What’s behind drop in M&A activism

Numbers much smaller than in previous years

Of all t he numbers contained in the special report on M& A activism, prepared by U. S. based Activist Insight and Canadian- based Kingsdale Advisors, two stand out as being different: 26 and 1. They relate to the number of M&A-related public activist demands in the U. S. and Canada respectively in the first quarter.

The lone Canadian transaction on the list is the acquisition of RDM Corporation by a subsidiary of Deluxe Corp. Broadview Capital encouraged the US$ 72million deal. Broadview’s Lee Matheson was an RDM director and said Thursday “the Deluxe acquisition was the best outcome for shareholders.”

The t ransaction came about three years after the board started identifying and reviewing potential acquisition targets in North America. After determining that the targets had become too expensive, in mid-2015, RDM launched a strategic review to ascertain whether there were any companies, which would want to purchase RDM. That search ultimately led to the deal with Deluxe.

The numbers for this year are significant because they are so much smaller than the comparable numbers in previous years.

For instance, for all of 2016, there were 147 such demands in the U. S. and 17 in Canada. The peak was in 2015 when there were 151 such actions in the U. S and 20 in Canada.

It’s not obvious why there has been a remarkable slowdown in activist demands. One possibility is the uncertainty engendered by the election of Donald Trump. ( It’s also not known if there is any seasonality in the activist world, given that the numbers for previous years are for the full year.)

Complicating the situation is the report’s contention that “only one- third of activist scenarios become public.”

The demands from activists are different from proxy battles — and t here are two underway at present: FrontFour vs. Granite REIT and PointNorth vs. Liquor Stores — because of what the activists want to achieve.

The data focus on four such goals: pushing for an M& A transaction, opposing a transaction, wanting to split the company, and making a takeover bid. Since 2010, and for both Canada and the U. S, 47.4 per cent of the demands have been to push for a transaction.

For Canada, the numbers show that 45 per cent of the M& A activism, between 2010 and 2016, “was aimed at preventing deals.” The report notes for Canada the bulk of the activist M& A demands ( 84 per cent) was focused on opposition to the terms of previously announced acquisitions. Accordingly activists typically don’t want to kill the deal; instead they want to reprice it.

The report shows M& A activists take a fairly broad sweep when i t comes to which industries to focus on.

While companies in the basic materials business are at the top of the pile, “services and technology companies” are the next most frequently targeted. Software and semi- conductor companies are vulnerable as are retailers and restaurant chains with significant real estate assets.

But when the M& A activist arrives, there is a good chance it will be at a company that has a market cap of less than $2 billion. Since 2010, about 60 per cent of t he companies t argeted have been in that range.

The report makes a number of recommendations and gives ideas on how to deal with an M& A activist. One key element is that management must know the top 20 to 30 shareholders. Another is to be prepared for surprise as the report notes that the number of “friendly negotiated” M& A transactions voted against by ISS has been “increasing steadily” over the most recent years.”