This June, Third Point – a prominent U.S. based activist investor – announced it had taken a $3.5 billion stake in the European food giant Nestlé, marking one of the largest investments ever made by an activist investor.
- U.S. activists look to Europe for new targets
- U.S activists have legacy advantages
- European activists have regional advantages
Other European companies such as AkzoNobel and Clariant have been under pressure from U.S. activists in 2017. In fact, according to data collected by Lazard, Europe has garnered 20% of the total capital deployed by U.S. activists year to date, compared to around 10% in prior years.1
So why are U.S. activists crossing the Atlantic in search of new targets?
The economic backdrop in Europe certainly appears brighter than it did at the turn of the year, despite the unrest in Catalonia. Political risks surrounding the elections in France, Germany and the Netherlands have eased, and recent economic data has painted a more encouraging picture.
European equities have also largely underperformed those in the U.S., and when coupled with stretched U.S. equity valuations, investors are looking to other regions for potential opportunities. The strength of the U.S. dollar relative to European currencies is also providing U.S. investors with more purchasing power.
Additionally, and perhaps one of the region’s distinguishing features, the governance framework in parts of Europe tends to be very shareholder friendly. This enables shareholders to influence companies from minority positions. For example, the CEO is typically subordinated to the board and is rarely also the chairman of a company. Minority shareholders have substantial influence over board nominations given that they can call extraordinary general meetings (EGMs) and add items to annual general meeting (AGM) agendas. By contrast, company management in the U.S. largely controls the process for nominating new board members, and securing a board seat can require an expensive proxy battle.
David vs. Goliath?
Although activism is a path less well-trodden in Europe, the U.S. has been fertile ground for activist investors since corporate raiders such as Carl Icahn and T. Boone Pickens gained notoriety in the 1980s. Activism has since become a popular strategy as a means to unlock value at companies through inciting some form of change.
Today there are a number of multi-billion-dollar activist investors in the U.S. jostling for investments. But when it comes to activist investing in Europe, do American- or European-based managers have the advantage?
Europe is complex and multi-jurisdictional.
Europe is complex and multi-jurisdictional. Not only do regulations differ from country to country, but investors need to appreciate and understand the cultural nuances. It’s also advantageous to be able to speak the local languages when engaging with company management and boards. While the larger U.S. activist managers have the resources to hire individuals with the requisite experience (including external consultants), their asset sizes tend to restrict them to investing in large- and mega-cap companies. Generally, these larger companies have management who typically better understand how to retaliate when under attack from an activist and may be more resilient to their demands.
With the exception of Cevian, probably the best known European-based activist investor and one of the world’s largest activist funds, European-based activist investors are generally much smaller and tend to focus on companies much farther down the market-cap scale. In addition to possibly less well-versed and sophisticated management, there is an increased likelihood that these companies will be merger & acquisition (M&A) candidates, and they are less well-covered in terms of sell-side research. It can be argued that the roll-out of MiFID II could further increase these inefficiencies.
These smaller European-based activists can really benefit from their strong, local networks. Those that have background expertise in a specific sector, region or country should have an advantage in terms of their knowledge of, and relationships with, companies. This can be beneficial for sourcing new ideas as well as when engaging with management and boards.
It looks clear to us that the backdrop for European shareholder activism is healthy. While the European managers may not have the brand names or the size of their U.S. peers, from a returns perspective at least, we could well see David overcome Goliath.
1Lazard’s Shareholder Advisory Group (October 2017). “Review of Shareholder Activism – 3Q 2017”
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