UK companies most at risk of investor activism
Investor activism saw a double digit rise in the UK over the past 12 months, according to a new report. The number of UK companies predicted to be under threat from public activist targeting has risen to 60 companies over the last year, with British corporates more than 40% more likely to face activism than those overseas.
An activist shareholder is a shareholder who leverages an equity stake in a corporation to put pressure on its management. The goals of activist shareholders, who often have a comparatively small stake in a company, can be both financial – aimed at increasing shareholder value – or non-financial changes in corporate policy, such as disinvestment from particular countries, adoption of environmentally or ethically friendly policies. Shareholder activism can take any of several forms, including proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management. Because a fairly small stake in a company, even one of less than 10% of outstanding shares, may be enough to launch a successful campaign, it is increasingly being favoured by shareholders as a means to affect change in their organisation, over a full-on takeover bid, which can be a more costly and difficult undertaking.
Relating to this, new research from global consulting firm Alvarez & Marsal (A&M) has further found that investor activism is growing across Europe, with a particular boom in the UK. The firm’s study took a detailed look at 139 situations – an increase of 31 on last year’s figures – in which activist investors had made public requests to company boards, before comparing them to the 1,715 corporates that had not experienced such activist campaigns in order to see how companies might better operate to avoid becoming victims to activism in the future.
Previous work by FTI Consulting suggested that poor stock performance, the inefficient use of capital deployment, and poor corporate governance were the major factors behind shareholder revolts. However, A&M’s study suggests that activist investors are increasingly motivated to act by the issues of board diversity and responsiveness.
The study states that amid an era of agile businesses where inaction can often cede ground to competitors, activists are becoming substantially less patient, granting boards less time to address underperformance. The average time between first evidence of underperformance and public activism has fallen to 1.8 years, from 2 years as of 2016. Meanwhile, gender balance on a board has taken an increased pertinence, given the heightened public scrutiny applied to the gender gap in business in recent years. A&M subsequently cite continuing indications that increasing the number of women on a board is often associated with a reduced risk of shareholder activism.
Another indicator of vulnerability to investor activism is size. Typically, activists target larger companies, with the average market capitalisation of a predicted target company now upwards of $17.58 billion. Indeed, financial performance is still an important factor, too, however. An uneven performance by a company’s divisions can also increase the likelihood of being targeted by activists. Investors in these cases often seek to improve the performance of weak business units or force a spin-off.
UK activists
Activism is growing across Europe as a whole. A&M’s paper anticipates that higher rates of capital and more willing participants mean that “wolf packs” of like-minded investors form quickly on the continent. These collectives rapidly establish enough critical mass to force a debate, and Germany, France and Italy have all became more attractive to activists in the past year; although Swiss and Scandinavian companies became less so.
It is particularly notable that Scandinavian corporates make up 19% of the A&M’s data set, however they constitute a disproportionately small 8% of firms likely to be targeted by activist investors. As the gender balance of boards has pushed up the number of activists elsewhere, this is likely to be due, at least in part, to the Nordics impeccable record on gender equality, which sees Iceland, Sweden, Norway, Denmark and Finland all among the top 10 of PwC’s Women In Work Index.
In stark contrast, UK corporates are 46% percent more likely than their continental counterparts to be targeted. As of A&M’s most recent predictions, a substantial 28 companies are on ‘red alert’, while the UK hosts a further 32 companies on ‘amber alert’, in terms of their likelihood of being hit by activism. Partially, again, this is likely to be linked in part to the performance of the UK in addressing its workplace gender gap. The UK has not only stagnated in recent years, but regressed in its position among other leading nations.
Companies in the UK are also more prone to investor activism thanks to the nation’s continuing consumer crunch. A&M’s study shows that consumer companies in general account for the largest number of corporates at risk, as they seek to adapt to continued market disruption from evolving retail channels, squeezed consumer spending and rising costs. On average, the consumer sector is 23% more likely to attract public activism, whilst the industrials sector is 13% more likely. In the UK, these factors are being felt particularly acutely, as a declining pound ramps up the price of imports, and stagnant wages see the spending power of most consumers hamstrung.
Commenting on the findings, Malcolm McKenzie, A&M’s Managing Director and Head of European Corporate Transformation Services, said, “Activism is growing across Europe… While declining shareholder returns are an initial point of interest for activists, there are many other significant factors. Boards need to take a broader perspective and often benefit from an “outside-in” perspective. A board that sees the warning signs should act pre-emptively to avoid the considerable financial, reputational and disruptive risks that can accompany a public activist campaign. In this heightened environment, it is crucial for boards to move decisively to ensure meaningful change is delivered before the “wolf pack” closes in.”
