By Montieth M. Illingworth, president of Montieth & Company
There it was in black and white in none other than The New York Times. Quotes from the CEO of DowDuPont, followed by ones from a line up of shareholders echoing the sentiment, that all is now actually much better for the company. The breakup once envisaged by management will now be a re-organisation. An otherwise fairly routine news piece except that DowDuPont is one of the largest companies in the world and the echoing support is from some of the world’s most prominent (some say notorious) activist investors: the vehicles for the likes of Nelson Peltz (Trian Partners), Daniel Loeb, (Third Point), and Larry Robbins, (Glenview Capital Management).
Why is this important? Not so long ago a) you’d rarely find a company on the scale of DowDuPont and these activist hedge funds, or any major activist, in the same news story, b) activists are sounding more and more “mainstream” as investors. And c) this is not the only example of both a) and b) of late, not just in the U.S. but also, increasingly, in Europe and Asia.
What’s changed is clear. Activism has new rules. In going more mainstream, activists have changed their strategies, and that includes how they want their interests to be perceived publicly. They also have realised that there’s money to be made at the top end of the market cap range and they’ll go almost anywhere in the world to find it. And as they’ve globalised, they’ve also matured when it comes to using PR to win hearts and minds, in the boardroom, amongst shareholders, regulators, and the media. Becoming more “user friendly” is just as important as being smart and unlocking shareholder value.
The New Rules
Here then are the new rules of activism today. These are instructive for all concerned: for management teams who need to be ever vigilant in how to deal with an activist approach and for any investor interested in activism, how it’s evolving, and its’ impact.
They’re mostly the same players with the same interests. In fact, there are now far more of them. By one estimate more than 100 hedge funds are engaged in frequent activism. A total of over 300 have launched campaigns in recent years. They represent over $100 billion of assets under management.
What has changed is that they’re far more strategically savvy than ever. This is important, first in terms of classic, textbook communications.
Management tends to focus on the tactical PR methods being used by activists, from “gotcha” pre-disclosures to the media and the weaponising of Twitter. The strategic PR shift by activists has two parts: first, taking advantage of management’s often flat-footed response, and second, elevating their own relevance and credibility.
Let’s first look at management’s response. By definition, in PR terms, activists have the tactical advantage over just about any corporate target when they launch a campaign. Citing poor performance, seemingly undeserved CEO pay, ancient board members, etc., they come out of the gate instantly putting the company on the defensive. Even after all these years of watching activists operate in the public sphere, very few management teams have learned yet how to create and deploy communications strategies that successfully defuse the activist’s campaign. In part that’s because, in many cases, the activists have a good case, on the surface of the facts at least. But mostly it’s that corporations are still fighting yesterday’s battle, and consequently so is their PR response.
Yesterday’s battle when the activist comes calling is about defending management. That PR response is to appear reasonable (measured tone), constructive (listen to all shareholders), and confident (in the decisions they already made that invited the activist attack). But that doesn’t address today’s primary issue, namely, that the activists aren’t attacking management’s ability to be reasonable, constructive and confident. What the activists today have figured out is how to make the issue the competence of management. And if they can convince people accordingly, they change the equation of what’s at stake. If management wants to be perceived as competent they have to agree (in part or whole) with the changes the activists are insisting on. That’s a strategic positioning win for the activists and it’s paying off.
Co-Opting Institutional Investors
Activists have leveraged on that positioning win by elevating their relevance and credibility as investors, another key shift in their mainstreaming. Long gone are the Gordon Gecko “greed is good” chest-thumping days. They have realised that it’s better to have fellow travelers among buy-side institutional investors. They’ve gone from travelling in packs (aligning with a few other hedge funds to win the day) to amassing in loosely-organised but still effective herds. This is another strategic PR win. Even if the traditional buy-side players don’t want to stand up and scream from the hilltops criticizing management (realising that if they do, their analysts will be denied access to management) the activists have brought them into alignment with their arguments. And many have willingly come. Why? They’ve had virtually no choice.
This is most abundantly the case in the U.K. following the last financial crisis. It even has a moniker, which itself is another PR victory for the activists: “soft activism.” This was brought about, post crisis, by the Financial Reporting Council’s U.K. Governance Code. That was followed by an update of the U.K. Stewardship Code in 2010, which essentially encouraged institutional investors to engage more with boards. Then came the Enterprise and Regulatory Reform Act of 2013, which put the target on management’s chest over the issue of executive director’s pay.
This regulatory nudge in the U.K. has not been met in equal terms by U.S. authorities. But it didn’t have to be for the traditional buy-side investors there to join the herd. That’s because, post crisis, asset management, across asset classes, has grown dramatically and globalised. Investment banking’s de-risking of their balance sheets has become asset management’s boon. It is no wonder, therefore, that with this globalisation of what amounts to savings from asset owners (largely, the pension schemes) the asset allocators are acting more consistently across borders. And the larger they get the more consistent becomes that behavior when it comes to aligning with the activists.
All of those shifts have increased activism’s appetites. Activism was previously focused on easy prey in the middle market. Then, emboldened by their growing success, activists woke up to the fact that the same amount of effort applied to the top 10% of names by market cap can generate far better rewards. That has created a who’s who of targets, globally: Hitachi, Walt Disney, Whole Foods, Rolls-Royce, Proctor & Gamble, WPP, Avon, General Electric, and on, and on.
And they’re not just going for the mothership. A new tactic is to target companies majority owned by a larger entity, essentially accusing the latter of lazy ownership. This is again the competency of management issue writ large. That’s what Elliott Advisors, the European affiliate of U.S. based Elliott Management Corp did when going after Italian rail signaling firm STS Ansaldo: it was majority owned by Japan’s Hitachi. Or when Paris’ CIAM went after Euro Disney and SFR Group and its owner Altice NV.
This appetite is becoming voracious. Hence the growing trend of activists’ actions leading not to reforms but outright sales. By mid-year, for example, in the U.S. fully 91 activist campaigns resulted in the exploration of a sale process; double the number year over year. There were 7 such sales in 2010, 36 in 2016. And dare we mention Amazon’s purchase of Whole Foods.
Why is this another PR win? It means that the campaign was so successful, so overwhelmingly convincing, with management not having a better alternative to packing up and going home, that only an outright sale would satisfy investors.
And so the biggest of the new rules of activism today: just when you think they might have somehow become predictable they change the terms of the argument.
about the author:
Montieth M. Illingworth is president of Montieth & Company, a global specialist communications consultancy with offices in New York, London, and Frankfurt. The firm advises organisations across sectors on a wide range of mission critical initiatives and special situations.
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