Long activist funds have led several battles in France in recent years, shaking up the governance of some companies to the point of radically changing them and even knocking heads. And, as the pandemic crisis comes to an end, experts show that this risk is still increasing for many reasons (abundance of cash, creation of dedicated SPACs, commitment of funds to governance or CSR issues, etc.). The activist’s main weapon is the public campaign and therefore an aggressive communication, so it is on this very field that one must know how to counteract.
They are called Elliott, Amber, Artisan, CIAM, TCI, Third Point, Blue Bell, Engine N°1 etc. and are unknown to the public, and sometimes even to the companies they attack, often by surprise. More and more European companies have had (or will have) to face activist funds, most often at their expense, whatever the extent of the damage.
The coronavirus outbreak put a damper on their efforts. But in the last quarter of 2020, they came back and increased their attacks: Lazard counted 57 new campaigns (a 128% increase over the third quarter), a little more than half of which were in the US. And the risk is likely to increase according to a recent study by the consulting firm Alvarez & Marsal, of the 1,600 European companies it monitors, 10% “run a significant risk” of being targeted by an activist campaign in 2021, particularly in Great Britain. The issue here is not to sort out whether activists are ugly vultures hungry for short-term gains (a complaint often levelled at them by their prey, but which they could not care less about) or valiant knights who defend the Governance’s widow and her orphans the minority shareholders. Everyone will have his or her own opinion on the question, depending on which side of the capital he or she stands.
French issuers, frightened by the audacity of these hedge funds have tried to barricade the country by shoring up the regulatory framework to protect local companies. But the Finance Committee of the French National Assembly, after having studied the subject diligently, has just issued a few recommendations without much impact. Rightly so as if corporate governance bars have raised significantly over the last 20 years in the country, there are still enough points of improvement not to limit critical expression. The legal bulwark having failed, managers have no choice but to prevent the arrival of “barbarians” at the gate. The safest thing to do is to constantly think about the best interests of shareholders, for example by not favoring growth at the expense of profitability (on the long term), by ensuring that executive pay packages is properly correlated with stock market and financial performance, or by making sure that board committees include enough truly independent directors.
The talent of the active shareholder is to federate others
If these fundamentals are solid, there is not much catch, and the risk of attack is fairly low. If there is a flaw, the activist fund will rush into the listed fortress via the governance or management problem after having perfectly documented it. Whether it is a poor performance compared to peers on the stock exchange, unsatisfactory ratios (ROCE, EBITDA, gearing), a lack of action on greenhouse gas emissions or some takeover price deemed too low… One thing is certain, whether the company admits it or not, the said subject is real, since a prominent financial expert, with years of experience, lots of side counsels and often many successful campaigns under his belt, is ready to fight to change it. His leverage is a share in the capital which is certainly small, but which is in fact considerable in large companies with fragmented shareholdings. Specifically as the talent of the active shareholder is to know how to unite the others behind him.
At this stage, it’s wise to put egos away. Indeed, a few cases (like Pernod Ricard against Elliott) have shown that it is more effective in the medium term to treat the activist investor as a demanding sparring partner than as a blind adversary. Indeed, if several private discussions do not lead to an agreement, the worst is yet to come for the image and stability of the company under attack.
The public campaign, orchestrated by a communications consultant, will last for months, and will publicly expose the subject of discord in all possible media. Press articles, of course – because the media love derailed trains and street fights between capitalists – but also presentations to proxy advisors, letters to the board of directors, open letters etc., relayed by ad hoc websites and social networks… All this ending up in the ring of the general meeting of shareholders where the enemy fund will table resolutions to achieve its ends, several years in a row if necessary. Time is often on their side.
On the side of the company under attack, to avoid this fist-fight, the defense communication must above all be serene. First of all, cries about the “value hunter”, claims that the share of capital held is too small to matter, or denigrating the “foreign attack”, demonstrate a form of panic and second, none of these arguments is solid enough. Hardly more convincing is the temptation to resort to a legal response, like Lagardère to Amber, which will generate even more public uproar and negative articles.
Strategically, the right way to respond is to meet the investor regularly and discuss his proposals. On the one hand, to consider the possibilities of giving him guarantees on certain points, possibly negotiable. But above all, to manage the pace and keep the communication as focused and positive as possible and thus reduce the “visible” pressure of the campaign. Tactically, the meetings will provide material for communication on the stages of the discussion, the positions and concessions of each side. This will give the media, employees and other shareholders, the true arbiters of this battle, the positive image of a constructive company, open to changes, which can rethink its strategy in a certain limit.
