Hedge funds attack German companies

Dusseldorf Europe and especially Germany are becoming more important for “activist” investors. At the beginning of the year, the trend of 2021 intensified. Hedge funds are primarily looking for European companies as targets for campaigns and influence. In the US, the phenomenon has been declining for some time.

Activities in Europe initially declined as a result of the Ukraine war. But the consulting firm Alvarez & Marsal (A&M) observed that this was only temporary: the pressure from the activists has been increasing again since April. In January and February, the number of known hedge fund attacks in Europe was already 30 percent above the previous year’s figure, according to a data analysis by A&M, which is available to the Handelsblatt.

The consultancy regularly analyzes the influence of investors on 1,600 European companies using a database that has been updated for years. Now it is clear that Germany is firmly in second place as a target of hedge fund attacks after Great Britain. The focus is primarily on domestic industrial companies.

Patrick Siebert, Managing Director and Co-Head of Alvarez & Marsal in Germany, says: “The activists are interested in conglomerates where they can demand that individual businesses be split up and separated.” The investors criticize the management. The aim is to change the company’s strategy and get more returns from the stock portfolios.

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According to the analysis, the ESG criteria have established themselves as a new driver, says Siebert. ESG stands for Environment (Environmental), Social (Social) and Responsible Corporate Management (Governance). The funds urge companies to implement their climate protection plans more quickly.

Enkraft Capital recently tried this in Germany: The investor publicly put pressure on the management of the energy supplier RWE. Enkraft Capital called for the climate-damaging lignite business to be split off.

However, Enkraft failed in the vote at the RWE general meeting. Other, larger funds did not follow the arguments of the activist investor, who only holds 0.03 percent of the shares. 97 percent of the shareholders voted against the separation motion.

Blackrock rejects stricter climate targets

The case describes two phenomena. First, while hedge fund attacks are often high profile, they are not often successful. On the other hand, the Ukraine war has consequences: the shareholders are currently putting less pressure on the energy companies with regard to their ESG goals. They worry about the performance of these systemically important companies.

A&M Co-Head Siebert says: “Many funds are currently holding back on claims against oil and energy companies because security of supply is also a priority for them.” The best-known asset manager Blackrock recently announced such a “breather”.

However, Blackrock sees itself as a passive investor. So the administrator doesn’t often demand something from the management of his portfolio companies himself, with the exception of the annual letters from Blackrock founder Larry Fink. But the company has a lot of voting power in large European corporations.

Blackrock does not want to support other shareholders’ general meeting proposals for stricter climate rules this year. This was reported by the British “Financial Times” in early May. In the tense energy supply situation, these rules are too extreme or would demand too much detailed work from the management of the company.

Logo of the oil company Shell

Investor Daniel Loeb praises the importance of the group for energy security.

(Photo: AP)

In fact, the shareholders of the oil companies BP and Conoco Phillips recently rejected proposals for stricter climate targets that individual shareholders had tabled at general meetings. And even US hedge fund manager Daniel Loeb, known for his blustering appearances, has cautious tones when it comes to Shell’s strategy.

Since joining Shell, Loeb has been calling for the group to be split up: into an old part based on fossil energy and into one that includes the green future business. In a recent letter, however, Loeb highlighted Shell’s reliable energy supply – for example through the LNG business.

>> Read here: “Restructuring of the portfolio”: Asset managers rely on this crisis management

Alvarez & Marsal assumes that hedge funds will only hold back temporarily. In the medium term, ESG goals would again drive investor action. Because many companies offer activist investors a target for this. At RWE, too, they are likely to demand separation from lignite again.

In its analyses, the consulting firm adopts the activists’ perspective: they are looking for companies that are performing poorly compared to important competitors, either operationally or in terms of share price. The funds then try to force a change in strategy that could boost stock market value.

28 German companies at risk

Siebert from A&M says: “The corona pandemic has separated the wheat from the chaff among German companies. Investors have a clear view of who is currently doing well and who is doing poorly.” A&M currently has 28 German companies on a list that it calculates are likely hedge fund targets over the next 18 months. The advice does not mention names.

What exactly the funds aim to achieve with their involvement often remains a secret. In spring, for example, the US fund Valueact increased its stake in the German advertising sales company Stroer to 11.42 percent. The intention behind it is so far unclear.

In other cases, the intentions are clearer. Funds are currently arguing for control of the North German wind energy specialist PNE. A subsidiary of the investment bank Morgan Stanley, as a major shareholder, expanded its power on the supervisory board at last week’s general meeting. The activist investors Enkraft and Active Ownership have positioned themselves against them and want to prevent a takeover of PNE. It’s more about power and money than strategy. But the conflict binds forces in the company’s board of directors and supervisory board.

In many cases, the potential for a split alone is attractive. The German Bayer AG is often mentioned because it is undervalued from the investors’ point of view due to the consequences of the glyphosate legal burden in the USA. They are therefore calling for the agricultural division, which is affected by this, to be separated from the pharmaceutical business.

Research at Bayer Crop Science

Investors bring the spin-off of the agricultural division into play.

(Photo: Bayer AG)

In the spring, the Swiss company Alatus Capital contacted the Leverkusen company and applied through its hedge fund not to approve Bayer boss Werner Baumann at the annual general meeting at the end of April. That could have meant the end for the Bayer boss, who regularly fends off the spin-off demands. The investor’s application failed, but the pressure on the group could remain.

>> Read here: In this way, the expensive gas is accelerating the green conversion of energy-intensive industry

In other cases, investors attack simply because of poor performance or management errors. This can currently be seen in two British companies: The consumer goods manufacturer Unilever wanted to buy the health products division of the pharmaceutical company Glaxo-Smithkline for 60 billion euros, but encountered bitter resistance from shareholders and failed.

Now the notorious US hedge fund manager Nelson Peltz has bought into Unilever and wants to stir up the group. The mobile phone provider Vodafone is also under heavy pressure. The management is accused of strategic weaknesses, which are reflected, among other things, in the sharp fall in the stock market value.

In January it became known that the Swedish company Cevian, Europe’s largest activist investor, has entered Vodafone – and has since presented its ideas about the future of the company to the management.

More: With good prognosis against hedge funds: How companies can fend off activist shareholders

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