In June and July of 2016, Schulte Roth & Zabel commissioned Activist Insight and FTI Consulting to interview 37 respondents from different activist firms.
The survey sample consisted of economic activist funds with combined assets under management of $153 billion that have engaged over 420 companies in more than 50 countries in public activist campaigns since 2010, including some of the largest and most high-profile situations. Respondents were asked about their experience with shareholder activism in their respective regions and their expectations for activity in the next 12 months. All respondents are anonymous and results are presented in aggregate.
Schulte Roth & Zabel foreword
Corporate advisers had predicted, or at least hoped, that a combination of factors – increased competition in the activist sector, fewer attractive targets, increased engagement by institutional investors and some poor returns in 2015 and early 2016 – would stem the rise of shareholder activism in 2016. While the headwinds led some to believe that activism must have peaked, the activists are having none of it and continue to expect the level of activism to rise. The market has evolved into a complex dance between public companies familiar with the classic activist playbook, newcomers making forays, and seasoned players engaging in unique types of campaigns.
If anyone thought that the vulnerability of multi-billion dollar behemoths such as Apple, Allergan, DuPont and Yahoo in the past two years was an anomaly, activists’ large cap campaigns in 2016 were a wake-up call. The number of campaigns at large cap companies for the first three quarters of 2016 has already surpassed the total number of such campaigns in 2015 by 20%. Given the finite number of large cap companies, however, activists in our survey reported that they do not anticipate significant future activism in the largest companies, with over two-thirds of respondents predicting little to no activist opportunities in the mega cap sector.
With companies now well-studied in classic activist campaign tactics, those targeted by activists know better than to pull from the old bag of tricks like poison pills, shareholder-unfriendly bylaw amendments and litigation. Companies have come to understand that to stand a chance, they must engage in early and open dialogue with investors – both active and passive. Where in the past activists often criticized companies for aggressively attacking their shareholders, many companies have pulled from the shareholder playbook and now regularly accuse agitating shareholders of “not playing nice.”
Regardless of the public posturing of targeted companies and an increase in the average length of time before companies enter into settlement agreements, a majority of activists reported that they were able to more easily settle disputes with management teams in 2016.
In 2014 and 2015, activists running majority slates became a norm, with nearly one-third of proxy contests seeing a majority slate proposed by activists. A significant percentage of respondents expect even more majority slates to be a cornerstone of activist campaigns through 2017.
Proxy contests, however, only represent one tool in the activist playbook. A majority of activists expect to see an increase in precatory proposals over the next year. After Carl Icahn’s successful push at eBay for a PayPal spinoff following his announcement of a precatory proposal, and Relational Investors and CalSTRS’ success with a similar proposal at Timken, activist funds have grown to appreciate that success does not always require a fullfledged proxy fight. While such proposals are nonbinding, companies know that the failure to implement a proposal supported by shareholders will lead to increased scrutiny from Institutional Shareholder Services possibly including withhold recommendations, and an increased likelihood of a fight with shareholders next year.
Fading are the days of the “activist season” – the predictable six-month stretch between the time when activists build their stakes and submit notice of their proposals to companies and whenannual meetings are held in May and June. A significant number of activists have turned to post-annual meeting tactics, such as the use of special meetings, consent solicitations and simple public campaigns, to exact corporate change. Thus, not only should we expect activism to continue to thrive, we should expect it to become an ever-present activity in the marketplace seeking to unlock value and hold managements accountable.
Marc Weingarten, Partner, Schulte Roth & Zabel
Eleazer Klein, Partner, Schulte Roth & Zabel
Activist Insight foreword
These are hugely interesting times to be covering the world of shareholder activism. After three years of activism going from strength to strength, there are again questions about whether this growth can be sustained. Some have argued that there is a brewing rejection of activist ideas by other investor groups, or that capital will be pulled from activist funds as rapidly as it has been poured into them. Sudden dislocations in the market – last September and in January of this year – have added to the conviction of these voices, especially when prominent activist positions have been among those to suffer.
The evidence of this survey suggests activists are far from pessimistic. While there is plenty of nuance in the pages that follow, activists believe most stakeholder groups have become more accepting of their role in capital markets, that the volume of activism will at least stay the same, and that they will continue to find management teams willing to work with them to create value. Many are even planning to add to their assets under management.
In particular, activists believe companies remain keen to settle campaigns before they get out of hand, even though the time taken to negotiate such agreements has lengthened. This may not be a contradiction – activists are not becoming any more modest in their demands, if their expectations for majority slate contests or special meeting demands are anything to go by. Yet the diversification of activism has made room for many different approaches. Sandell Asset Management may be followed by many other firms, if its use of a precatory proposal at Bob Evans Farms helps prompt a strategic transaction.
Although recovery in the markets has surely helped ensure that activists do not feel under siege, there are signs that their jobs will become slightly harder. Despite slightly more optimistic responses than last year, many still feel that the US, historically the source of most activist opportunities, is overcrowded. Favorite sectors to target, such as consumer goods, appear to be more fully valued. Larger targets are less plentiful. All of the above may push some activists overseas and the evidence is that Europe and the UK in particular, will be the focus of attention if this is the case. If anything, “Brexit” may have made these two destinations more attractive to activists. By contrast, fewer activists seem to be intrepid enough to follow the likes of Elliott Management and Third Point into Asia.
The sections of this report dedicated to how activists identify their targets contain insights rarely touched on elsewhere. First, it is performance that matters most, not valuation (surprising, given that many activists see themselves as value investors first and for emost). Second, although activists expect their investments to last three years on average, and spend six months researching before buying stock, M&A opportunities are the most prominent catalysts. The selection process is therefore a mixture of careful review and opportunism, not one or the other.
We at Activist Insight are pleased to be collaborating this year with Schulte Roth & Zabel and FTI Consulting – two firms we already have strong relationships with. This is our third year conducting this survey, and the results have always been interesting and often predictive about the trends we can expect to see in the year ahead. They will help guide our editorial decisions – especially as we add to our team of reporters in our London and New York offices.
We hope you will enjoy the analysis in this report. If you have any questions or observations about its findings or shareholder activism more generally, I would be delighted to hear from you.
Josh Black, Editor-in-Chief, Activist Insight