We asked our premium members to share their insights on the role of activist investors in public markets. Below are the thought leadership pieces submitted by Finsbury and J.P. Morgan.
Please note, these are the views of our premium members and do not reflect the views of the FT.
M&A - be it disposals, sweetening transactions or scuttling them and demanding money be returned to shareholders - is a growing theme of activism. According to Lazard, 45% of all activist campaigns globally in 2019 had an M&A perspective, the highest proportion to date.
Critically, the market believes that M&A activism creates shareholder value. The median cumulative abnormal return (CAR) around the announcement of M&A related activist demands is 1.9%, according to research by Boston Consulting Group. That is nearly three times the CAR for activist demands which do not have an M&A thesis (0.7%).
Conglomerates can be particularly vulnerable to activists pushing an M&A thesis to unlock value. These “lego” companies can be attractive break-up targets. They often struggle to adequately explain why their current structure is optimal for value creation, and not simply the culmination of acquisitions built up over time. German industrial conglomerate Thyssenkrupp has faced sustained pressure from its shareholders, amongst them Cevian Capital and Elliott, to improve performance and simplify its structure. Thyssenkrupp has changed its CEO as it looks to accelerate its transformation and is pursuing a dual-track process for its elevator division.
In the UK, Trian Partners took a position in June in Ferguson, the plumbing and heating supplies merchant, and has been credited in some quarters as a key driver for Ferguson’s subsequent decision to split its UK and US businesses. The US activist Cat Rock has been calling on the food delivery service company Just Eat to seek M&A opportunities. It has supported the subsequent £8.3 billion merger with Takeaway.com. Eminence, another US activist that sees value in Just Eat, in contrast said it planned to vote against the merger, believing it undervalued the food delivery business.
Bumpitrage – whereby an activist intervenes in a deal to extract a higher offer price from the bidder – is a constant threat during transactions. Elliott’s interventions in the takeovers of SABMiller by AB InBev and Quintain by Lone Star are two cases in point where higher offers were secured by the activist in order for the bidder to safeguard the transaction.
So, are you ready for a potential activist campaign?
US-based activists continue to be the most prominent this year, with Elliott and Starboard the most active players, launching 14 and 11 campaigns respectively, according to Lazard. First timers have accounted for a quarter of all new campaigns and traditional, long-only investors have been increasingly vocal and active. With a reputation for aggressive campaigning, US-based activists have, however, tended to modify their approach when engaging UK and European boards. They are increasingly savvy to business norms on this side of the pond. They consider carefully the stake they need to exert influence, and look to win over key stakeholders early on, including politicians and employee representatives, as well as shareholders.
Companies should recognise that activist strategies are constantly changing. One truism of an attack is that activists can’t win on their own; they need to build a consensus to effect change and unlock value. Shareholders – be they traditional asset managers, index funds, retail investors or employees – can have varying and evolving motivations and an activist’s platform needs to appeal to all of them. They will shift their focus from a purely value-driven approach to value and ESG if that’s what it takes to succeed.
All companies must be their own activist. This means proactively addressing vulnerabilities by looking in the mirror and asking the tough questions: are we effectively communicating our strategy and value creation story? Is the right strategy in place for long-term growth? Is this transaction defendable on rationale and valuation? Are there gaps in the ESG story? It means developing defence narratives and materials, rehearsing responses in simulations and dialling-up stakeholder outreach. It also means being transparent about the board’s decision-making – explaining why the company is not taking certain actions can help rebut activist attack points.
Companies must maintain constant control of their narrative and have storytelling channels ready – from shareholder letters to paid social media campaigns – with supporters identified in advance. PR and IR must work hand-in-hand and help the company stay attuned to sentiment.
No company can afford to be complacent.
Like chocolate-chip cookies and candyfloss, investor activism was once an all-American phenomenon. Today, it is truly global. Financial markets across the world have developed a taste for it, with specialised funds publicly challenging corporate boards on countless financial and strategic fronts.
But activism is not a crusade for the perfect corporate structure or vision. Be in no doubt, it is an asset class in its own right, and to raise funds and justify hefty management fees, it must demonstrate returns.
During the recent period of rampant activism between January 2015 and February 2019, returns from successful campaigns in North America and Europe outperformed the S&P 500 index by 200 basis points, according to JPMorgan analysis.
So far so good. But it is worth digging a little deeper, as not all activist campaigns have the same goal, nor yield the same results.
More detailed analysis shows that traditional activist campaigns — focused on changes in companies’ capital structures, dividend and buyback distributions, corporate governance or executive pay — underperform the market by 1.8 percentage points. By contrast, campaigns targeting a mergers and acquisitions-related event such as a corporate carve-out, a divestments or a spin-off outperform by 12.5 percentage points.
It is no surprise, then, that over the past few years, activist demands have turned in one direction, increasingly homing in on companies with assets to dispose of or businesses to separate.
The sale by Whitbread, the British hotel and restaurant company, of its Costa Coffee chain to Coca-Cola is one of many recent break-ups that were fuelled by activists. Then there is GE’s sale of its healthcare division to Danaher and the separation of its Baker Hughes energy business; United Technologies’ planned spin-off of its elevator and air conditioners and heating systems unit; and ThyssenKrupp’s split into a capital goods and a materials business. The list goes on.
But who do these separations best serve? The long-term interest of all shareholders or the short-term needs of activists hungry for quick returns?
A major M&A event generates returns relatively swiftly. If you separate a meaningful part of your business at a premium valuation, the impact on returns will be immediate, unlike those that could arise from more laboured and time-consuming processes such as a groundbreaking strategic transformation or shaking up a complacent management team.
The challenge facing boardrooms today is dealing with activists’ need for speed, the quick sugar high — their tendency towards short-termism.
With a target in sight, activists invariably demand that businesses be separated immediately. But a more judicious path might be to sit and wait; to continue with a company’s existing strategy that might well involve a separation but only at a time of its choosing. That could be when a transaction better aligns with overall market conditions, or when there is a cyclical recovery in the business.
Take the example of ABB, the Swiss engineering group that had been battling with Cevian since 2016 on the merits of a separation of its power grids division. If ABB had pursued a separation back then, it might have generated a premium valuation for the standalone business, and an attractive return for Cevian. But by making improvements to the performance of the business and patiently waiting for the right market conditions, in December 2018 it announced the sale of an 80 per cent stake in the business to Hitachi for $6.4bn. In doing so, it achieved a value that was substantially greater than anything possible two years earlier.
Managing activist campaigns can be challenging. With so many different factors and personalities involved, it is difficult to be prescriptive but preparation and communication are key to dealing with their approaches.
Being well prepared is initially the job of the investor relations team, which regularly takes the pulse of institutional investors and answers concerns they may have about the business. It then falls to management to take note of and develop a strategy to address shareholders confidently, before the interests of activists are piqued. Speed is of the essence here, as misgivings can quickly grow and spiral out of control.
Clear communication is also vital. To prevail over activists’ short-termism and their demands for separations, corporate boards need to clearly communicate to shareholders that they are open to fresh ideas. They must demonstrate their readiness to manage business portfolios in the long-term interest of all shareholders, to set clear performance targets for every division and, where a unit is struggling, put a plan in place.
Otherwise, there will always be activists ready to move in and take a slice of corporate apple pie.
