New battlegrounds: a global activism update
While shareholder activism is nothing new, in recent years it has affected a growing number of companies and regions. The number of activist campaigns leveled at companies worldwide is climbing slowly: 344 companies were subject to activist demands in 2014, up from 291 in 2013.
According to research published by Activist Insight, companies in Japan, Chile, Italy, France and Norway all experienced activism last year, while investors continued to make inroads in Canada, the UK and elsewhere. Below, four experts who watch activists closely give their take on how activity will evolve around the world in 2015.
The US is where traditional shareholder activism originated. In 2014 alone, 223 US companies were targeted by activist campaigns, compared with 202 campaigns in 2013 and 173 in 2012. In Q4 2014 ‘tier one’ activist capital represented almost $300 bn, though 2012 was still the peak year in terms of number of campaigns, says Tyson McCabe, senior director of advisory services at NASDAQ OMX.
‘The US will remain hot,’ he explains. ‘People talk about Europe and China, but the structure isn’t going away here any time soon.’ He adds that the investing landscape has been tailor-made for activists through ‘new regulations over the years that have empowered shareholders to feel a greater sense of ownership in terms of voting practices and governance’.
Two proxy fights stand out for McCabe as game changers in 2014: the Starboard Value campaign to replace all 12 of Darden Restaurants’ directors (the first time an activist campaign has managed to replace an entire board), and the Pershing Square push for healthcare firm Allergan to sell itself to rival firm Actavis.
‘We expect 2015 to show an increased willingness by activists to move toward a private equity-type model,’ McCabe says. ‘They’re looking for deals. Capital continues to grow, and they will need to be more creative in how they deploy it.’ Low interest rates, cheap money and a five-year high in M&A deals could all contribute to taking more large firms private. ‘Activists can then sell divisions, streamline and potentially create synergies across other portfolio companies,’ states McCabe.
Activists themselves should be thinking about the long term, he adds, particularly when it comes to the creation of new funds, given the impact that may have on succession plans. ‘We suspect we’ll start seeing transition plans to reduce investor unease, as many older activists are past retirement age,’ he says. ‘They need to start communicating what their hedge funds will look like in 20 years.’
‘There is a long history of institutional investors speaking their mind in the UK, but the arrival of a more US-style activism is something firms are bracing for,’ says Nick Dawson, managing director at Proxy Insight. Notable 2014 campaigns include Sandall Asset Management’s targeting of UK transport company FirstGroup, following the latter’s poor performance and new rights issue worth £615 mn ($946 mn).
Other countries might become more attractive to activist funds judging by recent months: Amber Capital has taken an interest in Italian firms, while Cevian is involved in German companies ThyssenKrupp and Bilfinder. ‘Germany is an area where activists may look because of its protections for minority investors in takeover deals – as seen with hedge fund Elliott’s involvement with Celesio and Kabel Deutschland – and a steady economy,’ says Dawson. ‘Management teams are still quite suspicious of activists, though.’
US-style activism is not quite as effective across the Atlantic, however. ‘Activists haven’t been as successful in getting their nominees elected in hostile elections or proxy fights, but all it takes is an underperforming firm and an activist with the right skill set to mobilize investors,’ notes Dawson.
Perhaps as a result, the number of European companies targeted by activists dropped slightly in 2014: 35 recorded cases versus 47 in 2013. Dawson says 2015 might see activity tick up again as regulations and attitudes change across the continent. ‘I’d expect Germany to see a few cases of activism; maybe a couple in France, Switzerland or Italy,’ he adds.
South East Asia
‘Activist campaigns in South East Asia have definitely grown in recent years, but not at the same pace as in the US,’ says Esther Luo, head of advisory services for Greater China at NASDAQ OMX. ‘There are cases that have been very successful, and we expect more success in the coming years.’ Unprecedented lobbying and more frequent proxy fights in the region will also likely spur regulatory changes that will further boost interest in governance, adds Luo.
Hong Kong is still an attractive target for activists, due to loosening rules for foreign ownership at Hong Kong-listed companies and corporates paying more attention to what investors think about sustainability and governance. In mainland China, however, shares are mostly owned by parent firms, the government or the firm’s founders, so there’s little space for other investors to influence company decisions.
‘In the past, retail investors usually would not vote at all and institutions would reject a firm’s decisions only if [they were likely to] have a negative impact on share prices,’ Luo explains. ‘Institutions may even withdraw their investments rather than try to influence management.’
One such incident that attracted a lot of local attention was seafood company Zhangzidao Group’s decision to write down stock worth 800 mn yuan ($128 mn) after it reported that a cold sea current had ruined its scallop fisheries. Learning that Zhangzidao’s rivals had not experienced the same problems in the same locations attracted the ire of its largest investors, including China’s National Council for Social Security Fund and the People’s Insurance Company of China.
The Shanghai-Hong Kong Stock Connect program will accelerate the activist landscape in China in 2015, predicts Luo. ‘The connect program means foreign institutions can have direct access to mainland China’s capital market,’ she explains. ‘The higher the foreign ownership, the more influence of activism [on] the local market.’
Though Australia is not a priority for activist investors from abroad, local shareholders still like to throw their weight around in the name of improving value. ‘Under Australian law, the collective interests of all shareholders are regarded as predominant over the interests of other stakeholders,’ says John Hobson, head of capital markets at AGL Energy. While this is often interpreted as a tenet to maximize value, it’s not expressly stated in corporate law, and this tension can enable special interest groups to press their various agendas, he explains.
The most powerful internal force in activism is industry superannuation funds, which manage more than A$400 bn ($313 bn) and have formed a lobby group to boost ESG performance. ‘Special interest groups are well aware of the potential influence of the superannuation funds and have begun targeting them in an attempt to garner broader support,’ Hobson explains.
With no comprehensive government policy on climate change, several institutions have taken it on themselves to screen against companies that are invested in coal. ‘These screens have been adopted with little, if any, engagement with the affected companies,’ Hobson says. ‘Corporates have initially become aware of the [institutions’] stance from the media. This significantly alters how exposed companies will have to manage ESG risks. There is no point lamenting key stakeholders’ unwillingness to engage, but it will require greater allocation of resources by companies affected to manage ESG risks in the years ahead and become more proactive with their engagement.’
This article also appears in the shareholder engagement issue of Corporate Secretary, IR Magazine’s sister publication