Consilium talks to Rothschild & Co’s Investor Advisory practice’s co-head of shareholder engagement, Alice Squires, about how to prepare for and manage activist investors.
What is an activist investor?
This can cover a broad spectrum. At one end there are specialist Activist Funds (such as Elliott or Trian) which deploy large sums of capital in companies and seek returns via public and private strategic campaigns to highlight value. At the other end, there are niche pressure groups who may be less financially motivated and instead address societal and environmental issues. Increasingly many mainstream investors and passive index investors (who may have previously confined their views to private company discussions) are becoming ‘reluctant’ or ‘constructivist’ activists and launching public campaigns to affect change and drive value.
Are activist investors becoming increasingly influential in Healthcare?
Yes, a record amount of capital was deployed in 2018, $65bn ($62.4bn 2017) and a record 161 board seats were won by activist investors globally. Campaigns are growing in Europe, with a record 688 companies subject to activist campaigns in 2018 (566 in 2017), and 10% of these were in the healthcare sector.
What is driving this trend?
At a high level, it is being driven by wider macro-economic challenges, regulatory, environmental, political and societal pressures which create the conditions necessary to enable activists to challenge Boards, to demand greater transparency and hold them to account.
At a bottom up level, the growth in specialist activist funds has been driven by their ability to promise or generate above market returns in a low growth, low interest rate world. There is considerable variation in the actual returns delivered and between returns within different types of campaigns. Transaction-focused campaigns appear to deliver better returns, average +13% on a 12-month outlook, versus campaigns pursuing governance change, which is -3%. It is likely therefore we may see more of the bigger, bolder, transaction-focused campaigns, focused on strategic change in the future or challenges like Elliott to the Bristol Myers Squibb acquisition of Celgene.
Can activism be a force for good?
A force which promotes greater accountability to drive better returns clearly has the potential for good. It is, however, very case specific. At the most sophisticated end of the spectrum, fund managers comment that the quality of research and due diligence they see in activist campaigns can be superior to sell side research. Activists can and do identify undervalued targets and propose fundamental changes, which could benefit all investors.
However, what looks obvious from an external perspective to an activist may be value destructive for commercially sensitive reasons and the time frame over which activists are investing is not aligned to the long-term interests of the rest of the register. The time, cost and energy which management expend defending an activist campaign can also be a significant drain.
What strategies can companies adopt to avoid disruption by activists?
Be alert to vulnerability. Activists look for underperforming share prices and catalysts. They are also looking for a share register where they can get support and will exploit weaknesses in corporate governance/remuneration votes, or across the range of ESG issues, to establish a stronghold.
Know your share register and how well aligned and supportive it is of company strategy and the Board. Shareholder engagement is now a Board level issue (including Chairman and SID roadshows) and needs to include passive/index funds, given the weight of capital on the register.
There are a wide range of ways to do this via perception studies, intelligence around investor meetings, analysis of register behaviour, developing and accessing new buyers and advice around messaging, strategy and governance.
How should companies engage with activists?
Meet, listen and respond to questions, correct misconceptions, which may be underpinning the challenge. Be aware that the activist is likely to have spoken to existing shareholders before speaking to you and will continue to do so through an investment campaign. They can only win if they can get support, so understand the alignment between the activist and the rest of the register via intelligent targeted engagement on an ongoing basis – that’s crucial when it comes to defending yourself.
