In an article published in 2015 I claimed that shareholder activism is on the rise in Europe. As predicted, the wheels have been turning. International law firm Fried Frank reports that in H1 2018 (first six months) there has been a resurgence of activist campaigns in public companies seeking inter alia change in target company board, sale of the target or one of its divisions, or blocking or improving terms of a take private offer. Overall in H1 2018 the amount of capital deployed in activist campaigns doubled in Europe compared to the annual average in 2013–2016 and already 25 percent of capital used globally was deployed in Europe.
It is a rare public tender offer in Sweden that is not affected by a well-known activist fund acquiring a blocking +10% stake. In Finland we have also seen some board proposals voted down in shareholders’ meetings with institutional investors joining in the vote with an activist player and demands for board seats, sale of divisions and special audits. Given that Finland has the same squeeze out threshold as Sweden (i.e. 90 percent of outstanding shares and votes) it is just a matter of time when the same player(s) active in Swedish take privates start taking blocking positions in announced Finnish friendly deals.
Historically Finnish boards and incumbent blocking position owners have been able to resist take private offers outside the public eye. The accepted wisdom has been that bear hugs (hostile take private offers) are neither welcome nor achievable in our business community. Private Equity fund documentation may allow take privates but usually forbids hostile investment strategies. Activists (whether supported by their own balance or acting as third-party fund managers) are not subject to any of these constraints. The activist game book includes seeking and encouraging third parties to make take private bids and public letters openly and loudly questioning the board’s and other shareholders’ resistance on welcoming a bidder.
So once again it is worth considering what one can do to prepare for an activist campaign. To begin with, there is no substitute for a business strategy that provides competitive earnings in peer valuation. The board should periodically update the company’s valuation based on the approved business plan, so that it can always on a fairly short notice determine whether a given take private approach is value creating for the shareholders. This will also help to defend cold shouldering low ball offers that start creeping up at times of declining share prices (the next upcoming downturn). There is no excuse of not being up to speed with short- and long-term investor sentiments and activities. The boards should have an understanding on how the take private game is played and have a manual on what to do when the activists come knocking on the door.
My intention is not to glorify activist strategies by any means. The US debate on whether activists are good for the long-term business strategies of their target companies is worth visiting. So, being aware of “snakes” is not promoting snakes as pets. Putting one’s head in the bushes in full denial will, however, no longer be a winning strategy as it comes to activists.
This blog post was first published on DIF’s website.