WHO’S AFRAID OF THE BIG BAD ACTIVIST?

The catalogue of activist shareholder attacks on European companies has been steadily growing in recent years. Already several campaigns have attained almost legendary status. Pharmaceuticals company Stada, for example, where hitherto unknown investor Active Ownership Capital (AOC) with a shareholding of around 5% succeeded in toppling the chairman, pushing its own candidate onto the supervisory board and forcing the management on a radical change of course. Thyssenkrupp, where CEO and Chairman of the supervisory board both resigned and the subsequent CEO announced a new corporate structure, following continued criticism from 20% shareholder Cevian. Pernod Ricard, where Elliot, having amassed a 2.5% stake, made a very public call for the company to improve margins and corporate governance, eliciting a prickly response from the French government.

These are just a few recent cases. The 2018 Review of Shareholder Activism by Lazard shows that the number of activist shareholder campaigns has been on the increase worldwide, with a record 226 companies targeted in 2018 (2017: 188). The aggregate value of new activist positions rose to a record US$65 bn in 2018 (2017: US$62.4 bn). Top activist in terms of market value of current activist positions was Elliot (US$14.7 bn) followed by ValueAct (US$12.6 bn) and Cevian (US$11.2 bn).

But how dangerous are such activist shareholders really? Do corporates need to worry? And what defences are there, if any?

For the most part, activist campaigns are launched on the basis of small individual shareholdings, usually under 10% and rarely more than 25% of any targeted company. Activists aren’t generally looking for full control. Usually, they are calling for some form of improved shareholder return, for example through an increased or special dividend or better overall operational performance, for example through a change of strategy or divestment of non-core operations. Essentially, such aims are likely to gain a favourable hearing from other shareholders.

The real activist threat lies not so much in their financial clout, then, but in their powers of persuasion. Only by convincing other shareholders that their proposals offer the best perspective for the company, can minority investors hope to push through their agenda. In order to do that, activist shareholders have developed impressive skills in the field of communication. Their attacks are often stage-managed for maximum impact. Choosing the right moment to deliver their message to the key influencers, they are frequently able to use an element of surprise, stealing the initiative and forcing target companies to adopt an awkward, defensive position in the response.

Communication is a powerful tool and credibility is a major asset. Activists have understood this and some have already established a formidable reputation. Corporates need to understand this, too, also when it comes to communication with investors. The main defence for corporates lies in building up their own credibility. This means having the courage to communicate on company strategy. Companies that pay attention to communication, listening and responding to criticism and explaining their strategy in a transparent and consistent manner, should have nothing to fear.

James Gibbs – July 8, 2019