A recent survey by business advisory firm FTI Consulting has found that merger and acquisition (M&A) activism is on the rise, with the overwhelming majority, or 89%, of leading activist investors surveyed expecting an overall increase in M&A activism this year.
The Shareholder Activists’ View survey, which engaged investors that had been involved in over 500 “activist situations”, asserted that the shareholder activism landscape had changed dramatically over the last several years, citing data by data analyst Hedge Fund Research which indicated that activist hedge funds managed over $93-billion in 2013 – almost triple the amount managed just five years ago – and an increase of 42% from an estimated $65-billion in 2012.
This increase in investment had been fuelled by returns of 16.6% in 2013, which far outpaced the average hedge fund, returning 9.3%.
Further, the study found that the investors in these activist funds now included an increasing number of large pension funds and institutions – the same pension funds and institutions that had been increasingly supportive of activists with their votes.
“The increased returns and inflows of monies clearly show that activist funds as an asset class are not only here to stay, but are increasing their influence on M&A transactions. As these funds grow larger, they are able to target larger companies, doubling the amount of companies targeted with market capitalisation greater than $2-billion in 2013,” the report read.
Using balance sheet and operational strategies, activists had not been deterred from engaging with well-known Fortune 100 and Fortune 500 companies.
According to investment platform Dealogic, global M&A activity reached $804.5-billion in the first quarter of 2014, compared with $655.8-billion in the first quarter of 2013, up 23% year-on-year, marking the highest first-quarter volume since 2008.
This emerging asset class could present significant challenges for the successful conclusion of transactions by employing investment strategies that focused on not only the target company but also the acquirer.
“It is a similar trend we are seeing in South Africa, with shareholders becoming more concerned about not only the company’s governance issues, such as executive pay and board selection, but also whether shareholders will be getting value for their investment in M&A activity,” commented FTI Consulting South Africa Strategic Communications MD Max Gebhardt.
“This is especially so as local companies see their shareholder base become increasingly internationalised,” he said.
Of particular interest was the activists’ willingness to engage on the acquirer side of a transaction, with an acquirer often using more aggressive balance-sheet structures to execute M&A.
“An M&A activist may well look at this structure and the risk profile of the transaction and decide that they like the board’s more aggressive balance sheet approach, but would like the cash returned rather than used for M&A. This type of activism will put more deals in jeopardy,” added FTI Consulting Strategic Communications activism specialist and MD Steven Balet.
While nearly three-quarters, or 73%, of activists polled said they would adopt the traditional investment route, by investing in a target and then applying pressure to increase the offer price during transactions, a “surprising” 43% of activists stated that they would look for opportunities to discourage the transaction and, instead, push the acquirer to unlock value through share buy-backs, dividends and divestitures.
Looking to Europe, FTI Consulting Strategic Communications MD and special situations UK team head Edward Bridges noted that, although the survey demonstrated that a significant number of activists saw no shortage of targets in North America, 40% of activists were shifting their focus to Europe and elsewhere.
“This shift corresponds with the increasing level of activist engagements the market has seen internationally, particularly in the UK where almost 50% of European activism takes place [as] corporate governance and legal frameworks are most activist friendly.
“Hence, we have seen a sharp increase in corporate focus on activism defense planning, particularly as there has been real evidence of long-only institutions [increasingly becoming activists] in their own right as well as implicitly and explicitly support[ive of] activists’ positions,” he said.
The survey further revealed that, with respect to strategy, originating an activist position was not the sole basis for investment in a target company, as 69% of those surveyed supported other activists by investing in activist situations.
In turn, upon public announcement of a campaign, an activist could normally rely on a significant percentage of “follow on” shares to be bought; therefore increasing their bargaining position and creating a larger voting bloc than was readily apparent from the activists’ own share-ownership filings.
The media also continued to play an important role in activist engagements, with 88% of activists interviewed stating that the media had positively impacted activism.
“Activism has gone mainstream and the media has become very supportive of activists who have become increasingly sophisticated in their engagements and in use of the media,” remarked Bridges.
While only one-quarter of those polled already used Twitter and other social media platforms when engaging in activist campaigns, the survey found that 69% expected an increase in use of social media this year.
“When considering pre-emptive activist defence planning, companies need to understand what social media strategies were available both in defence and offence,” Balet added.