Frankfurt The calm should finally be over in 2023 – activist investors are preparing a new wave of campaigns against listed companies. Management and supervisory boards must be prepared for the fact that Anglo-Saxon hedge funds in particular will buy into their companies and then push for changes to the previous strategy.
Today, 71 percent of executives in European stock corporations expect that “shareholder activism” will increase in the next twelve months. Almost half of those surveyed even expect a significant increase, according to a survey by the law firm Skadden and the analysis company Activistmonitor.
“Shareholder activism remains a hot topic in Europe. Most of the time, the talks take place behind closed doors and below reporting requirements. The main topics for 2023 and 2024 are the use of capital in the various business areas and a clear group structure,” says Michele Iozzolino, Head of Investment Banking in Germany at JP Morgan. Volatile markets, where there is a large gap between market value and fundamental value for many companies, present attractive opportunities for activist investors.
The number of campaigns was already increasing in 2022
The past year has seen an impressive comeback by activist shareholders. According to an analysis by the investment bank Lazard, there were a total of 235 new campaigns worldwide in 2022, which corresponds to an increase of 36 percent compared to the previous year. After activists held back during the pandemic, the 2022 push soared to its highest level in four years. And the investment bankers, lawyers and consultants are convinced that this will continue in the new year.
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The most prominent example of several campaigns at one company is the chemical company Bayer. Activist funds such as Inclusive Capital, Bluebell and Alatus Capital want to have a say in the agenda of large German companies in a crucial year – this includes the search for a new CEO.
The group combines agrochemical and medical businesses under one roof. Many similar corporations have separated in recent years and created pure pharmaceutical or agrochemical suppliers.
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Analysts at the investment bank Lazard counted more activist investors in 2022 – an increase of 36 percent compared to the previous year.
In their valuation models, some hedge funds expect such a step to result in a strong increase in Bayer’s stock market value. “The example of Bayer shows that not all activist shareholders act according to the same pattern – the field ranges from evolutionary improvement as an external source of ideas to participation in the committees to radical demands that are driven from outside or via the annual general meeting,” explains Kai Tschöke, co-head of investment banking at Rothschild & Co. in German-speaking countries.
According to Activistmonitor Atlas Investissement, other prominent examples of activist attacks are at the telecom group Vodafone, Dark Horse Capital at the travel portal Lastminute.com and Fundsmith Equity Fund at the consumer goods giant Unilever. In Germany, activists have interfered in the strategies of Fresenius and the software company Teamviewer in recent months.
Five gateways for activists
Often drawn to poor stock market performance, according to Skadden and Activistmonitor analysis, there are five key demands from activists:
- a change in the board of directors or management or supervisory board members
- Rejection of a proposed acquisition or merger
- Cost reduction and/or operational improvement
- “Corporate Clarity”, i.e. the sale of peripheral areas to avoid conglomerates
- Better “capital allocation”, i.e. the optimization of the use of capital in the group.
“Recently, activists have increasingly focused on capital allocation decisions with the aim of reducing temporary undervaluation, for example through larger share buybacks,” says Iozzolino. The activists also put investment and M&A decisions to the test.
Some hedge fund managers are urging companies to use their free cash flow to buy back shares rather than spend on acquisitions, says a London investment banker. “A difficult economic environment, increased energy and interest costs as well as pressure on sales and margins mean that companies often pursue more conservative debt and balance sheet policies. From an activist perspective, however, inefficient balance sheets are vulnerable,” warns Jens Maurer, co-head of investment banking at Morgan Stanley in Germany.
Undervalued tech companies are at risk
In the current year, technology groups in particular could be targeted by activists, which is already the case in the USA. According to Lazard, tech companies accounted for 27 percent of campaigns in the United States, a record and well above the long-term average of around 16 percent. According to Lazard, the main attraction here is the low valuations after the price declines.
Many of the companies surveyed indicated a significant increase in outreach from hedge funds, early-stage activists and private equity funds, representing a new group of potential activist investors. Activist Investing in Europe 2023 Report
The increase in campaigns is also due to the broadening field of activists. In addition, the number of money managers who have not previously worked as activists is growing. “Many of the companies surveyed indicated a significant increase in outreach from hedge funds (54 percent), first-time activists (46 percent) and private equity funds, which represent a new group of potential activist investors,” the report, titled “Activist Investing in Europe 2023”. First-time activists can be recently established funds, or long-standing investors or corporations that have not been active in the past.
Not every entry is good for shareholders
Last year’s campaigns brought mixed results for shareholders, with the market not rewarding every announcement of an entry by activists. According to Lazard, in 56 percent of the cases there was an outperformance of the respective share after three months – measured by the total shareholder return, i.e. the combination of dividends and price increases. Technology and retail companies in particular often underperformed the overall market.
Boards and management teams that fail to stay alert and adopt proactive strategies risk confronting activist investors. Armand Grumberg, head of Skadden’s European M&A practice
When it comes to defending against activist campaigns, reference is repeatedly made to the communication strategy of the corporations. According to Skadden, efficient communication with investors can certainly prevent or limit activist demands, especially if the activist has to fear as a result of the communication that he will not receive sufficient support from other or important shareholders or in the media.
Even if a campaign has already started, its impact can often be effectively limited with communication. Dialogue between shareholders, institutional investors and activists remains an important tool to counter the attacks. “Boards and management teams that fail to remain vigilant and pursue proactive strategies risk confrontation with activist investors,” warns Armand Grumberg, head of Skadden’s European M&A practice.
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