What's driving the rise in shareholder activism?
In recent years, we've seen a significant rise in shareholder activism, in large part due to the divergence between passive funds, so index funds and ETFs, and more active strategies, like we expect from regular weight institutional investors and some of the hedge funds.
Activism delivers alpha because the managers themselves are able to say, we're actually asking for and pushing companies to make specific change that they expect to be value enhancing. The fund managers can say, it was our change, our push that drove that value enhancement, and take credit for that.
Historically what we had seen was, activism was particularly prevalent in the United States. What we've started to see much more recently is, we've seen a rise of activism in Europe, with a significant growth in activism since 2010. We've also seen Asia accelerate the pace of activism, in particular in Japan, where we've seensome governance enhancements that have also made this interesting and attractive for shareholders.
And the US continues to be a strong place for activist investing with US funds leading the charge both here and internationally, and in particular targeting larger companies.
How activism drives and hinders M&A
We see activism serving as a catalyst for M&A in two primary ways. First, we see activists taking positions in companies in consolidating industries, and often times taking a public position and stating the company should be for sale, even if management has not agreed to that.
The other thing we've seen activists do is really focusing on some of the larger conglomerates and trying to break those up into their smaller component pieces, often resulting in either spinoffs of particular subsidiaries or even sales of certain assets. On the other hand, we see activism often as a hindrance to M&A transactions.
We see activists engage in bumpitrage. In bumpitrage, the activist will take a position in a target company stock, and attempt to hold up the deal, and use that position as a way to advocate for either an unwind of the deal, or to attempt to change the terms of the transaction, effectively looking for a "bump", from them for the acquisition value.
A more recent phenomenon that we've been seeing is activists taking a position in the actual acquirer's stock and then agitating at the acquirer either to not do the deal, because they feel the deal itself is value destructive, or to try to achieve changes or conditions on the acquirer management, thereby increase the value after the actual acquisition is closed. Both of these tactics increase the execution risk around M&A.
What's ahead for activism?
Looking ahead to the end of the year and in to next year, we expect activism to continue to be a popular investment strategy. We also expect it to continue to be a concern for boards and managements of public companies as they think about both their strategic and operational plans going forward.
Increasingly, we're seeing the role of index funds evolve. Index funds, as you know, cannot sell their holdings. They're required to hold companies as a basis of the index that they comprise. And as such, what we are seeing is index funds engaging with companies, and working with them, especially around ESG issues. It will be important for corporates to engage with index funds.
Index funds have a high level of ownership in almost all public companies in the US, and those index funds are often the swing votes in contentious situations.
Lastly, we expect the institutional investors to behave more like activist investors. This will allow those investors - the institutional funds - to continue to differentiate their offering away from that of the index and ETF funds.