M&A feels the force of shareholder activists

Shareholder activism is moving into the mainstream as activists launch ever-bolder campaigns

Increasing investor activism is driving M&A-related activity in Europe and North America, from outright acquisitions of companies targeted by activists to divestiture and spin-off announcements.

The trend of investor activism has been rising in Europe over the past few years, according to campaigns included in Activistmonitor data*. Some 24 new live campaigns, where an activist made a public demand, were launched in Europe in 2014; this increased to 40 and 61 campaigns in 2015 and 2016, respectively. In 2017 to date, 32 new live activist campaigns have been launched. With 214 European companies having an activist invested as of mid-2017, activity in Europe is high.

In terms of M&A-related conditions, Activistmonitor Europe recorded 22 cases of activist target companies announcing a complete or a partial sale in H1 2017, a 47% increase over 15 such announcements in H1 2016, and double the 11 announcements recorded in H2 2016. In North America, a total of 100 campaigns were launched in H1 2017*, a 13% decline from 115 campaigns in H1 2016. Within industry sectors, total activity in the consumer and leisure segment increased by 66.7%, with 20 campaigns announced, while healthcare had a 40% jump in campaigns, at 14.

Among target companies with market capitalization above US$300 million, there were 49 activist campaigns in North America in H1 2017 that saw an M&A-related outcome, up from 40 in the second half of 2016, according to Activistmonitor data.

As activists grow in confidence, even the most established corporate giants have grown vulnerable to activist campaigns. Shareholder activism is going global, with potentially profound implications for M&A markets.

Activist investors can determine a company’s M&A strategy in different ways; for example, by pursuing a sale or breakup, or by campaigning for a higher takeover price for an announced acquisition—or alternatively, by seeking to block a transaction altogether.

A buoyant M&A market has galvanized activist investors, says Jeff Gramm, author of Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism: “If there’s healthy M&A demand then [activism is] a quick way to unlock value in an undermanaged company.”

The key dynamic is replacing management or changing the board: “The reason they want to do this is that they feel that companies’ assets are being underutilized by current management,” Gramm says. “In that sense, M&A is the easy way out for activists, to close a perceived valuation gap without having to do the hard work in the boardroom.”

Consumer care

The consumer sector is of particular interest to activists, who see the sector, with its multi-brand company portfolios and low debt, as ripe for trimming.

This is reflective of a resurgence of activity within the global consumer M&A market. In H1 2017, US$241.8 billion was spent across 885 deals, overtaking 2016’s annual total of US$220.9 billion, making it the second most targeted sector by value. Activity in the sector was bolstered by megadeals, with eight deals priced over US$5 billion announced in the first half of 2017, up from seven during the whole of the previous year.

The consumer sector has witnessed some particularly prominent moves by activist investors, as shareholders push for companies to adapt more quickly to changing consumer demands.

According to Activistmonitor, the consumer and leisure sector accounted for 24% of all M&A-related demands in the first half of 2017. For example, in February, Trian Fund Management disclosed a US$539 million stake in consumer products giant Procter & Gamble, angling for a board seat, which Trian later upped to US $3.47 billion. Trian’s Nelson Peltz is on record saying that he believes P&G has been slow to adapt to shifts in consumer tastes. 

Resource rich

The energy, mining & utilities (EMU) sector has also been attracting the attention of activists of late. Again, a direct link can be drawn between activist activity and an uptick in M&A. EMU emerged victorious following a difficult couple of years to become the most targeted sector by value in H1 2017. A total of US$261.65 billion spread across 662 deals accounted for 17.9% of global activity.

Earlier in 2017, Elliott Advisors requested an independent review of Australian minerals giant BHP Billiton’s petroleum business, as it seeks to restructure the company. The firm launched its offensive in April, with proposals that it claimed would help unlock up to US$46 billion in value by spinning off BHP’s oil and gas assets. (Since then, and following further public pressure, BHP has announced the sale of its legacy US onshore assets, a deferral of its expansion into potash and a significant board upgrade in the form of a well-regarded new chairman and two replacement directors.)

Elliott Advisors has also launched a campaign at AkzoNobel, a Netherlands-based multinational paint company, confirming increasing interest among American activists in overseas targets. In July, Elliott filed a second lawsuit in its attempt to oust the chairman of the Dutch paints group following its rejection of three takeover offers from PPG Industries. In August, the two sides announced an agreement to suspend litigation for at least three months. The agreement was based on alignment of the two sides on the strategy to fully separate Akzo’s Specialty Chemicals division and include board nominations.

Distraction or discipline?

The question remains whether shareholder activism is healthy for the M&A market. Some boards dislike the disruption brought on by activist moves. By pushing for a place on the board, activists can unsettle companies and breed division in the ranks.

“The concern is that shareholder activism can feed an overly-strong focus on short-term performance at the expense of the long-term health of the company, and that the vocal activists do not represent the interests of the wider spread of the company’s passive, long-term shareholders,” says Gramm.

But there are positives: Activists can play a key role in pushing up valuations, by rendering companies more efficient, such as through more disciplined use of cash and capital.

Establishing a causal link between shareholder activism and company performance post-M&A is difficult, cautions Gramm: “A lot of academic research points to positive shareholder returns. Objectively, it's a good thing. But, keep in mind, when a company gets sold, you can’t compare it to how it would do as it would have been independent. That’s not comparing apples with apples.”

Activist investors, flush with cash, show no sign of pulling back from M&A-related corporate campaigns. Newer markets in Europe and Asia are priming themselves for the disruptors’ interventions.

“You are now seeing the US export activism to Australia, and a lot of young Australia fund managers are looking at acquisitions,” says Gramm.

If the link between shareholder activism and higher valuations is sustained, the scene could be set for continued growth in M&A volumes, in the US and beyond.

*Data includes companies with a market cap over US$100 million.

Receive M&A Explorer quarterly email updates when new data is available.