Rise in shareholder activism reinforces why companies need to act
AlixPartners expects the trend of shareholder activism in the UK and abroad to continue as investor dry-powder grows and activists become increasingly sophisticated.
London – The last 12 months have seen a continuation of the trend of increasing shareholder activism in the UK and elsewhere. This is a trend that AlixPartners expects to continue as investor dry-powder grows and activists become increasingly sophisticated. Interestingly, the size of the companies they are targeting is also increasing - since the start of 2017, the average revenue of the companies being targeted has increased by almost 59%, indicating that larger companies are no longer safe from activist intervention as recent actions involving Unilever and BHP Billiton demonstrate.
A recent analysis by AlixPartners, the global business advisory firm, of 40 recent cases of activist shareholders’ interventions within Europe has identified common levers that activists are looking at to drive shareholder value. Ultimately, public company Boards and activist investors are aligned in wanting to maximise shareholder value, but to guard against becoming a target, public company Boards and Executive teams need to urgently review their businesses more self-critically. After all, the best defence against becoming a target is to deliver shareholder value.
From its analysis, AlixPartners has compiled a checklist of key areas that companies can use to focus any self-review based on the most common levers that activists target during their campaigns:
- Board remuneration and governance: 65% of the activist deals reviewed were cited to have a focus on changing the Board of Directors or Management team. Management pay and governance has come under increased scrutiny since the shareholder spring of 2012. More can be done in confronting any disconnect between shareholder value and corporate pay and also to bring increased diversity and better checks-and-balances to the Boardroom.
- M&A success: Too many corporate acquisitions made in last ten years haven’t delivered the growth or synergies that were originally forecast, thereby disappointing shareholders who had supported the acquisitions. The resulting lack of strategic focus is often a drag on shareholder value and companies need to look critically at core vs non-core businesses to counter this. Around one out of four activist deals reviewed are focused on the sale of underperforming parts of the company, often having been created from previous M&A activity.
- Corporate simplification: Another consequence of prior M&A activity is a propensity for complex corporate structures. This can result in excessive costs, management distraction and lack of sufficient focus on cash generation. Boards need to focus on overheads and streamline operations before pressure is applied by the activist investors. 40% of the activist deals reviewed were cited to have a focus on cost reduction or turnaround.
- Near-term value creation: Rebalancing strategies to give greater emphasis to near term value creation. Longer term “strategic rationale” arguments used by corporates should no longer be an excuse for lack of immediate action.
- Organic growth: Companies need to place a greater focus on organic topline growth and not use acquisitions to mask underperformance in this area. Organic topline growth is a key indicator of the health of the underlying business model of a company.
- Capital structure: In the absence of sufficiently accretive uses for retained capital, companies should be considering capital structure alternatives and the potential to return excess capital to shareholders to optimize returns.
Analysis of companies that are typically vulnerable to activist campaigns finds similarities, including a mix of high and low growth business units and sustained underperformance relative to their peers. Often this is driven by disruption in the market, and it is therefore unsurprising that since the start of 2016 more than half of the selected activist deals have been in the Oil & Gas, Retail, TMT and Metals & Mining sectors.
Eric Benedict, Managing Director and UK lead at AlixPartners said: “The growth in shareholder activism, and the depth of information available to investors, emphasises the need for companies to act now. The recurring trait we see in these approaches is value creation. Which is why it’s not enough to act once the activist has knocked at the door. AlixPartners’ analysis of recent cases show that the reality is that almost 80% of changes tabled by activists end up being approved by shareholders.
“We believe that we are uniquely qualified to support management teams and boards who wish to understand the way that these new sophisticated investors prepare and execute their investment thinking - because through our extensive experience over the last twenty years working with value investors we can bring a financial investor mind-set to a public company situation.”
Graeme Smith, Managing Director and EMEA co-lead of Investigations, Disputes & Risk at AlixPartners said: “As with many things in business life, the increasing trend of shareholder activism is an import from the US. This trend is likely to continue as financial investors have increasing levels of capital to deploy in investment markets and public equity markets have the advantage of being both large and liquid. Activists are no longer only thought of as “corporate raiders” as in the past, but as keen, analysis driven sophisticated investors who are looking to take advantage of the sense that traditional shareholders have not been doing enough to hold Boards to account for underperformance.
“Whilst the intervention of an activist investor can be perceived as a distraction by Boards, the common levers they focus on are entirely rational and provide a good sense-check for Boards. In the end, a well-run company that is delivering shareholder value is unlikely to represent a profitable target for an activist campaign.”
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