Activist investors are using new avenues and techniques to pursue their goals
Even though the challenges posed by activist investors – those that attempt to effect major change at companies through stock ownership or board appointments – are not new to most issuers, the way in which they will wage their 2015 proxy fights just might be. The number of activist campaigns leveled at companies worldwide is slowly climbing, too: 505 were recorded in the first half of 2014 alone, up from 497 in the first half of 2013.
As regulations and corporate governance expectations change around the world, however, new activist battlefields appear to be emerging. According to research published last year by Activist Insight, companies in Japan, Chile, Italy, France and Norway all experienced activist campaigns, while investors continued to make inroads in Canada, the UK and elsewhere in Europe.
Tactics are also changing: increasingly, campaigns are using board representation or M&A activity as their primary means to drive change, with traditional routes such as demands for share repurchases, increasing dividends or the removal of executives becoming less popular.
In the face of such a changing landscape, Corporate Secretary spoke to four experts from around the world to ascertain both the changes in activist investors’ outlook during 2014 and the potential ways in which their approaches will develop in the coming year.
The US is where traditional shareholder activism originated and looks set to continue as a frontrunner in the future. In 2014 alone, 223 US companies were targeted by activist campaigns, compared with 202 recorded incidents in 2013 and 173 in 2012. According to McCabe, in Q4 2014 ‘tier one’ activist capital represented almost $300 billion, though 2012 was still the peak year in terms of the number of campaigns. But this doesn’t allow for the fact that the average market cap of targeted companies has increased by several billion dollars in recent years.
‘The US will remain hot,’ says McCabe. ‘People talk about Europe and China, but the structure and sexiness 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’. Some institutions, including traditional non-activist fund Vanguard, now use internal governance departments to assess their holdings, sparking the advent of ‘governance roadshows’ by companies as an outreach initiative.
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.
‘In general, we expect 2015 to show an increased willingness by activists to move toward a private equity-type model,’ McCabe says. ‘In other words, they’re looking for deals. Capital continues to grow, and they will need to get more creative in the ways in which they deploy it.’ Low interest rates, cheap money and a five-year high in M&A deals could all contribute to taking more large companies private. ‘Activists can then sell divisions, streamline and potentially create synergies across any other portfolio companies,’ McCabe explains.
Activist investors should be aware of the long term, McCabe advises, particularly when it comes to investors’ money being used to seed new funds, given the impact that may have on any existing succession plans. ‘We suspect we’ll start seeing transition plans to reduce investor unease, considering a lot of the older generation of activists are beyond retirement age,’ he adds. ‘They need to start communicating what their hedge funds will look like in 20 years.’
Many European issuers are conscious of what activist campaigns might mean for them in 2015, says Dawson. ‘There is a long history of institutional investors speaking their mind in the UK in particular, but the arrival of a more US-style activism is something corporations are bracing for,’ he explains. Notable 2014 campaigns include Sandall Asset Management’s targeting of UK transport firm FirstGroup, following the latter’s poor performance and new rights issue worth £615 million ($932 million).
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 [New York-based 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. ‘The kinds of activism that succeed tend to be those carried out behind closed doors,’ Dawson notes. ‘Activists haven’t been as successful in getting their nominees elected in hostile elections or proxy fights, but all it takes is an underperforming company and an activist with the right thesis and skill set to mobilize investors.’
Perhaps as a result, the number of European companies targeted by activist campaigns dropped slightly in 2014: 35 recorded cases versus 47 in 2013. This year may be different, says Dawson, with regulations and attitudes changing 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 Luo. ‘There are cases we’ve seen that are very successful, and we expect more success in the coming years.’ Investors’ increasing eagerness to be active owners has led them to pay more attention to corporate governance. What’s more, unprecedented lobbying and more frequent proxy fights in the region will likely spur regulatory changes that will further boost interest in governance in the near future, Luo predicts.
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 companies, 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 company’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 has attracted a lot of local attention – described by observers as a ‘black swan event’ – was seafood company Zhangzidao Group’s decision to write down stock worth 800 million yuan ($129 million) 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, says Luo. ‘With the connect program, 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.’ The rise in foreign investor activism would also speed up local investors’ adoption of US activists’ attitudes and methods, she adds.
Though Australia and its surrounding territories are not a priority for activist investors from abroad, local shareholders are still known 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 Hobson. While this is often interpreted as a tenet to maximize value, it’s not expressly stated in corporate law, and this inherent tension can enable special interest groups to press their various agendas, he adds.
A relatively high standard of corporate governance in Australia may also deter foreign activists, Hobson continues. The most powerful internal force in shareholder activism is industry superannuation funds, which manage more than A$400 billion ($325 billion) and which formed the Australian Council of Superannuation Investors, an organization committed to improving the ESG performance of the companies in which its members invest. ‘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. ‘The major battlegrounds currently involve coal-seam gas, wind farms and coal.’
With the lack of a comprehensive government policy on climate change, several institutions have taken it on themselves to screen against companies that are invested in coal. To date, such cases have been relatively isolated.
These screens have been adopted with little, if any, engagement with the affected companies,’ Hobson says. ‘In the first instance, corporates have become aware of the [institutions’] stance from the media. This significantly alters how any 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.’