Ac­tivist tigers qui­etly wait for right time to pounce

The Daily Telegraph - Business - - Business Comment - MAL­COLM MCKEN­ZIE Mal­colm McKen­zie is head of Euro­pean Cor­po­rate Trans­for­ma­tion Ser­vices at Al­varez & Marsal

‘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?

Hit pause

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

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