Activist investors jeopardizing M&A deals
As the money pouring into activist hedge funds provides added firepower to pursue larger targets and increases activists' influence over M&A transactions, those deals will likely be more difficult to complete.
The overwhelming majority (89 percent) of activists polled in a recent survey expect to see an overall rise in M&A activism in 2014 and many said they are more willing to engage on the acquirer side of a transaction. That was among the key findings of a study by FTI Consulting’s strategic communications segment, conducted together with UK-based Activist Insight and reported earlier this week. The survey consisted of in-depth interviews with top activist investors that have collectively participated in more than 500 activist situations since 2000.
Nearly three-quarters (73 percent) of activists polled said they would stick with the traditional approach of investing in a target company and then exerting pressure to get the offer price raised during negotiations.
While M&A activists are generally supportive of the more aggressive balance sheet approach that acquirers are using to execute deals, a surprisingly high 43 percent of activists said they would try to discourage the transaction and push the acquirer to return cash to shareholders through share buybacks, dividends or divestitures rather than use it for M&A, according to Steven Balet, managing director and activist specialist in FTI Consulting’s strategic communications segment. That kind of activism will put more deals in jeopardy.
The preference for using cash for things other than M&A deals shouldn’t necessarily reinforce the perception that activists are interested mostly in short-term gains, says Josh Black, editor of Activist Monthly, a magazine published by Activist Insight.
‘Activists don’t like diversified businesses. They like businesses that are focused on core operations,’ he says, citing Sandell Asset Management’s recent attempt to get UK-based transportation conglomerate FirstGroup to sell its Greyhound bus business.
As for activists that are in favor of M&A deals, you need look no further than Pershing Square’s Bill Ackman’s partnering with eyecare pharmaceutical company Valeant in its proposed acquisition of Botox manufacturer Allergan ‘to see how creative they can be and how expert they are in putting together deals,’ he adds.
As for strategy, activists are not only originating positions in target companies but also supporting other activists by investing in situations that have already commenced. The survey showed that 69 percent of participants are doing this. That means that once a campaign is announced, an activist can typically count on a significant percentage of ‘follow on’ shares being purchased, which strengthens his bargaining position by creating a larger voting bloc than is indicated by his own share ownership filings.
From the late 1990s to the post-financial crisis era, the focus of activism has changed from convincing a company to agree to be acquired to pressuring a company about how to use cash on its balance sheet, says Balet.
‘There has been a natural progression of that into looking at M&A deals with a balance sheet view, telling an acquirer whether it’s a good deal or not and potentially telling them not to do the deal,’ he says.
Balet agrees that activists have been pushing lately for de-conglomeratized transactions such as CalSTRS’ successful campaign to get Timken to spin off its bearings business last year. And activists are attracting the support of more institutional investors for those suggestions.
Although 87 percent of survey participants said there are plenty of targets in North America, 40 percent said they are shifting their focus to Europe and elsewhere. Because nearly half of European activism occurs in the UK, where corporate governance and legal frameworks are most activist-friendly, UK companies are putting much more effort into activism defense planning, especially given evidence of increasing activism among long-only institutions.
The main differences between activist methods in the UK and US, Black says, is that more of the UK activity occurs behind closed and tends to target small and mid-cap companies, while the focus in the US is increasingly on mid to large-caps.
Media attention has also had a positive impact on activism, according to 88 percent of activists interviewed. Use of social media is one way that activists have become more sophisticated. Although just one-quarter of survey participants already use Twitter and other social media platforms when engaging in campaigns, 69 percent said they expect an increase in use of social media this year.