US investor money continues to flow into European equities. The Financial Times reported in February that US purchases of European shares are at levels not seen for 15 years. If you’re fully invested, or a listed corporate, that should be good news. But what if it’s not that clear-cut? Consider too that activist investors who are prevalent in the US market are experiencing significant inflows of money, earned through some years of successful returns and could be targeting your company.
As it happens, there’s a widespread expectation in Europe that activist activity which has long been prevalent in the US is on the up. Sandell’s buying 3% of FirstGroup, Elliot’s investing in Morrisons and buying more F&C, and Cevian’s involvement with G4S, all serve to bolster this perception. But the contours of an attack can be different. Last summer, two UK institutions unseated a chunk of the board at AIM-listed Gulf Keystone, perhaps not your typical activists (if there is such a thing).
What if the activist money arrives on your share register? As an optimist you might think it’s a time-consuming distraction. That would probably be a mistake. At worst, a small investment and some carefully crafted use of the financial press might be the end of you you as a director, and you as an independent company. When Christopher Hohn’s TCI bought 1% of ABN AMRO, it was the beginning of the end for a Dutch icon. More recently, Carl Icahn, with reportedly less than 1% of eBay’s stock, nominated two new board members for election and launched an aggressive attack on two existing board members.
And don’t for a second think you’re too big. One notable recent battle saw Icahn pushing Apple (market capitalization around $500 billion) to buy back $50 billion of stock.
So my first message in dealing with activist money, would be to look within. Deep down, if you’re a PLC director, you know if you’re a likely target. You need to be mindful of your fiduciary duties of course, but also of your own reputation, which could be vulnerable. At a simple level, you track your shares. You know whether your company is performing in any sense and you know your valuation. You know if your governance really is up to scratch. If you don’t, you should. If you know your house isn’t in order, be very ready for people to take advantage of where you are most vulnerable.
My second message is prepare. What might you do? For one thing, know your vulnerabilities. Find out what’s out there about you and I don’t mean just in the investment banking reports. You might be surprised what lengths a would-be investor might go to make a judgment. These investors are well connected to banks, politicians, fund managers, PR companies, expert networks and many more. Know what’s out there about you!
Third, watch the share register very closely. Your activist can be well under the disclosable limit (3% in the UK) and still create a very big fuss. Look for movements on the register. Look for the nominee names. Use the Section 793. Remember that in the UK there are many trading platforms now. It’s harder and harder for your advisor to really know what’s going on in your stock. Your advisor’s market intelligence can be fragile not what you need at a time like this. Know and understand what you can expect of your advisors in any situation, but particularly here.
Another thing is to engage in regular and responsive dialogue with your shareholders. If you don’t want to sell freeholds and pay down debt that might be fine but debate it, justify it, and explain it. Be clear on which shareholders (if any) disagree. Go through it as a board. Hire someone independent who isn’t trying to be nice to you in the hope of getting the next deal. Rehearse it with them. Get your own PR machine ready.
Do your homework (or get someone else to do it) on the activists. There aren’t many of them, certainly compared to the universe of investing institutions. Know what they have done elsewhere. Know if they’ve been successful they aren’t always. In defeat they do retreat. Speak to people who know them. Engage.
Bear in mind two more things. At the time the activist appears on your register you may not view them as an agent of positive change. Many are, however! Second, the best activists and indeed the best hedge fund managers are seriously good. They’re clever, astute investors. They can and do make mistakes of course, but one thing is for sure: Whatever they’re saying to you or about you, they will have thoroughly researched their case.