European corporates increasingly vulnerable to activism – Activistmonitor panel

• No company large or small immune to activism
• Governance demands provide first step to strategic change

European companies that are performing relatively well are increasingly being targeted by activist investors as they attempt to distinguish themselves from passive investment strategies, according to speakers at the Activistmonitor Breakfast Briefing panel hosted at Acuris’s offices in London yesterday.

Activists are progressively targeting companies that previously may have been considered immune to activism because of their strong financial and share price performance, argued Nicole Karlisch, executive director at Morgan Stanley.

Activist investors are under pressure to see more certainty in their investment returns, so they are taking stakes in ‘less risky’ companies, in which they see the potential to generate high returns through engagement while at the same time being relatively certain not to lose money, Karlisch said.

US activists are in a process of trying to differentiate themselves to their own investors by investing in Europe or UK-listed companies, according to Cas Sydorowitz, global head of activism at proxy solicitor Georgeson.

The rising importance of stewardship responsibilities among institutional investors is helpful for activism, but is not revolutionary as there are still several perspectives to take into account, commented Petteri Soininen, co-head of RWC Partners’ European Focus Fund, which terms itself an “active owner”.

“If we think about trading in the markets by algorithms and shares being held by ETFs and asset holders, the question is: who is now governing these companies? The ETF providers, or the small investors who have active stakes and are managed by active fund managers?,” Soininen said. Moreover, the corporate governance department of an institutional investor may also have a role in influencing the company.

Institutional investors are also more active when it comes to ESG (environmental, social and governance) factors, the speakers agreed. Activists can often find common ground with other investors on such issues, said Karlisch.

Therefore, shareholder influence cannot be ignored in contemporary equity markets, the panelists agreed.

Engagement technique

The amount of disruption at a senior level of a company once an activist discloses a stake is enormous, according to one of the speakers, who has experience as an internal advisor at a company under an activist campaign.

Once an activist surfaces in the company’s register, the next “two to three months” are used to set up a defence strategy without coming over as too aggressive, the speaker added. However, this can be difficult when the activist is not coherent and fulsome in its demands, the panelists agreed.

One typical aspect of a campaign is to attack the company’s corporate governance and board representation by appealing to proxy advisors and corporate governance experts who are responsible for proxy voting, Sydorowitz said. However, the governance arguments are often just an opening gambit to enable operational or balance sheet change down the road, he continued.

Companies which already have highly active and engaged investors might see an activist turn up as well, argued Karlisch, mentioning the investment of Elliott Management in GEA Group [ETR:GEA] following GBL’s stake building as an example.

No matter how much support an activist has from other investors, a proxy fight is usually the last resort, stressed Sydorowitz. The reputational risk that goes along with a public fight, and the resources needed to undertake one, are important elements to take into account before escalating a campaign to such a level.

Activists such as US-based ValueAct Capital have an entirely different approach, employing little or no public comment, according to Andrew Honnor, managing partner at PR firm Greenbrook, which represents ValueAct.

by Claudia De Meulemeester and William Mace in London

Click here to request a free trial.