Activists’ interest suggests UK market has a management problem

The UK’s persistently undervalued stock market is irresistible to global activist shareholders. Campaigns rose across Europe last year, according to data from consultants at Alvarez & Marsal. The UK was the most popular location for the seventh year running.

This is a dubious distinction, given concerns about UK equity market malaise and longstanding underperformance. But the agitators appear to have had some success. Two years after an activist shareholder campaign, according to the data, UK company share prices beat the wider market by 9.2 per cent. Campaigns in the US and Europe generated lower outperformance of 6 per cent on average.

The UK’s appeal to activist investors makes sense. Not only does it have more listed companies than other European markets but share registers are more open. Larger free floats help in two ways. There are fewer large, influential owners, including families or founders, who wield influence over the company. A more distributed shareholder register can also mean a more willing investor audience to coalesce behind activists’ demands.

But the market may also simply be ripe for their intervention. A&M’s analysis suggests that activist campaigns focused only on dealmaking, governance or environmental and social factors reap lower rewards than those that home in on operational performance. Bumpitrage efforts — where shorter-term activism can boost takeover offers — yielded positive results at deals for tobacco group Swedish Match and UK software group Aveva.

The UK market trades at roughly a one-third valuation discount to global stocks. There is much debate about whether sector composition, growth outlook, income-focused investors or waning domestic pension money is the root cause. The repercussions, however, are clear given the rise in private equity-backed takeovers and a growing roster of companies, such as Tui, CRH and Ferguson, opting to move their listing overseas.

The A&M findings add weight to the optimists’ case: That UK stocks trade at lower multiples because they offer lower returns and that, once adjusted for this, the discounts often disappear. Activists who campaign to improve UK operating out-turns yield better outperformance than in other markets: 15 per cent in the two years following vs 9 per cent on average. 

For UK targets, noted A&M’s Paul Kinrade, outperformance was more heavily weighted towards earnings growth than multiple expansion than the average. That might suggest that the UK’s crop of blue-chips offer more scope for tougher management and the cutting of corporate fat than elsewhere.

Those bemoaning the UK market — both executives and reformers overhauling governance and listing rules to ape global competitors — should also look closer to home to explain underperforming shares.

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