The lower incidence of publicly visible shareholder activism in the first half of 2019 in Europe could be due to a less stable geopolitical climate, poor stock market performance and an increase in private negotiations between parties, according to specialist advisors interviewed by Activistmonitor.
Twenty four new live activism campaigns were initiated in the first half of 2019, compared to 35 in the comparable half of 2018, and 66 demands were recorded in the period, which was a 14.2% decrease on the 77 registered in 1H18.
A less stable geopolitical climate contributed to generally weaker returns across the investor spectrum towards the end of 2018 – not just for activist investors, said Nicole Karlisch, executive director at Morgan Stanley responsible for shareholder activism in Europe.
Activists are therefore increasingly taking stakes in less “risky” companies, where downside investment risk is limited and returns can still be reasonably well predicted, she said.
Poor stock market performance could also be hindering activists’ ability to “cash out” from their positions and move on to new campaigns, commented Jason Caulfield, global head of value creation services at Deloitte.
As the duration of campaigns lengthen, additional demands are added as activists’ strategies evolve, so campaigns that start with demands for board seats might move on to more specific responses, such as shares buy-backs, particularly if stocks are trading at low prices, Caulfield said. “If more campaigns are lengthening and fewer starting then the mix of demands may reflect this,” he said.
According to Activistmonitor’s latest half-yearly data, the largest increases were seen within two demand types: capital allocation/structure changes (5 demands in 1H19 vs 3 in 1H18) and oppose acquisition/merger agreement (3 vs 1), and share buy-back/dividend/return of capital (6 vs 5). The biggest decline was in board and management change demands (19 in 1H-19 vs 30 in 1H-18), although this category still recorded the highest number of demands overall.
The most demanding activist so far this year, despite launching just one campaign at Ophir Energy, was London-based Petrus Advisers (7 demands from all ongoing campaigns), followed closely by Elliott Management (6 demands), and Crystal Amber and SpringOwl Asset Management (both 4). Elliott logged the most demands in both 2018 and 2017.
Karlisch suggested Morgan Stanley had seen an uptick in M&A-related activist demands, with such campaigns shown to be the ones that yield the highest returns – frequently over 30%. Indeed, with some aggressive and resourceful activists having demonstrated an ability to undertake full acquisitions of targets, it only adds credibility to pressure they might put on companies to sell themselves, she said.
In 1H19 there were nine demands asking for strategic alternatives, including a merger, three demands opposing an acquisition or merger agreement, 10 supporting bolt-on acquisitions, divestitures or spin-offs, and only one opposing the same, according to Activistmonitor’s data.
Caulfield’s team is being increasingly approached by board members and senior executives to discuss how they can tactically avoid encouraging activists, he said.
“Carrying out M&A, for instance, raises flags for activists, attracting their attention, so it is particularly advisable to consider the activist defence strategy before and alongside major corporate development activities,” he said.
Corporate governance-related demands by activists are generally a good development for the market as a whole, according to a London-based lawyer with activism experience, because boards need to be challenged into implementing legitimate checks and balances in order to avoid the type of “group thinking” that encourages conformity and prevents innovation.
Just over 42% of all demands made in the half related to board, management or governance changes, down from 53.2% in 1H18, according to Activistmonitor research.
Morgan Stanley expects growth in the number of companies in which activists have announced substantial stakes but have made no public demands, and where discussions are likely to be held behind closed doors, said Karlisch.
Activistmonitor considered five campaigns as “potential” in the half (vs three in 118), meaning situations where there are signs of activism occurring, but there have not yet been any public demands.
US investors will become more familiar with the European market and customs and of the fact that potentially more progress can be made in private discussions rather than via public agitation, said Karlisch. Such a constructive and collaborative approach tends to get greater traction if given more time, noted Caulfield.
However, if a campaign does drag out, chances increase that the activist will publicly voice more demands in a bid to play the “negotiation chip”, said Karlisch, pointing to environmental, social and governance (ESG) factors as typically one of a number of additional demands sought.
“ESG topics are an example for such peripheral demands,” she said. “This tactic can help activists build their support base – particularly among passive and other institutional investors – albeit it is unlikely those demands would yield the investment return the activist is after.”
Even the most passive investors in the market are recognising the need for activism, so investigating links and relationships between institutional investors and pure activist funds is key to mounting an effective corporate defence, said the lawyer.
Overall, company executives and directors have become more aware of the existence of activists and the demands they make, but some can “still mistakenly feel they benefit from a ‘safety net’ around them due to company size or no obvious investment thesis for an activist,” said Karlisch.
However, in the lawyer’s words: “You can’t avoid activism these days. Management change and strategy change, as well as long-term governance improvement, is all good for the market.”
by William Mace and Claudia De Meulemeester