Why Small Caps Stay in the Activist Spotlight
If there was one clear takeaway from our January 22 webinar, it’s that small-cap companies continue to sit at the center of activist investor activity for very practical reasons. The discussion moved easily between how activists spot opportunity, how campaigns actually unfold, and what boards and leadership teams should be doing long before an activist ever shows up.
Andrew Shapiro of Lawndale Capital Advisors put the economics in plain terms. “Small caps are attractive for a simple reason. It’s the opportunity-to-effort ratio. It’s just better than it is in a large-cap activist situation.” As he explained it, “You go after a small cap, the prospective upside is multiples and it takes less capital to matter.”
Part of that opportunity comes from how inefficient the small-cap market can be. “There’s more information inefficiency, less research coverage and more mispricing,” Shapiro said. But finding the right situation still requires discipline. “I looked for a value gap, a performance gap and a path, and you really need all three,” he shared. “Mispricing plus fixable problems plus a realistic path to influence the company and the board is what creates opportunity in small caps.”
Once activists engage, board dynamics quickly come into play. “I usually want two in the boardroom because you want someone who can second a motion and get it on the record,” Shapiro noted. From the company side, he stressed that preparation pays off. “Preventative work costs a fraction of what a public fight will cost in time, money and reputational damage,” he said. “You score far more credibility if you engage and communicate in advance, not only in response to activism.”
That kind of preparation starts with understanding the rules of the road. Randall Adams of Seward & Kissel talked about how much attention goes into the fine print. “We do a very in-depth look at the charter, the bylaws and how the corporate governance of the company works,” he said. At the end of the day, strategy still comes back to value creation. “It really comes down to what is the most credible value path here.”
One reason small caps attract activists is the clarity around influence and timing. “With a small cap, you generally know whether you will have the power to effect change and the timeline is usually shorter and more discrete,” Adams explained. He also pointed to how activist styles are evolving. “We are seeing much more of a constructivist approach among newer activists.”
Leonard Wood of Goodwin added perspective on what campaigns often look like in practice. “We commonly see nominations of three or more directors, with an understanding that they may ultimately settle for one or two,” he said. Institutional investors, he noted, are generally open to hearing activists out. “Institutional investors are generally willing to listen to activists and hear what their case is.”
For companies, credibility and execution matter more than anything. “The best defense against activism is a credible long-term plan supported by consistent execution,” Wood said. When companies fail to tell their story clearly, activists often step in. “When an activist believes that a company isn’t telling its story convincingly, the activist will look to step into that vacuum.” His advice was straightforward. “Small-cap companies are well served by investing in advance preparedness.”
Keith E. Gottfried of Gottfried Shareholder Advisory talked about how exposed many small-cap companies still are. “Small caps are often very underprepared, perhaps even sitting ducks, and sometimes dealing with activists who may not have the most benign motives,” he said. Timing makes everything harder. “When the activist shows up, the clock is already against the small cap, and moving quickly to enhance its activism preparedness can be outcome determinative.”
Not every engagement leads to a constructive outcome. “There are a lot of situations on the small cap side where there is no path to a meeting of the minds because the activist has an agenda that may not be aligned with the interests of all shareholders,” Gottfried observed. He also flagged early signals that an activist intends to go public quickly. “When you see an activist come in at just over five percent of the company’s stock, it’s almost obvious that they want the world to know they have taken an activist position and have activist intentions.”
The communications side of activism came through clearly as well. Brendan Foo of Forward Global cautioned against letting emotion drive strategy. “One of the most dangerous things is when companies allow themselves to be pulled into making things personal,” he said. Alignment inside the organization is critical. “Everyone needs to align on the message before speaking publicly.”
Foo described activism as an ongoing chess match. “It’s a little bit of game theory. You’re doing repeated iterations of the same fight.” Over time, credibility becomes a real strategic advantage. “Credibility is constructed brick by brick, and if it’s built the right way it can become a long-term deterrent to aggressive activism.” And he offered a reminder not to take “constructivist” claims at face value. “If activists present themselves as constructivists in bad faith, that tells you something important about who you are really dealing with.”
What stayed with me most from this conversation is how consistent the themes were across perspectives. Small caps remain attractive because mispricing, influence and upside come together more easily than they do in larger companies. Governance structure and timing shape how quickly pressure can build. Preparedness, credibility and clear storytelling can change the trajectory of a campaign. And while some activism can be constructive, leadership teams need to stay realistic about motives and risk.
For boards and executives operating in the small-cap world, the message was steady and practical. Preparation cannot wait until an activist appears. Credibility is built over time, not in crisis. And how a company communicates, internally and externally, often determines whether it controls the narrative or reacts to it.
