November 20, 2019
M&A activism is a persistent campaign theme
M&A – be it disposals, sweetening transactions or scuttling them and demanding money be returned to shareholders – is a growing theme of activism. According to Lazard, 45% of all activist campaigns globally in 2019 had an M&A perspective, the highest proportion to date. TMT and energy companies were the top targets, with high-profile pushes for divestitures at AT&T, eBay, Marathon Petroleum and Sony.
Critically, the market believes that M&A activism creates shareholder value. The median cumulative abnormal return (CAR) around the announcement of M&A related activist demands is 1.9%, according to research by Boston Consulting Group. That is nearly three times the CAR for activist demands which do not have an M&A thesis (0.7%).
Conglomerates can be particularly vulnerable to activists pushing an M&A thesis to unlock value. These “Lego” companies can be attractive break-up targets. Importantly, they often struggle to adequately explain why their current structure is optimal for value creation, and not simply the culmination of acquisitions built up over time. German industrial conglomerate thyssenkrupp has faced sustained pressure from its shareholders, amongst them Cevian Capital and Elliott, to improve performance and simplify its structure. thyssenkrupp has changed its CEO as it looks to accelerate its transformation and is pursuing a dual-track process for its elevator division.
In the UK, Trian Partners took a position in June in Ferguson, the FTSE 100 plumbing and heating supplies merchant, and has been credited in some quarters as a key driver for Ferguson’s subsequent decision to split its UK and US businesses. The US activist Cat Rock has been calling on the food delivery service company Just Eat to seek M&A opportunities. It has supported the subsequent £8.3 billion merger with Takeaway.com. Eminence, another US activist that sees value in Just Eat, in contrast said it planned to vote against the merger, believing it undervalued the food delivery business.
Bumpitrage – whereby an activist intervenes in a deal to extract a higher offer price from the bidder – is a constant threat during transactions. Elliott’s interventions in the takeovers of SABMiller by AB InBev and Quintain by Lone Star are two cases in point where higher offers were secured by the activist in order for the bidder to safeguard the transaction.
So, are you ready for a potential activist campaign?
US-based activists continue to be the most prominent this year, with Elliott and Starboard the most active players, launching 14 and 11 campaigns respectively, according to Lazard. First timers have accounted for a quarter of all new campaigns and traditional, long-only investors have been increasingly vocal and active. With a reputation for aggressive campaigning, US-based activists have, however, tended to modify their approach when engaging UK and European boards. They are increasingly savvy to business norms on this side of the pond. They consider carefully the stake they need to exert influence, and look to win over key stakeholders early on, including politicians and employee representatives, as well as shareholders.
Companies should recognise that activist strategies are constantly changing. One truism of an attack is that activists can’t win on their own; they need to build a consensus to effect change and unlock value. Shareholders – be they traditional asset managers, index funds, retail investors or employees – can have varying and evolving motivations and an activist’s platform needs to appeal to all of them. They will shift their focus from a purely value-driven approach to value and ESG if that’s what it takes to succeed.
All companies must be their own activist. This means proactively addressing vulnerabilities by looking in the mirror and asking the tough questions: are we effectively communicating our strategy and value creation story? Is the right strategy in place for long-term growth? Is this transaction defendable on rationale and valuation? Are there gaps in the ESG story? It means developing defence narratives and materials, rehearsing responses in simulations and dialling-up stakeholder outreach. It also means being transparent about the board’s decision-making – explaining why the company is not taking certain actions can help rebut activist attack points.
Companies must maintain constant control of their narrative and have storytelling channels ready – from shareholder letters to paid social media campaigns – with supporters identified in advance. PR and IR must work hand-in-hand and help the company stay attuned to sentiment.
No company can afford to be complacent.