The number of activist attacks launched in the first half of this year was the lowest since 2015: only 522 companies saw public campaigns.

The reason for this was no mystery. Activist funds decided to hold back from making public moves due to the potential reputational risk of acting aggressively during the global Covid crisis.

But that hasn’t remained the case. Activist funds who treaded lightly in March and April, launched 16 new campaigns in May. And many hedge funds are openly raising multi-billion-dollar funds to capitalise on market dislocation. Others’ war chests are ready now, waiting to be deployed as we move into the next phase of the pandemic response.

Jim Rossman who heads Shareholder Advisory at Lazard summed it up when he said, activists are ready “to take advantage of attractive valuations while they last,”  and we will likely see a “strong resurgence in activism in the second half of the year.”

Darren Novak, Head of Activist Defence at UBS, echoed this prediction. “Activists are waiting for second-quarter results to come out to see which companies are most vulnerable. That will be just the beginning of the wave.”

CMi2i shareholder analysis shows increased activist risk in Europe

It appears that activists are not sticking to historically obvious targets, but rather buying stock across a wide-range of companies, waiting to see which ones will present the best opportunity as the pandemic continues to unfold.

CMi2i research conducted over April and May looked at the share registers of 25 European issuers across different sectors and market capitalisations. The investigative analysis led by Dan Stromgren uncovered some 50% more shareholders than are visible in the public domain, and showed that on average, issuers had seven activist fund investors on the register - two of which had invested covertly. The analysis also exposed increases in prime brokerage accounts, as well as six other share register red flags that issuers should be looking out for.

Not only are funds hedging their bets but the formula for activism has changed. The factors influencing the choice of activist targets have shifted in response to the crisis. As revealed in a recent study by EY, focus on share price under performance relative to a target’s peers has declined in importance. Activists are now looking more at the fundamentals of the business than market reactions, particularly with the Covid crisis inciting fundamental strategic and operational changes at many companies.

Also cause for concern is the openness of shareholders to an activist agenda. With the success of an activist ultimately relying on other investors, this element of the equation is of critical importance.  Here we find another red flag. According to IR Magazine’s Shareholder Activism research report, almost  two-fifths (39%) of investor respondents say they are more likely to support an activist campaign than they were three years ago, with almost half of European and Asian respondents agreeing with this statement.

As such the bottom line for issuers is this: you don’t know what you don’t know.  It cannot be assumed your company is not a target for an activist just because the stock is not undervalued, or there is a strong ESG record.

Avoiding an activist attack

Once an activist launches a campaign, the issuer faces a difficult battle. Activist Defences require real-time shareholder intelligence and a highly orchestrated shareholder communications campaign — not to mention a solution to the perceived issues at hand. Identifying a potential attack before it takes place could mean the difference between a long protracted public battle that concludes with the dismantling of the board and the company as it once was, or management maintaining control. Given the widespread and immediate risk posed to issuers, investment banks such as UBS, J.P. Morgan and Goldman Sachs have launched activist defence products, as have management consultancies and other advisory firms across the globe. 

Yet in an ideal world, an issuer never has to employ these services.  They can identify activist risk before a campaign is launched.  They can find and fix the perceived weakness before it can be exploited.  And they can mitigate the risk of a public activist attack.

Conclusion

We live in a new economic landscape, one that provides a fertile ground for activist attacks.

Corporates face a litany of serious issues, from long-term debt financing to day-to-day cash flow.  Monumental decisions are being made about staff cuts, product support and the closing down of sites. Companies are not in a position to fight activists because they are busy putting out other fires.

But even with a high degree of sympathy for issuers’ current challenges and the impossible decisions they now face, it probably goes without saying — there may be no fires to fight if the sparks of activism are identified and dismantled first. 

Learn more about CMi2i Activist Alert & Activist Defence on our website or by emailing info@cmi2i.com.

About CMi2i

CMi2i is a leader in capital markets intelligence, specialising in the world’s most accurate Equity & Debtholder identification service. As an issuer agent, CMi2i supports issuers and their advisors with investor relations, M&A, shareholder activism, capital restructuring and reputation management goals. The company has supported more than 1000 corporate transactions, 1200 AGMs and has over 500 clients worldwide. CMi2i’s LIBOR Solution provides an end-to-end service for issuers wishing to identify bondholders and solicit their approval for the new rate.