compelling arguments because their goal is clear – inflict maximum damage on the company – and nothing the company says is going to distract them from it.
While media is definitely a participant in this process, there is reason to be cautious about proactive engagement. As a general rule, companies should respond as needed to defend their position against blatant misrepresentation of the facts. However, the media is unlikely to be interested in prosecuting the company’s reasoned viewpoint when the shorter provides copy that is so much more ‘newsworthy’. It is not unheard of for shorters to use social media to develop momentum for their story, including creating multiple personalities online, each supporting and spreading the shorter’s arguments.
Companies under a short attack are in a dangerous, fast moving battle with only one winner. There is no standard playbook but the skillset associated with issues/crisis management is often key to victory. The most effective strategy is to communicate loudly and often to every stakeholder in the company to counter the stories being peddled by the shorter, who has only one outcome in mind.
Short attacks are rarely over quickly, so establishing a strategy that will serve the company over a long period and marshalling additional resources are also important. The goal is to keep the company together, maintain morale and ensure it survives.