Fund chiefs aid activist raiders but in Britain politeness is key
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The asset managers, known for their large index fund ranges, backed the takeover specialist in its £7.9bn bid to acquire engineering stalwart GKN, despite fierce opposition from consumers, politicians and industry groups.
Melrose, which was also supported by activist investors and hedge funds, won the fight by a narrow margin when it secured 52.4 per cent shareholder support. It was the GKN stakes offered up by LGIM and BlackRock that pushed Melrose over the line.
The contest was the latest sign that asset managers and other large investors in the UK are ready to oppose the management of companies, after years of criticism for their mostly unwavering support of British boardrooms. Figures show that many of the world’s fund managers have voted with company management at least 90 per cent of the time at annual meetings.
But several of the UK’s largest investors told FTfm they were more willing than ever to go against British boards during controversial takeovers or aggressive campaigns by activist investors demanding change.
“We often talk to them [activists],” says Richard Buxton, chief executive of Old Mutual Global Investors. “We are not activists but we are certainly active ourselves behind the scenes.”
He said OMGI had spoken to the activists behind two of the most high-profile campaigns in the UK: Ed Bramson’s Sherborne Investors, which is stalking Barclays bank after building a large minority stake, and Elliott Advisors and Sachem Head, which have pushed for a break-up of Whitbread, the hospitality company. Mr Buxton did not say whether he would support their efforts.
Activists, also known as corporate raiders, have long been a part of the investment arena in the US but their arrival in Britain and Europe is relatively recent and was initially treated with scepticism.
Many long-term investors, such as traditional mutual fund managers, feared that activists and takeover specialists were focused solely on short-term returns rather than long-term performance.
But Sacha Sadan, director of corporate governance at LGIM, says activists are often not as bad as they are made out to be.
“The word activist is normally seen as a bad thing but it doesn’t have to be. Activists can bring something to the table. I do think they can be an important part of the investment chain.”
David Pitt-Watson, Pembroke visiting professor of finance at Cambridge Judge Business School, says asset managers are more willing to engage with activists and takeover specialists because of rising pressure on them to be “active owners”.
“It should be completely normal that shareholders are active as owners of companies, that they are asking good questions and make sure the company is run in the long-term interest of the company. But most of the resource of fund managers is put into trading shares rather than ownership,” he says. “Activists help them do that [active ownership].”
According to Activist Insight Online, the data provider, the number of UK companies that were publicly subjected to activist demands jumped from 22 in 2014 to 43 in 2016. It fell to 36 last year but 2018 is on course for a record year, with 16 public campaigns so far. Activists have begun building stakes in shopping-centre owner Hammerson and food wholesaler Booker.
Data from Alvarez & Marsal, a professional services company, shows that the UK market appears to provide good pickings for activists. Its research found that 61 British companies are considered to be at significant risk of being publicly targeted by activists.
A senior figure at a large fund house says: “We knew they [the activists] were coming but it really is building up.”
The campaign in 2015 by Elliott at Alliance Trust, the investment company, is seen by many as the turning point on activism in the UK.
During a fraught proxy battle, Elliott elicited the support of Aberdeen Asset Management and LGIM, two big traditional Alliance Trust shareholders.
It was a sign that traditional investors’ sentiment with regard to activists was changing.
Daniel Summerfield, co-head of responsible investment at USS, the £60bn British pension fund for university workers, says there has been an increase in activist campaigns in the UK and in Europe.
“We are willing to talk to all investors who share a common interest in a company. We are very happy to have those conversations in the initial stages,” he says. “It will depend on what the activists’ objectives are as to whether those discussions continue.”
He adds that as more activists arrive in Europe, it has become easier to understand their style and whether USS would want to work with them, arguing that the aggressive stance of activists in the US does not work in Europe.
“As the activists have developed their strategies this side of the pond, it has become much clearer who we would like to work with. There has been a quick realisation [by many activists] that you can’t apply the tools from the US this side of the pond.”
Many of the most aggressive US activists, including Nelson Peltz of Trian, Carl Icahn and Pershing Square’s Bill Ackman, have either avoided Europe or had limited success. Several investors that spoke to the Financial Times said they would be unwilling to work with activists such as Mr Ackman because of their combative style.
In contrast, one of the most successful campaigns in the UK in recent years was mostly carried out behind the scenes. On the back of its 2015-16 campaign at engine-maker Rolls-Royce, ValueAct was given a seat on the company’s board after agreeing not to publicly lobby for the break-up of the business.
But there are some other big investors who are reluctant to back even the most polite of activists. One UK-based senior figure at a large fund house struck a cautious note, rolling his eyes when asked whether activists were a good or bad addition to British boardrooms.
“We have to be quite careful and quite clear about the alignment of interests,” he said. “There are times when we work with activists and other times we won’t, depending on that alignment.”
Another large UK investor added: “Not all activist investors are the same. For some time we have engaged with them on a case-by-case basis when we feel that they are pushing for change that will create long-term sustainable value.”
For UK companies, the growing influence of activists and takeover specialists, as well as the increasing support from traditional shareholders, could signal big changes and pile pressure on boards to engage more regularly with investors and ensure performance remains robust.
“Your salvation [as a company] lies in knowing the activists cannot win unless they have a very good argument,” Mr Pitt-Watson says.
He adds that while, on average, activist investors do add value to companies, they can also be bad news for wider sectors, leaving companies feeling wary.
“Giving your support to an activist can be very attractive when you are only considering one company, but you need to be careful that the tactics of activism don’t make other companies defensive,” Mr Pitt-Watson says.
Despite the concerns, big investors say they plan to continue speaking to activists and takeover specialists. A UK-based senior investment figure said: “They are not all demons with horns. There are some good ones.”