The activist investor’s effect on dealmaking has manifested in a number of ways over the past few years. David Whissel, executive vice president at MacKenzie Partners recently told Activist Investor that M&A-related activism is “now essentially a permanent fixture of the capital markets.”
Often the focus is on driving transactions by placing pressure on companies or, on the other side of things, acting to get a deal shelved. According to recent data from Activist Insight, eight U.S. companies saw acquisitions opposed by one of their shareholders in 2019. It’s the highest since 2013.
Another strategy is “bumpitrage” – a tactic where an activist investor buys shares in a company that is in the midst of a takeover and then uses their influence and position to cast doubt over the current bid and drive the company to renegotiate. The tactic has started to spread outwards from the US to the global market.
“Having originally built on experience gained in intervening in public bids in the US, activists have now adapted this strategy for the UK market,” writes Sam Bagotand Dan Tierney at Cleary Gottlieb Steen & Hamilton LLP in an article for Financier Worldwide. “Activists frequently seek to exploit minority shareholder protections built into the UK legal framework for takeovers, which are implemented through either a scheme of arrangement or a contractual offer.”
Bumpitrage campaigns have had some success over the past decade. According to Activist Insight, between 2013 and 2017, 18 successful campaigns boosted purchase considerations by an average of around 21 percent.
Having a Say on Leadership Teams
In the current climate, shareholder activism seems to be focused on senior leadership. According to data from Lazard, in the second quarter of 2020, half of all activist campaigns have involved targeting boards and management teams. It’s a jump from 33 percent in the first quarter of 2020 and the whole of 2019, an unsurprising one at a time when leadership is critical to weathering the ongoing crisis.
A prime example is Privet Fund Management’s recent posturing. In March, after two rebuked offers the previous year, Privet Fund Management (which isn’t an activist per se but has used activism as a tool) partnered with UPG group to get five director candidates elected to chemical manufacturing company Synalloy Corp.’s board. By June they’d clinched three seats.
The focus on leadership campaigns could be, in part, due to increasing headwinds for M&A surrounding COVID-19 uncertainty. According to Lazard, only 34 percent of campaigns in the first half of 2020 featured an M&A objective, a dip from 47 percent in 2019.
“Around 30 percent of all H1 M&A campaign activity occurred in February alone, prior to the onset of COVID-related volatility,” according to Lazard’s Review of Shareholder Activism.
It’s a reprieve, but as major multinational investment banks have indicated, a brief reprieve at that.
Tactics That Blur Lines Between Private Equity and Activism
More recently, traditional shareholder activism has seen some movement towards private equity transactions, adopting private equity approaches to accomplishing goals that might’ve required activist tactics.
Elliott Management, one of the largest activist investors in the world, utilized its private equity arm to take a traditional approach to acquire network software firm Gigamon for $1.6 billion in 2017. It did it again this past year with bookseller Barnes & Noble. Activist investor Starboard Value took a private equity approach last year with its $200 million strategic preferred stock investment in pizza chain Papa John’s alongside an agreement over changes to corporate governance.
And likewise, on the inverse, private equity has borrowed tactics from the world of activist investing. It makes sense, Mackenzie Partner’s Whissel told Activist insight, even with the “contractual and cultural limitations on a private equity fund’s ability to wage proxy contests or hostile takeovers.”
“The amount of research and due diligence that goes into each investment, the long-term nature of each project, and the focus on using different capital allocation and operational efficiency levers to drive returns – it’s understandable that private equity investors would begin to borrow certain tactics from activists,” says Whissel.
The blurring of lines helps boosts an activist’s credibility when it approaches a company, there’s a promise that the activist will – whether by taking a long term position in the company or through activist tactics like public demands – pursue that change.
As Innisfree Chairman Arthur Crozier told Activist Insight, “Private equity is now very crowded… expanding into activism provides a wider range of targets.”
Trying Harder, Failing more
For activists shareholders, 2020 has already proven an active year. According to a report from CGLytics, there were 797 campaigns in the first half of the year alone. Yet very few of these campaigns have been successful.
According to the report, 38 percent were unsuccessful or withdrawn leading to 283 failed campaigns so far. It’s a rising failure rate when contrasted with 185 in 2019, and 132 failures in 2018. But that doesn’t mean the activist influence on deals is decreasing. In fact, failures have their own undesirable effects.
“Whether activist campaigns are successful or not,” write the authors of the CGlytics report. “It is important to note that any activist campaign brings negative publicity, takes time to arrange, and in many ways disrupts the activity of a business and its management.”
Illustration by Christy Lundy