By Schulte Roth & Zabel, Activist Insight and Hedge Fund Insight staff
Recently, Schulte Roth & Zabel (SRZ), a leading financial services law firm, and Activist Insight released their 2018 Activist Investing Annual Review. The review analyzes recent trends in shareholder activism, ranks the top activist investors, and predicts what’s to come for activist investing.
2017 proved to be a major year for activist investing with some of the largest proxy fights to date. In general, activists targeted fewer companies, but companies that were targeted were much larger than usual.
Return to large-cap targets
2017 was a headline-grabbing year, as activists increasingly targeted companies with multibillion-dollar market capitalizations in the United States and Europe. More than 21% of all campaigns focused on large-cap companies, up from approximately 19% in 2016. Highlights included Trian Partners’ engagements with Procter & Gamble (P&G) and General Electric, Greenlight Capital’s engagement with General Motors, Third Point Partners’ engagement with Nestlé, as well as Pershing Square Capital Management’s bid for board seats at Automatic Data Processing. This trend is the natural result of an increase in the flow of assets to activist funds based on the success of activist strategies, particularly as a counterbalance to the overall trend of investors shifting toward passive vehicles. The recognition by institutional investors of the benefits of activism has also increased their willingness to lend support, allowing activists to engage even larger companies with performance and operational issues.
Resurgence of the proxy contest
Over the past year, the percentage of publicly announced settlements has declined 6%, as compared to 2016. Emboldened by more aggressive defensive strategies and advice, many companies subject to activism, especially large-cap companies, have been more reluctant to settle. Some companies have rejected activist overtures out of hand, instead opting for costly and public proxy fights. It is estimated that P&G spent over $100 million in its efforts to keep Nelson Peltz off its board, surpassing previous proxy fight spending records. This strategy, however, has been met with mixed success this year, as activists have achieved partial or full victories in 54% of campaigns that went to a vote. Backlash against dual class shares Dual class share structures, where insiders are given control over companies disproportionate to their economic ownership, came under heavy fire in 2017, highlighted by Snap’s decision to sell non-voting stock in its initial public offering. Index providers S&P Dow Jones and FTSE Russell announced plans to limit the eligibility of companies with multiple share classes to be included in their major indexes, while MSCI is investigating whether such companies should be barred from inclusion in its indexes. Following this backlash, Facebook was forced to abandon its plans to create a new class of non-voting shares, while Uber’s board voted to switch to a “one share, one vote” structure as it gears up for an IPO. Companies wishing to go public in 2018 will now have to evaluate meaningfully the consequences of using such structures.
Activism outside the United States
While the bulk of activism continues to take place in the U.S., the number of activist campaigns has grown throughout the rest of the world. The European Union adopted shareholder rights directives that encourage shareholder participation, paving the way for increased activism in the future. In Switzerland alone, Third Point took a $3.5 billion stake in Nestlé while Corvex saw success in its campaign to scuttle Clariant’s planned takeover of Huntsman. Across the rest of Europe, other American hedge funds have launched large campaigns, such as the U.K. branch of Elliott Management’s campaign at—and eventual truce with—AkzoNobel, while European activists such as TCI Fund Management and Cevian Capital continue to achieve favorable results. Similarly, Asia has seen an uptick in activism. Japan, once thought to be virtually immune to activists, has seen exponential increases in shareholder engagement, leading Prime Minister Shinzo Abe to embrace shareholder activism as part of his plan to initiate corporate governance reform. In keeping with recent years, activism is likely to become more common outside the United States in 2018.
In 2018, SRZ and Activist Insight predict the following trends:
· More activists will try to differentiate themselves based on their track record, expertise, and objectives as a way to gain currency with the wider investor community and to distinguish themselves from “bad actors.”
· Activists will portray themselves as interested in environmental, social, and governance (ESG) issues. Most will likely talk more about the long-term consequences of their involvement.
· An increasing number of activists could look back to existing portfolio positions for alpha, pushing for second proxy fights or further changes as new opportunities grow more limited and riskier.
· Activists will look to identify turning points where they can influence company strategies, rather than relying on proxy fights. Those will include CEO transitions, M&A, and urgent board refreshment drives.
· Increased excitement about corporate governance changes in Asia, especially in Japan and South Korea. The big money, however, will flow to Continental Europe, where M&A will frequently be the catalyst now that political and economic concerns have largely abated.
Ele Klein, co-chair of Schulte Roth & Zabel’s global Shareholder Activism Group, commented that it has got to the point that activism is more accepted in Asian countries like Japan. This cultural shift directed from the top of society (from PM Shinzo Abe) has allowed investors such as Hong Kong’s Oasis to turn their deep research into active positions.
Turning to a recent develoment, Klein noted that the restructurings and re-financings in the oil and gas sector over the last few years had created opportunities for activists. “By now it is clear who has come out well and who has not. Activists can make a case against the losers, perhaps taking a view on the industry background. There has been some increase in activity in the sector already with more to come,” he explained. Something similar has taken place in REITs he noted.
You can read the full review here.