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The world is enamoured with passive investments. In a nutshell, these are funds – like Exchange Traded Funds which are listed on stock markets – that automatically move securities in and out of a portfolio in line with an index. The reason they are so popular is because it is hard to beat market averages. So, instead of handing over money to a costly fund manager, who may not succeed in producing superior performance, investors are opting for lower cost tracker-type options that deliver the average returns. However, there are still some investment professionals who do seem to have the knack for outperforming averages. As Max Gebhardt, managing director of FTI Consulting South Africa, notes here, hedge fund managers that specialise in merger and acquisition (M&A) activism are making their investors very happy. The prediction is that shareholder activism will become increasingly visible in the year ahead as these investors look for new hunting ground. If you are a do-it-yourself stock market investor, pay close attention to what these activists are up to – because you will get some clues on what to buy and sell. – JC
By Max Gebhardt*
Findings from a recent global survey on attitudes towards shareholder activism has revealed that merger and acquisition (“M&A”) activism is on the rise.
FTI Consulting, a global business advisory firm helping organisations protect and enhance enterprise value, conducted the study in partnership with Activist Insight, a global information source on activist investment. In-depth interviews were held among leading economic activist investors engaged in more than 500 activist situations aimed at increased returns, gauging their views on renewed areas of focus for shareholder activism in 2014.
The shareholder activism landscape has changed dramatically over the last several years. According to data compiled by Hedge Fund Research, activist hedge funds managed over $93 billion dollars in 2013, almost triple the amount managed just five years ago, and an increase of 42% from an estimated $65 billion in 2012. This increase in investment has been fueled by returns of 16.6% in 2013, which far outpaced the average hedge fund, returning 9.3%. Further, the investors in these activist funds now include an increasing number of large pension funds and institutions – the same pension funds and institutions that have been increasingly supportive of activists with their votes.
The increased returns and inflows of monies clearly show that activist funds as an asset class are not only here to stay, but are increasing their influence on M&A transactions. As these funds grow larger, they are able to target larger companies, doubling the amount of companies targeted with market caps greater than $2 billion in 2013. Using balance sheet and operational strategies, activists have not been deterred from engaging with well-known Fortune 100 and 500 companies.
While conducting this survey, FTI Consulting interviewed economic activists – activists whose primary goals are increased returns – on their thoughts concerning the landscape for activism in 2014 and where they expected increased or decreased activity in the market.
M&A activism is a key theme
The results from the survey show that the overwhelming majority (89%) of activists believe that 2014 will see an overall increase in M&A activism. According to Dealogic, Global M&A volume reached $804.5 billion in the first quarter of 2014 compared to $655.8 billion in the first quarter of 2013, up 23% year-on-year, marking the highest first quarter volume since 2008.This emerging asset class could present significant challenges for the successful conclusion of transactions by employing investment strategies that target not just the target company, but also the acquirer.
The same trend is evident in South Africa where shareholders are also becoming more concerned about not only companies’ governance issues, such as executive pay and board selection, but also whether shareholders are getting value for their investment in M&A activity. This is especially so as local South African companies see their shareholder base become increasingly internationalised.
Especially interesting is the activists’ willingness to engage on the acquirer side of a transaction. An acquirer will often use more aggressive balance sheet structures to execute M&A. An M&A activist may well look at this structure and the risk profile of the transaction and decide that that they like the Board’s more aggressive balance sheet approach, but would like the cash returned rather than used for M&A. This type of activism is likely to put more deals in jeopardy.
While nearly three-quarters (73%) of activists polled say they would take a traditional route, namely, investing in a target and then applying pressure to increase the offer price during transactions, a surprising 43% of activists interviewed stated they would look for opportunities to discourage the transaction and instead push the acquirer to unlock value through share buybacks, dividends and divestitures, rather than go through with the transaction.
Europe (more specifically the UK) is becoming a greater focus for US activists
Although the survey demonstrates that a significant amount of activists (87%) see no shortage of targets in North America, 40% of activists are shifting their focus to Europe and elsewhere. This shift corresponds to the increasing level of activist engagements the market has seen internationally particularly in the UK, where almost 50% of European activism takes place where corporate governance and legal frameworks are most activist-friendly. Hence, we have seen a sharp increase in corporate focus on activism defense planning, particularly as there has been real evidence of long-only institutions becoming more activist in their own right as well as implicitly and explicitly supporting activists’ positions.
The survey also revealed that with respect to strategy, originating an activist position was not the sole basis for investment in a target company – 69% of those surveyed support other activists by investing in previously commenced activist situations. In turn, upon public announcement of a campaign, an activist can normally count on a significant percentage of “follow on” shares being purchased, increasing their bargaining position and, in effect, creating a larger voting bloc than is readily apparent from the activists’ own share ownership filings.
Activism makes for great media copy and the impact of social media is proven
Media also continues to play an important role in activist engagements, with 88% of activists interviewed stating that media has positively impacted activism. As such, activism has gone main stream and media has become very supportive of activists who have become increasingly sophisticated in their engagements and in use of the media.
While only one-quarter of those polled already use Twitter and other social media platforms when engaging in activist campaigns, the survey found that 69% expect an increase in use of social media in 2014. For example, when Icahn took an activist stake in Apple, they announced it via Twitter. The impact was immediate and moved the markets – it was a lesson that everyone in the activist community noted and one that is likely to be emulated. When considering pre-emptive activist defense planning, companies need to understand what social media strategies are available both in defense and offence.
The full survey findings from FTI Consulting will be released in May 2014.
* Max Gebhardt is the Managing Director of FTI Consulting South Africa. He has been working as a journalist and communications consultant for the last 20 years. Most recently he was the Deputy Editor of the Financial Mail as well as the Business Affairs Editor of Business Day where his primary responsibility was writing the newspaper’s editorials.
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