Shareholder activism at larger cap companies is becoming more common because these tend to be more prone to inefficiency and poor corporate governance than smaller ones, according to representatives of Elliott Management and Cevian Capital.
Speaking at the ICGN annual conference in Milan this week, Giorgio Furlani of Elliott and Harlan Zimmerman of Cevian agreed that inefficiencies created by the “conglomerate effect” often prompt activist interest in large companies.
Companies should not diversify their businesses and risk creating a conglomerate discount when investors are the ones best placed to choose how to allocate their own capital, via their own diversified stock portfolios, Furlani suggested.
Other reasons large market cap companies are being targeted more often include increasing support for activism from fellow shareholders and the increasingly large size of activist funds. Activists are becoming more “mainstream” in terms of acceptance of their ideas and input by management and advisors, the pair agreed.
In addition, underperforming small and mid-cap companies were more likely than larger companies to being taken completely off the market by private equity buyers or acquired by larger strategic competitors, Zimmerman noted.
A large cap company is often too big to be taken out in the same way, or is considered a national champion, he said.
While larger companies are more covered by sell-side analysts, their job is to “predict what the company will do, not to write what they think the company should be doing, which can be two completely different things”, Zimmerman said.
The more fragmented shareholder base of a larger companies also meant they were under much less pressure from traditional investors than in smaller or mid-cap firms, in turn breeding complacency and providing an opportunity for an activist to come in, he said.
“Those big companies that are destroying value, doing much worse than they should be doing… just bouncing along at bottom of the peer group for ten years with no one really doing much about it… these companies are the ones that provide really attractive opportunities for activists,” Zimmerman said.
Cevian has ongoing campaigns at conglomerates including ABB [VTX:ABBN] and Bilfinger [ETR:GBF], while Elliott has also targeted AkzoNobel [AMS:AKZA], BHP [LON:BLT] and Whitbread [LON:WTB].
Elliott recently has joined Cevian as an investor in ThyssenKrupp [ETR:TKA], but the two are not working in partnership, Activistmonitor recently reported.
by William Mace in Milan