The number of activist investors in Europe has nearly doubled over the past five years with one in twenty publicly listed European firms becoming a target.
However, the United States still leads the way, with activity double that of Europe. One in ten firms listed on the NYSE have encountered an activist investor.
“Activist funds have been part of the furniture of capital markets for quite a long time in the US,” says Dr Jason Caulfield, global head of Value Creation Services and M&A Operations in Financial Advisory at Deloitte, and author of the report containing the findings.
“If you speak to activists, who are practitioners in the US, they say it’s become an increasingly competitive market. Some years ago, activists then looked outside the US to deploy funds in what is quite a successful business model and have looked to regulated capital markets elsewhere in the world, and then set up shop”.
According to a previous report also conducted by Deloitte, the rise of activist investor is due to low interest rates, leading to both large pools of private capital for investment while liquidity has dragged down equity and debt returns.
This is accomplished by cooperating with other long-term investors, Caulfield says. “What activists leverage is teaming up with other shareholders. They go in take a small single digit percentage state, after having done all of the homework, having found other investors, like mutual funds who may be disgruntled or who agree with whatever the activist’s investment thesis is.
“So rather than a 5% voice, they’ve got a disproportionate voice because they have teamed up with other shareholders and they have a 35% voice, so they’re listened to”.
While activist investors typically only buy a small single digit percentage of a company’s stock, they have deep pockets. Their most common targets are firms with market capitalisations greater than $50bn. Out of 3,800 publicly listed US companies, nearly one in five (19%) have been the primary or partial focus of an activist investor. In Europe the rate Is only slightly lower at 15%
Caulfield says that cost/benefit is the main driver causing activist investors to target large firms.
“There is a fixed cost of running a campaign”.
“In terms of benefits to cost, it’s often more beneficial to target larger companies, have over the years, built up a, a conglomerate type structure may have, become slightly unfocused. Larger companies as they as they get larger, their growth rate may start to tail off, presenting some fairly conspicuous, opportunities to enhance value”.
On a sector level, the report also found activist investors preferred firms operating in consumer and services or life sciences and healthcare. One is four US firms in these sectors that also have a market cap above $50bn had been subject to an activist campaign. Europe sees a similar level of activist investor activity in the consumer and services sector.
Get to the gains
Caulfield says activist investors are usually looking for more immediate short-term gains.
“Activist investors rather take a small single digit holding, not paying the ownership premium private equity takes. Instead they work with the management team, to encourage them to change their position, whether it be making investments or changes like operating performance or cash to shareholders.
“Once that management team announced those changes, often that is then reflected in the share price and the activists moves on. Rather than it being a three to five years hold, it might be six to eighteen months tops. It’s a completely different model. It’s a very liquid asset, owning 5% you can move in and out.”
This makes activist investor activity difficult to prevent because they are buying such a small percentage of company stock.
More than half (51%) of activist investor demands in the US are for ‘quick wins’ like share buy-backs and M&A. For the rest of the world such demands sit at 31 percent.
While the data suggests most activist investors continues to operate in high value, high market cap companies, Caufield says trends in the US are showing greater interest in the mid-tier firms, like those within the FTSE 250 and that firms in Europe should better prepare themselves for an activist campaign.
“The FTSE 100, CAC 40 and the DAX, they all have very active campaigns taking place at the moment and those are without a doubt continuing to happen. The next echelon down, companies in the US, there’s equal amount of activist campaigns taking place. In Europe, in Japan and elsewhere, not so much because they just haven’t got there yet. They’re working their way through”.