The new barbarians at the gate

Are campaigns by activist investors the modern equivalent of the hostile takeover attempt? Like the latter, they have the capacity to shake target companies to their very foundations. They are played out in public, dominate the financial pages for weeks or even months, can become highly contentious and place communications staff in the vanguard.

But, unlike the contested deal, there is no time limit. There is no point at which a campaign’s orchestrator has to either put up or shut up. An activist can stay active until such time as they have achieved their aims. Those aims usually involve some type of corporate action in the hopes that it will result in a significant increase in the share price of the target company.

Disposals, a change in strategy, a restructuring, a boardroom shake up, even a break up, or a combination of them, all have resulted from successful campaigns. And the activists are on the march, both in number and geographically.

The UK market is particularly attractive to activist funds because of the strength of the corporate governance system as well as regulations that have promoted greater access to investor information

A study by business advisory firm FTI Consulting found that activist campaigns increased by a factor of five in countries outside the US between 2010 and 2016, rising from 70 to 342. This year, according to ActivistMonitor, the US has seen a 66 per cent jump in the number of activist campaigns against companies with market values in excess of $10 billion (£7.6 billion), with huge household names, such as Proctor & Gamble, General Motors and Whole Foods, caught in the crosshairs.

These so-called super campaigns demonstrate that no company can consider itself immune to activist attention Outside the US, FTI identified the UK, as well as Canada and Australia, as the marketplaces most likely to see an increase in activity in the future, with a combination of factors including economic upheaval, undervalued assets and increased scrutiny of corporate governance standards at work.

Oliver Parry, director at corporate governance consultancy Morrow Sodali, agrees with that assessment. ‘Shareholder activism has been on the rise in the UK for quite some time now,’ he says. ‘Indeed, the UK market is particularly attractive to activist funds because of the strength of the corporate governance system as well as regulations that have promoted greater access to investor information. This greater transparency facilitates dialogue between activists and boards.’

He says companies should take note, and plan ahead accordingly. ‘It’s really important to have a communications plan in place. During my time at the Institute of Directors, I was lobbied by both corporates and hedge funds. In my experience I have noticed that, where the board is not prepared to engage with activist investors, a ‘war of words’ in the media develops. That’s not helpful for other shareholders or employees of the target company. It is better to have constructive dialogue, behind the scenes, which should be led by the chairman.’

There is an increasing recognition that activism, and being an active shareholder, is actually force for good, and that is a message we are keen to communicate

Activists themselves agree with this. They would far rather deal with their issues in private, despite the excitement they generate in the media, and they say there is more openness to them than there was. Sarah Rajani, director of communications at Elliott Advisors, one of the most active firms in this space, says the perception of activists and activism is ‘maturing’. ‘There is an increasing recognition that activism, and being an active shareholder, is actually force for good, and that is a message we are keen to communicate,’ she says.

Rajani says that it is rare for activists to go public by launching a campaign. They prefer to work by agreement if possible. Only when all avenues have been exhausted will they take their message direct to a company’s shareholders. When that involves businesses where institutions are the dominant force on the shareholder register, there will typically be an open letter to shareholders in the UK, outlining the activist’s case.

In the US, this could be accomplished via a 13D SEC filing. This will contain the activist’s thesis, which will have been constructed only after extensive research, typically conducted over many months and often involving outside consultants. It will also contain proposals as to how value could be unlocked, whether through disposals, balance sheet optimisation or consolidation of a company’s holding structure, as with the current campaign focusing on miner BHP Billiton.

The mining company recently announced it would divest its underperforming shale business within two years, which was one of Elliott’s demands, and sell its non-core nickel operations. ‘That would be followed up by briefings and talking points, having people available to communicate our perspective. The communications team will initially look to leverage engagement with media, commentators, opinion writers and the like,’ she says.

But social media is playing an increasingly important role, particularly where smaller shareholders are involved. Earlier this year when Elliott Advisors campaigned for management changes at New York-based industrial metals group Arconic, which had been spun out of Alcoa in 2016, it took the battle straight to retail investors. It posted a square A5 brochure which, when opened up, revealed a LCD panel that played an animated message outlining the arguments Elliott wanted to convey.

‘With retail shareholders it is very much a bespoke approach. Activists are increasingly alive to the value that can be gained through using social media; targeting the blogs shareholders might read, or the LinkedIn and Facebook groups they might be members of, using Google advertising,’ explains Rajani. ‘It doesn’t displace the traditional tools we would always use, however. Engagement with media is very important as a means of disseminating your message.’

Rajani detects increasing respect accorded to activists in countries where shareholder rights may be more limited than in the UK and the US, or where the market is less developed. She highlights the important role activists play in ensuring accountability of boards, particularly given the increasing amount of money held in passive index funds.

If an activist is unable to achieve its objectives in private, and decides to push the button on a campaign, then it is vital that the message is carefully tailored. One communications professional explains: ‘If you’re dealing with institutions you have to be very careful. The absolute last thing you want to do is annoy them. You have to be very nuanced with what you say and what you do. You don’t want to lose them. With individual shareholders, it’s different. You need to find a way to grab their attention.’

Greenbrook, a consultancy that has expertise in dealing with activists, agrees. Managing partner Andrew Honnor says: ‘You’ll always build a website as part of a campaign to communicate your message. But after that, you have to think of the audience you’re trying to reach. Most of the time that will be institutional shareholders, who the activist wants to bring onside, so it has to be pitched carefully.’

Activists are increasingly alive to the value that can be gained through using social media; targeting the blogs shareholders might read, or the LinkedIn and Facebook groups they might be members of, using Google advertising

Honnor also says activists are becoming increasingly smart, as they learn which tactics are most effective, and make use of the tools provided by new technology. ‘Most, so far have typically used the traditional communications route, working through the financial media, rather than being social media led. However, this is changing rapidly,’ he explains.

‘Our approach is to examine and use the delivery systems that most effectively address your specific shareholder audience and other stakeholders. Where you have lots of retail shareholders, that’s when I think social media comes into its own.’

Another adviser adds: ‘The obvious advantage [social media] gives is that you can take your message direct and unfiltered to your audience. You don’t have to spend a lot of time and energy trying to convince people. It could also help you to maintain interest throughout the course of a long campaign when the traditional media starts to flag or move on to other stories. But you have to be careful not to lose control of it at the same time. That’s always the risk with something like, say, Twitter.’

Jason Hollands served as the communications chief for Foreign & Colonial Asset Management when it was caught in the crosshairs of US activist Ed Bramson. He now serves as business development director and head of communications at Tilney Group, an investment advisor. He says that activists are increasingly skilled when it comes to communicating their message, and that this is something boards and the advisers need to be aware of.

He says: ‘While in the past many have been notoriously media shy, this is not the case where activists have got involved in targeting, say, investment trusts where the shareholder bases can be highly diversified and this might mean taking their campaign to a proliferation of discretionary private client managers, and retail investors, rather than a modest number of large institutions.

‘PR is often a key component of such campaigns. In my view Elliott Advisors fought a very effective PR ground war in their campaign to shake-up the board of Alliance Trust, for example, creating a degree of media attention sufficient to draw in other financial advisers and independent commentators who may not have agreed with all aspects of Elliott’s critique but certainly felt the incumbent board had a case to answer.’

It should not necessarily be viewed as bad news that an activist has shown up. Hedge funds are often looking to influence a company’s long-term strategic direction and, in many cases, have done extensive research about ways to improve shareholder value

That campaign was ultimately a success, resulting in the departure of chief executive Katherine Garrett-Cox, whom Elliott argued had too much power but too little oversight, a shake up of the board, and a change in strategy, with external managers brought in to oversee parts of the trust’s portfolio. It has been peaceful since then.

However, some companies do not fight the activists, but instead listen to their demands and act upon them. Jonathan Bush, chief executive of Athenahealth, an electronic patients records software company in which Elliott Advisors built up a nine per cent stake, found it a positive experience. The Boston Business Journal reported Bush saying: ‘This process, including the arrival of our activist investor, has caused all of us to look at the company through different eyes. Our mindset was… bookings growth and gross margin. [Now] the mindset around here is totally different.’

Parry urges compromise like this rather than prolonged and public battle seen at Alliance Trust. ‘I have said this before but corporate governance really is a two-way street. There has to be engagement on both sides. Productive dialogue can take place when boards are prepared to consider the views of the activist,’ he says. ‘Boards need to be attuned to the interest from activists, in particular hedge funds. It should not necessarily be viewed as bad news that an activist has shown up. Hedge funds are often looking to influence a company’s long-term strategic direction and, in many cases, have done extensive research about ways to improve shareholder value. Demonstrating that the company is willing to listen objectively to the views of its shareholders is necessary to avoid a more protracted public conflict.’

Ultimately, the best defence against an activist investor is a higher share price

But while the milieu is an evolving one, with more companies willing to open a dialogue with activists, there will always be battles. And they will always excite the media. Critics of activists accuse them of trying to take control of companies on the cheap. If activists want to change a company’s strategy, critics argue, they should launch a takeover bid. Hollands has a simple answer for companies that don’t welcome the attentions of activists: get the share price up.

‘Ultimately, the best defence against an activist investor is a higher share price. A shrewd defence tactic is for a company to flag they have an activist on their shareholder register at an early stage, as this news in itself can spur interest in the stock,’ he argues. Indeed, the announcement of Elliott’s economic interest in Athenahealth saw its shares rise 22 per cent in one day. ‘A sharp rise in a previously depressed stock price may realise much of the value an activist has identified through their analysis and investment case, and prompt them to exit their position without taking their campaign on to the next level of demanding board representation or a strategic review,’ says Hollands.

Activists always start the process with an idea of the return they wish to make, but how they achieve that does not matter. Hollands points to the example of FTSE 100 private equity company 3i, who in early 2013 announced that an investment vehicle managed by Sherborne Investors had started buying its stock and that its structure allowed it to acquire up to 30 per cent of a target. ‘This unorthodox move, of outing a new shareholder with a position below the level which would normally be disclosed, saw 3i’s share price move sharply higher and Sherborne’s fund exited its position in November that year,’ says Hollands. ‘In that example, value was created for all shareholders just by the presence of an activist on the register for a period of months.’