By Jamie McLean
Investor activism is where an individual or group “purchases large numbers of a public company’s shares and/or tries to obtain seats on the company’s board to effect a significant change within the company” (Investopedia, 2019). Normally this will begin in the form of a minority stake in the company, often between 1% and 10% of a target’s shares. Investor activism usually occurs when an activist has a different view than management on how to maximise shareholder value, and therefore they attempt to coerce the company into adopting their strategy.
How do they do this?
Activists employ a variety of tactics, including open letters to the board and fellow investors (10X EBITDA, 2020), proxy fights incorporate votes, nominating directors to gain control of the board, and even litigation to challenge board decisions. In one-third of cases, campaigns are M&A-driven, with around 40% of these being pushed for the target company to divest parts or all of their business (Lazard, 2019).
Who are the Main Players?
The most prominent activist investor globally is Elliott Management, with $14.7bn invested in current activist positions and 22 new campaigns in 2018 spanning across 9 countries.
Other notable groups include ValueAct, with $12.6bn in market value of current activist positions, Cevian, with $11.2bn, and Trian, with $10.1bn.
What is the Trend?
In short, there has been a growing number of attempts, successes, and money invested in activist campaigns over the past few years, with 2018 being the most significant year yet.
According to Activist Insight, FactSet and public filings at 12/31/2018, 226 companies were targets of activist investors in 2018, compared with 188 in 2017. The amount of capital deployed behind campaigns in 2018 reached $65bn, up from $62.4bn in the previous year. This meant that a new record of 161 board seats were won by activists in 2018, up from 103 in 2017 and an average since 2013 of 111.
Not only this, but an increasing number of investors used activism as a tactic for the first time.
Lazard’s Review of Shareholder Activism nicely depicts this below, with there being a total of 131 investors engaging in activism in 2018, of which 40 were “First Timers”.
Graph: Lazard’s Review of Shareholder Activism
What's New?
There is another development in the world of shareholder activism – the increasing importance of institutional investors and shareholder advisory companies. Large traditional asset managers, such as Janus Henderson and T. Rowe Price Investment Management, have historically not voiced support for management or activists. However, more recently there has been a growing trend of managers taking sides. Examples include Janus Henderson encouraging athenahealth to explore a sale of the company following Elliot’s offer to acquire them, helping lead to a $5.7bn acquisition by Veritas Capital and Elliott (Lazard, 2019), and T. Rowe Price voicing support for Nestle’s board despite Third Point raising questions. In addition, shareholder advisory companies have had significant influence on activist campaigns. Recent examples include Starboard Value withdrawing its proxy encouraging shareholders to vote against Bristol-Myers Squibb’s $90bn takeover of Celgene after Institutional Shareholder Services and Glass Lewis gave their backing to the deal (Financial Times, 2019).
The rise of activist investing has been mirrored by a rise in passive investing. I.Appel, T.Gormley and D.Keim present the argument that this is not merely a coincidental correlation in their paper “Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism” (2018). Passive investors have an incentive to maximise performance of the shares in their index as clients are more likely to choose a passive investment strategy over an active one if passive investment outperforms active investment. The evidence suggests that as passive investors are unable to engage in stock selection, there is an added incentive to push for management and governance improvements in the equities that they are mandated to own. On the other hand, since stock selection of active managers is made at their discretion, if a company is underperforming they can either sell their position or engage with the company as an activist. As active investors have this extra option to sell, it reduces the incentive of active investors to become activist when compared with passive investors. Furthermore, when a passive institutional investor is present in a company, there is often a higher degree of ownership concentration. This makes it easier to coordinate a successful activist campaign if an activist is able to get the passive investor on board. Thus, while passive investors rarely commence activist campaigns themselves, in many cases they are an enabler and supporter of activists.
Deals to Know About
Edward Bramson of Sherborne pushed for a board seat at Barclays, encouraging them to shrink their investment banking operations.
Starboard Value and Elliot Management suggest EBay divest StubHub. EBay agree a sale to Viagogo for $4.05bn.
Trian push Ferguson, a plumbing products distributor, to sell UK business.
Icahn drops opposition to Dell-VMware share buyback after Dell raises offer.
Icahn and Deason joined forces to block Fujifilm’s $6.1bn deal with Xerox.