Shareholder Activism: a disruptive investment strategy growing in popularity
Activist investing is becoming increasingly popular as an investment strategy, driven by constrained top line growth prospects, challenged financial targets, and fear of value destroying mergers & acquisitions.
Investor activism is a strategy where an investor purchases an equity stake in a company, then pushes for change within the business with a view to unlocking perceived value. Activist investors often harness not only their direct voting stake in the business, but also the media, other significant investors and director relationships to pressure the board and management to agree to their demands. Given the disruption an investor campaign can cause, and the sometimes significant demands of activists, this can be a significant risk to a company and boards need to be aware of common activist triggers and how to deter activist attack.
According to S&P Capital IQ assets under management of activist hedge funds in the US have grown from around US$47bn in 2010 to US$125bn in 2015, which represents a compound annual growth rate of 22 percent. This is a significant amount of both capital value and potentially disruptive activist activity.
In Australia, shareholders owning more than 5 percent of a company’s shares are able to call general meetings and propose resolutions including moves to remove directors. This potentially gives them a very effective channel for disruption.
Activists are more inclined to strike companies:
- Where there is a perception of a lack of capital discipline.
- Which have underperformed relative to peers on one or more of a variety of financial, operational, and/or strategic metrics.
- Which are perceived to be worth more broken-up than as a merged entity.
- Where the long-term strategy is perceived to be sub-optimal for investors, especially in relation to M&A transactions.
Importantly, activist investors are receiving growing support from traditional investors, and are frequently supported by proxy advisors. The usual activist suspects of hedge funds and institutional shareholders are being joined by superannuation funds and other shareholders that are stepping up their engagement with companies.
Statistics show that between half and three quarters of activist demands are either met in whole, or when a compromise is reached. The success rate is much higher, possibly over 70 percent if campaigns where at least one demand was achieved are considered. And this has not shown any signs of slowing in the past five years.
This makes them a powerful group, who are often quick to mobilise and use agile social media platforms like Twitter to get their message out to large audiences, way beyond the usual shareholder group email. According to Global Proxy Solicitation, a proxy and advisory firm, Australia saw a record number of board spills in January 2014 (eight) and over 230 companies, including Qantas, Fairfax Media and Brickworks saw “public actions” taken against them resulting in changes to strategies and/or governance.
Activist investing is often driven strongly held opinions, fuelled by perception. This is both a danger and an opportunity. The danger is clearly apparent in an activist’s power to influence, but the opportunity is for the board to more clearly articulate their strategy and benchmarks for success to a wider external audience. This includes not only firm’s overall profitability, but the value the board gives to its governance, financial situation and investments and sustainability.
One of the strongest tools to combat activism is to plan early and act fast. Establish clear and transparent communication to all shareholders and institutional investors, long before there is an attack on the company. Building strong direct relationships with shareholders and the public will only benefit the company and form part of a strong effective activist defence campaign if it is every needed.