Companies have always viewed delivering profits, healthy dividend payments and a stable, or rising share as the best way to ensure positive investor sentiment. If companies want to deal effectively with activist investors, communication is key.
Activist investors are on the rise. Recent research from asset manager Lazard identified activist campaigns at 226 larger companies globally in 2018, a 20% rise on 2017, with activist funds investing a record $65bn of fresh capital. Meanwhile, the Activist Investing Annual Review 2019, produced by Activist Insight in association with international law firm Schulte Roth & Zabel, noted there were as many as 922 companies targeted in 2018 worldwide compared with 856 in 2017. Asia hit a record high in 2018 with 111 companies targeted, just slightly lower than the figure of 148 for Europe. While such statistics may strike fear in the hearts of some boards and chief executives, having a clear investment research strategy focused on a number of key measures, can combat or even prevent activist investors from taking predatory positions and fomenting unrest. Keeping close to shareholders by constantly communicating with them, monitoring shareholder registers, building relationships with funds or individuals that take up significant holdings, developing strong links to investment analysts and having a strong social media presence are all very effective measures that companies can take to guard against activist investors.
Activist investors have a long history
Few companies welcome the arrival of an activist investor. It’s not hard to see why. The emergence of activist investors in the 1980s, saw them aggressively buying up large amounts of shares in target companies often in an attempt to trigger demergers, management changes and share buybacks. Harassed targets occasionally accused raiders of “greenmail” – buying shares in a company and threatening a takeover, forcing owners to buy then back at a higher price – or demanding money as a condition for lifting their siege. And while less common today activist investors still engage in aggressive public attacks, litigation or even proxy battles, with the ultimate goal of many to secure a seat on the board of the target company to influence its future direction and potential growth.
Even the largest companies are not safe
This year has already seen a sharp rise in activity amongst activist investors and with Sterling continuing to weaken against a basket of currencies – in particular the US dollar – there have been warnings that many of the UK’s largest companies are at risk of being swamped by activist investors as they fail to satisfy shareholders, with companies including Whitbread, Centrica and Next among 54 businesses identified as being vulnerable. So far this year US-based investor Edward Bramson has already applied pressure on Barclays bank through a stake held by his Sherborne vehicle, in an attempt to muscle his way on to the bank’s board. Elliott Management, Paul Singer’s hedge fund, is making noise about governance and unsatisfactory profit margins at Pernod Ricard, the French spirits maker. Hedge fund ValueAct’s two-year campaign at Olympus, its first Asian investment, resulted in a deal to appoint three non-Japanese board directors and it is reported to be seeking a new Japanese target.
Most recently Crystal Amber, the activist investment fund has threatened printing giant, De La Rue with plans for an emergency general meeting of shareholders to force chairman, Phillip Rogerson to resign. Chief executive, Martin Sutherland has already done so following a torrid year for the company which has seen its share price fall 45% in the wake of several significant setbacks, not least of which was the loss of the government contract to continue to make British passports, while there have also been a number of profit warnings. Crystal Amber, perhaps understandably, is concerned this leaves De La Rue vulnerable to a takeover bid that might harm its investment. In a development that as has surprised the City meanwhile, Elliott Advisers, the UK subsidiary of an aggressive $34bn US hedge fund, has recently taken a 5% stake in the over-50s insurer Saga, a relative minnow given Elliott Advisers normally takes positions in FTSE 100 companies. Such is the level of activity one might be forgiven for thinking no company is safe.
Fundamental part of a company’s IR strategy should be to keep very close to shareholders
But activist investors can only thrive in an environment where a company has neglected its shareholder base. While it may sound obvious, maintaining a close relationship with investors is a fundamental part of any approach if a company wishes to avoid activists from hijacking shareholder meetings or calling for new a strategy or, worse still, a change of leadership.
Among the actions a company’s board of directors can take to mitigate the threat posed by activist investors is to regularly communicate with their investors as well as the wider market. Regular trading updates are vital. They should also be honest: if there are problems within the company identifying those early and communicating how the company intends to deal with them is vital. It shows leadership, a willingness to be self-critical and a commitment to make improvements. It’s also shows transparency. One of the great mistakes that companies make is that they do not report for months on end. This can lead shareholders to distrust the management team or feel taken for granted, neither of which is helpful.
Treating all shareholders as equal, regardless of how many shares they hold, is also wise. Those with larger holdings –such as pension funds that can claim to represent a large number of smaller investors – may argue that they entitled to a greater amount of information and/or influence but in reality providing information to larger shareholders, while keeping smaller investors in the dark, will only lead to resentment which an activist investor will be able to exploit.
Boards need to monitor shareholder register changes and foster new substantial shareholders
Something that many large corporations ignore is their own shareholder register. This is dangerous for two reasons: firstly, it enables activist investors to take a position in the company that gives them potential influence over the direction of the company and secondly boards miss opportunities to build strong relationships with new substantial shareholders. As a case in point, for the past six months Just Eat has found itself under attack from US hedge fund Cat Rock, which has criticised the takeaway app’s ‘unambitious targets and flawed incentive schemes’. The US hedge fund, has built up a 2% stake in Just Eat over the past two years and towards the end of last year began to criticise the company for becoming “the worst-performing public equity in online food delivery”.
In December, Cat Rock urged Just Eat to shed assets, change pay incentives for senior executives and announce three-year financial targets by the end of January. By February Just Eat chief executive, Peter Plumb – after just 16 months in the role – was forced to resign and the company came under renewed pressure from Cat Rock, which this time began calling for the company to merge with Dutch rival Takeaway.com, in which the hedge fund held a 4.9% stake. While Just Eat said it took “communications with all our shareholders extremely seriously” Cat Rock was able, with just a 2%
stake, to apply significant pressure on the company. Soon after Just Eat reported revenue rose 43% to close to £800m last year, reversing losses from a year earlier. It also reported profits of £80m with full-year 2019 revenue expected to be between £1bn-£1.1bn. Yet none of this persuaded Cat Rock to give up its attack on the company.
There followed market speculation that Amazon could take a stake in Just Eat after the Competition and Markets Authority issued an initial enforcement order regarding Amazon’s minority stake investment in Deliveroo, believing there was evidence that the two firms were planning to merge. By July having still not found a new chief executive Just East bowed to the pressure from Cat Rock and announced its merger with Takeaway.com.
Could Just Eat’s predicament have been avoided? We cannot know for certain but if management had kept a closer eye on who was buying the company’s shares and reached out to new and potentially significant shareholders, this would definitely have helped.
Investment research can help maintain a strong investor and shareholder profile
Investment research is also a key tool in companies’ armoury to help maintain a healthy relationship with investors. All senior company executives want to communicate a positive narrative around their company’s growth trajectory and future plans. Independent research can support and amplify this. Having the backing of analysts who agree with the underlying business model and believe that the strategy the company is pursing will yield the desired results can help prevent or mitigate activist attacks.
Equally, independent investment research may highlight some areas where improvement is required or where a particular strategy may have unintended consequences and so may help the company to address problems earlier. It may also highlight to the company areas of concern its shareholders may already have, as well as maintain a healthy profile with its retail investors. A common mistake most companies make is believing that performance alone is sufficient to maintaining a strong relationship with investors. While paying a healthy dividend to shareholders and returning value through a rising share price will be appreciated by investors, analyst research that supports the company’s vision or highlights areas for improvement that the board actively engages with will ensure that more difficult periods are dealt with most easily than might otherwise be the case.
Digital defence – use social media to reach out to investors
Boards and senior management need to communicate as effectively as possible with their shareholders. Today this means engaging with using social media. It is not enough to use traditional media or trading updates. If an activist investor is calling for change, it is vital that senior executives know the view of shareholders. A social media campaign that targets a meaningful sample size of institutional and retail investors can help companies gain that knowledge in advance. This goes deeper than simply looking for social media posts where investors actively complaint about the company. It extends to the use of emoji’s, and Likes. If there is a Facebook page through which shareholders speak to one another and share their concerns it is important that companies are aware of what those concerns might be. Obtaining insights into investor sentiment on key issues can be invaluable. A recent survey by a global communications consultancy found that 90% of buy/sell-side investors used social media to research investments.
For a company already under attack from activist investors, a coordinated approach across multiple online platforms is likely to be necessary. LinkedIn is probably the best way to reach institutional shareholders. Placing ads on Google search to direct investors to a proxy microsite, which can give
answers to questions that shareholders are asking. Targeted ads on Facebook can place key messages into the newsfeeds of retail shareholders and employees. Display ads can appear alongside top-tier news coverage. Having an effective social media strategy does not guarantee victory in a battle with activist investors – but not having one would likely be a key factor in losing it.
Companies have always viewed delivering profits, healthy dividend payments and a stable, or rising share as the best way to ensure investor positive investor sentiment. If companies want to deal effectively with activist investors, communication is key. Fundamentally, companies need to maintain the same attitude they would have once had with their investors, reassuring them that their investment is safe, the company is honest and can be trusted and that is takes the concerns of its investors seriously. To do this they must engage positively with their shareholder base, both through investors relations communications but also through media and social media channels but they must also be equally active in putting an effective investment research strategy in place.
Rachel Carroll is President, Managing Partner Edison Inc