Activist investors have been highly visible in the US for many years. However, momentum this side of the pond seems to be gathering.
According to the investment bank Lazards, in 2018, 58 companies in Europe had to deal with an activist, accounting for c.25% of global campaigns, up from 52 in 2017. Some big names have been targeted in the UK, such as Whitbread, which responded to pressure from Elliott by spinning off the Costa coffee business, and GKN, which was also under threat from Elliott and was bought by Melrose. The number of new activist investors keeps rising, with 131 new entrants in 2018; there are also signs of traditional investors adopting more of an activist approach towards companies where they are invested.
There appear to be several drivers behind this trend, which looks set to continue into 2019. Indeed, only last week activists Elliott and Starboard took a stake in eBay, demanding management change and a break-up. The rise of passive investment funds, particularly in the US, where Vanguard, Blackrock and State Street account for nearly 20% of the S&P 500, is focusing more attention on wider governance issues; in markets like the UK, this is being compounded by increased regulatory focus on corporate governance, with the Investment Association Public Register providing a highly visible “naughty step” which companies should try to avoid. In addition, as Stock Market returns have reversed in 2018, it has become more important for all investors to find “alpha”.
The usual approach by activists is to purchase a stake in a company, and often seek seats on the company’s board, with the goal of affecting a major change within the company that would lead to a higher share price. There is a risk that they can become hugely disruptive and demanding of management time, with the average cost of defending against an activist estimated to run well into seven figures.
So the first question must be how can companies stay off the activists’ radar?
There is clearly some “motherhood and apple pie” advice: you should have a robust corporate narrative, develop strong relationships with shareholders and other stakeholders, and tick the right boxes on corporate governance.
Rather perversely, if you are in an unattractive industry, you appear to be far less at risk. So management in the retail sector might be able to relax, if it was not for the trading problems which they face. The recent A&M Activist Alert flagged that the consumer and industrials sectors in Europe see the highest likelihood of activist campaigns (accounting for nearly 60% of the total targets identified). And the consumer sector in Europe has already seen some high profile activist campaigns, including Corvex at Danone and Loeb at Nestle.
Geography can also be important; according to A&M, nearly 40% of the activist targets in Europe are based in the UK where the legal and governance regime is more attractive. There is no doubt that the tighter regulation in The Netherlands seemed to be a key attraction for Unilever as it tried, and failed, to move its main listing out of the UK last year.
You appear to be at risk if you are a good company in a good industry but have slightly underperformed peers. As a former consumer analyst, I have been intrigued by Elliott’s recent move on the French spirits company Pernod-Ricard. This is a company that has performed well over the last few years, with its share price up nearly 40% over a three-year period. However, this does not quite match the performance of the nearest competitor Diageo where shares are up c. 50%. Some of the accounting ratios do look better at Diageo, for various reasons, and there may be a perception that a strong family influence can mean under-management. However, some of the criticism here looks offbeam; Elliott has talked about the opportunity to take out EUR500m of costs, and they are absolutely right. Pernod spent EUR1.7bn last year on advertising and promotion of its brands – can a third of this and you could deliver those cost savings, but I think that most sensible observers would see that as detrimental for the long-term growth of the business.
And what advice would I have for companies which come under activist pressure? I think it is quite right for a company to engage with what is probably a substantial shareholder as it would with other institutional investors. There is always a question of whether it is better to have the activist inside, with a board seat, when they will probably be less vocal externally. And the activist’s attentions may not always be totally unwelcome – I do wonder whether his aims may not sometimes overlap with those of an ambitious CEO with a change agenda, who may be finding the rest of the board reticent to move in the right direction.
At the end of the day, whatever the activists’ stated aims, a good financial performance which should lead to a higher share price is the best way to escape the predators hunting at the door. This can ensure they make a decent profit and depart looking for new targets.
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