The Darmstadt-based activists recently offered no major targets.
(Photo: dpa)
Frankfurt. Activist shareholders are now an integral part of shareholder culture in companies and capital markets. After a calmer phase during the corona crisis, most experts assume that activists in Germany will become increasingly committed again.
One way to prevent such attacks is to be more transparent when forecasting financial figures. A study by the WHU – Otto Beisheim School of Management and the communications consultancy FTI Strategic Communications shows that inadequate and imprecise financial forecasts are associated with an increased risk of becoming the target of activist investors.
“The more transparent the financial forecast of a group, the fewer gaps management leaves between the assumed and the realized value,” comments Christian Andres, Professor of Corporate Finance at the private university. “And if there is no gap between the assumed value and the value realized on the capital market, there is little room for an activist shareholder to argue that the company is falling short of its potential.”
Activist shareholders buy into companies and push – sometimes publicly – for changes and often for seats on the supervisory board. Aareal Bank is a prominent example. Once they have found their goal, management is often confronted with demands for radical changes.
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This usually involves special dividends or the spin-off of parts of the company. Environmental, social and good corporate governance (ESG) issues are also used as gateways. Ultimately, the activists are concerned with increasing value in order to get higher profits for themselves and the other shareholders.
New targets for hedge funds
Companies are particularly at risk when the performance of the share price lags behind the peer group. Activists, who prefer to concentrate on their core competencies, are also targeting conglomerates with several business areas.
>> Read here: Hedge fund attacks: More than 60 companies are ‘extremely vulnerable’
Share prices have risen sharply in the past year, which is why there were relatively few points of attack for the activists, says Rüdiger Wolf, partner at the Boston Consulting Group (BCG). But that time is over: The price fluctuations on the stock exchanges are increasing again, there are phases of weakness. “This means that the activist shareholders will increasingly report back, also in Germany,” says Wolf.
According to the study by WHU and FTI, the best way to defend against such attacks is in two steps. The first priority for every listed company is the regular internal weak point analysis and the anticipation of possible points of criticism. Management must show how the strategy and business model affect earning power – in relation to the current financial year and in the medium and long term.
According to the study by FTI and WHU, the second lever lies in the prognosis. 33 public attacks on companies from the stock indices Dax, MDax, TecDax and SDax were examined. It was checked how many of the attacked companies had given a forecast for the current financial year, the following year and beyond. For comparison, a control group was formed from randomly selected companies from the Dax family.
The study concludes that there is a direct link between a lack of financial forecasting and the risk of vulnerability to activists. The randomly selected companies in the control group provided a financial forecast 64 percent of the time, the attacked companies only 48 percent of the time.
The study shows that both attacked and randomly selected companies often forecast sales, profits or cash flow for the current year. The values here are over 90 percent. For the following year, there is only a forecast in 27 percent of the sales in the group of companies attacked later. The control group comes to 45 percent.
In recent years, for example, Deutsche Bank, Thyssen-Krupp and Bilfinger have been targeted by the activists. On the other hand, Siemens, Merck and Allianz, for example, did not offer any major targets for attack.
The Siemens share benefited from the permanent restructuring of the group under the former CEO Joe Kaeser, for example through the IPO of the medical subsidiary Siemens Healthineers. Merck often disclosed accurate information, and Allianz also scored with transparency in the profit figures and a steady dividend policy.
“Corporations in particular with many direct, listed competitors, such as in the automotive industry, must not only dare to look into the near future, but also into the more distant future,” says co-author Florian Bamberg from FTI. “Because otherwise, investors buy their peers – which leads to a weak share price and thus leaves the door wide open for an activist shareholder to attack.”
The problem with medium and long-term forecasts: they are subject to uncertainty. Above all, external influences such as the global economy, interest rate developments or raw material costs are difficult to assess the longer the observation period.
Therefore, the following applies: The more short-term the forecast, the more specifically companies should name the key figures they are aiming for. The further you look into the future, the more qualitative factors or directional statements come to the fore.
More: Aareal Bank is open to parting with its IT subsidiary