A striking feature of the UK market this year, and one which seemingly is of increasing importance across Europe and in Asia and Australia, has been the growth in activist investors taking stakes in companies and seeking a change in the company strategy.
Whereas this was once much rarer than in the US, hardly a week now seems to go by without speculation of the intentions of an investor to agitate for change in the UK, often in the form of the sale of a subsidiary or of the whole company.
In recent weeks, Whitbread, First Group, Rolls Royce, Wincanton, Micro Focus, De La Rue and Merlin Entertainments have all attracted interest as to the intentions of activist shareholders, and Lazard estimates that as many as 36 companies in the UK were targeted by activists last year.
In continental Europe, the value of companies in which activists are invested doubled last year and Christopher Davis at New York-based law firm Kleinberg Kaplan, an expert on activism, describes the trend as also “very clear in Australia.”
This asks questions as to why there has been so marked an increase in activity and whether it is likely to continue to grow.
In a recent interview with Acquisitions Daily, Paul Hammes, leader of EY’s global divestiture advisory services, highlighted the growth in data analytics and the availability of such information to outside shareholders as a factor in encouraging people to agitate for change.
Hammes says that it is becoming increasingly common for shareholders to turn up at meetings with management in possession of data of which the management itself is unaware. Davis also says that shareholders often now use technology, social media and other new forms of communication to talk to customers and academics to give themselves a perspective as to the weaknesses within companies with which management is not fully aware. He says that it is “getting harder for underperformers to hide”, and that applies to subsidiaries within otherwise soundly performing companies almost as much as to whole enterprises.
Allied to this is a change on regulatory regimes, and in some cases, a corporate culture which is more friendly to such activity. Changes to the Corporate Governance Code in the UK, which have increased the independence of boards from executive management, and the EU Shareholder Rights Directive are cited by many as making it easier to put pressure on boards to search more actively for shareholder value.
Opposition to corporate change in countries such as France has tangibly reduced in recent years. For instance hostility to the principle of outside shareholders has lessened. Meanwhile, many institutions are increasingly willing to work with activists to achieve specific change. Davis underlines that pensions funds, and sometimes even index funds, are more willing to engage with activists than in the past. Especially where they are receptive to a specific proposal for change, they are increasingly willing to support the nomination of directors proposed by activists. This seems particularly true when shareholders don’t have any wish to see cash returned to them or when there is what Davis describes as a “contribution to society angle” to the quest for change.
The use of activism in the US has been part of the investment scene for many years, and Davis adds that much of the “low-hanging fruit” in US markets has been picked but many of the leading activist shareholders have continued to build assets under management.
The likes of Elliott Advisers, Third Point and Value Act have been identifying potential targets in the UK for some time, and as they look for new places to deploy that capital, the number of countries where they see suitable candidates is growing.
Davis says that there is evidence that having a common law jurisdiction is an aid to activism, creating a clarity in the legal framework that is usually supportive to shareholders’ rights, and that in countries such as Hungary and Poland, there is little sign of activism taking root. However it seems that across much of the English-speaking world and an increasing part of continental Europe, companies and their advisers need to be alert to the growing likelihood of outsiders seeking to rattle the cage.