Activist tigers quietly wait for right time to pounce
‘Those carrying on guns blazing through the pandemic would have run a big risk of being seen as tone deaf’
When facing a world of turmoil and unpredictability, having one less opponent to worry about should be welcomed. This will very much be the case for UK corporates right now, who are having to fight fires from all angles amid the devastating impact of the Covid-19 pandemic.
What many besieged companies may not have noticed, during the chaos, is that there has been an uncharacteristic quietness from activist investors of late.
Is this relative silence evidence of a something here to stay, or is this merely a moment of respite before the activist tiger pounces?
This was supposed to be a big year for activist campaigns, with an increased number of UK and continental European corporates in the firing line. But then Covid-19 hit, bringing disruption and ripping up business plans, resulting in a rewriting of the corporate landscape.
Amid the turmoil and market unpredictability, activists have lost visibility, and have largely moved away from major public campaigns. Those carrying on guns blazing through the pandemic would have run a big risk of being seen as “tone deaf ”, and so lacking broader market support.
Many campaigns have been put on hold, notably Sherborne Investors’ two-year campaign to oust Barclays’ chief executive, Jes Staley. This backing off was attributed to the “complexity of the management situation” in light of the Covid crisis.
Meanwhile, some expected campaigns just didn’t materialise at all. In fact, the number of corporates targeted by activist funds in Europe in the second quarter of this year was 50pc lower than in the same period in 2019.
But while activists during this period may have looked like swans – quiet and unassuming above water, underneath, they have been paddling furiously.
Encouraged by a market hungry for yield and with little patience for underperformance, more than ever, the activist funds are looking for opportunities to strike. This severe disruption we’re seeing at the moment will turn in their favour, exposing the weaker performers who have previously been masked by a booming market.
In these recent months when all has seemed quiet on the surface, activists will have been quietly building up their positions in target companies. And as the dust starts to settle on “peak Covid”, they are now narrowing their focus, building their arguments and preparing to launch their attacks.
This is the calm before the storm.
What was in their sights?
With second-quarter results season upon us, now is a key moment where the full Covid impact starts to reveal itself. Activists will very soon be able to see which corporates have been well led through the storm, and which have fared less well in their efforts to preserve shareholder value.
That’s why we’re predicting a large uptick in activism in the UK as we move into the second half of the year. These attacks will be opportunistic and cross-sector – although our analysis of early indicators suggest that the industrials, healthcare and technology sectors will receive particular focus from activists in coming months.
On the other side of the equation, some sectors that have been worse hit by the Covid crisis will drop further down the activist target list as they enter into “distressed” territory. This is true of the consumer space, in particular retail, which no longer has the pulling power it used to hold for activists.
As activism starts to pick up again, we’ll see a resurgence in demands focused on operational and financial restructuring, M&A, and some ensuing industry consolidation. On top of this, we can expect to see an increase in demands centred around Environmental, Social, Governance (ESG) causes. While governance has always been a key area of focus for activists, environmental and social causes have historically carried less weight. But this is changing, and the greater societal challenges wrought by Covid will accelerate market and shareholder awareness.
As the link between strong ESG ratings and heightened financial performance becomes harder to dispute, activists will have more to gain from advocating for change in the social and environmental space. Those that take a bolder stance on these types of issues can be seen as acting for the greater societal good whilst ( given the higher ratings for companies with good ESG ratings) also bringing greater financial value to all shareholders.
Businesses seen to not look after their staff, customers and suppliers during the crisis may find themselves under attack. Take Legal & General, which recently threatened action against companies who mistreated employees or suppliers. Or on the environmental side, TCI Fund Management, which vowed to penalise directors of companies that failed to disclose emissions. As shareholders become more vocal on these issues, this traction will build.
Time for action
Boards viewing the lull in activism as the new normal will be left smarting. More than ever, it is critical that boards can see through the turmoil wrought by Covid, understand their relative operational and financial performance and act to drive a stronger return to their shareholders and wider society. Above all, clear and consistent leadership is key, and boards must work tirelessly to demonstrate this.
Now is the time for bold action – it is not a time for hiding. There can be no off-limits areas. Without this laser focus, companies won’t have long before the activist tiger pounces.
The activist campaign against Jes Staley, the Barclays chief, has gone quiet as the pandemic raises greater issues