The golden age of shareholder activism

Kevin Romanteau

From an early age I have been fascinated by finance and in particular hedge funds. At the age of 16, I started trading and my passion grew for corporate strategic actions taken by activist hedge funds. My previous experience both in speculative hedge funds – and my current position in investment banking, gave me the necessary tools to analyze markets and develop strategies. Recently, I have been invited to speak at the Middle East Investment Summit in Dubai, Factset, BFM Business and French Ministry for the Economy and Finance on the “Shareholder Activism” topic.
Activism is a strategy in which an investment firm takes a minority position in a public company with the ultimate goal of unlocking value. It targets companies with poor stock price performance, ineffective and/or inefficient capital deployment and/or poor corporate governance.
By deploying a wide range of private and public tactics, Activists can achieve improvements in company performance and share price. Activists typically follow a familiar pattern of escalating pressure by focusing on corporate strategy, performance, capital structure, boards of directors and M&A activity.
Sharing my activist vision, this article will detail the understanding ‘Shareholder Activism’.
Activism Overview
In the late 1990s, a new actor entered in the corporate governance scene. At this time, the term ‘activist shareholder’ was synonymous with ‘corporate raider’ – a term many of you may be familiar with. Since then, the activist role has become a niche sector where few hedge funds, including Elliot Management, decided to develop sophisticated strategies to unlock the value of these companies through corporate strategy action such as capital structure allocation, Board actions, and M&A activity.
This is mainly due to the recent financial crisis, which has created one of the most challenging business environments since the Great Depression. As a result of the financial crisis, in the past few years companies around the world have significantly strengthened their capital structure by deleveraging, reducing capital expenditure, increasing equity base and maintaining a conservative strategy. The result has been the accumulation of a large pile of cash for corporates.
The number of activist campaign had nearly doubled in the last 5 years. At least 50% of the campaigns were located in the US focusing mainly on Industrial, Telecom and Services sector. The economic condition in Europe and the Middle East and Africa convinced Hedge Fund to focus in. Now, this region is becoming a new ‘Eldorado’.
Last year, Activists deployed a record amount of capital through 805 campaigns. Through these campaigns they were able to leverage their credibility with traditional shareholders and access large pools of capital with almost $200 Milliard and so target the largest companies globally. The campaigns on large cap companies such as BHP, Credit Suisse, Erickson and Nestlé confirmed that national champions and every industry can be targets and that no company is exempt.
What is driving the rise in shareholder activism?
The most compelling reason for the gaining popularity is that activists have outperformed the market and achieve significant returns for their investors. There has also been a fundamental shift in the perception of shareholder activism. They are no longer seen as the “corporate raiders” but more like legitimate investors seeking to increase shareholder value.
What is shareholder activism?
Activism is a strategy in which an investment manager takes a minority position in a public company and elaborating a course of action that unlocks value in order to transforms the long-term performance of the target company.
There are numerous ways which activist shareholders exert influence on the board of directors or company management. Activist investors typically start with simply engaging in dialogue with the company leaders to encourage change. Some activist shareholders also take their concerns public, using the media to illustrate their perspective and expectation.
Activists seek to influence a company, rather than control it. They are relatively long-term investors and frequently structured to provide ‘patient capital’. Finally, you understand that activism uses a hybrid approach between private equity and hedge fund.
Activists are vital for strengthening Corporate Governance, Merger and Acquisition operations, Operational improvements decisions, Capital structure adjustments.
In terms of track records, last year 70% of the activist campaigns were successful and deliver an average return of 20% per year depending mainly of the strategy and target’s geography.
How activist select their target, what are the target criteria?
Often activists identify business issues with strategic and/or operational decisions that CEO or management have made. For example some companies lack a clear strategic plan and have underperforming businesses, or keep locked excess cash on the books. Another hot topic for activists is criticizing governance issues such as CEO compensation, Board diversity or the number of independent directors. They are looking for to take a Board seat to have more influence and convince other shareholders to intent action. The most reason is that in many cases, the companies have lost their way or vision and are unable to operate within a new environment.
Isn’t management supposed to anticipate change to reduce risks and thrive in any environment?
Current management, perhaps managed well the company in the past, is no longer effective – as you know, the past is not always a reflection of the future. A company constantly needs to develop new products and innovations to compete in the new economic environment and meet evolving customer demands.
When a company fails, it is due to a lack of strategy, poor asset utilization, disruptive technologies, or simply poor management decisions. When management does not have answers, someone needs to step in with new ideas and “out of the box” thinking to fix the corporation issue and restore corporate performance and shareholder value.
How unlock the value?
‘Firstly, get to know the business well as well as the company’s accounting policies. Wealth creation requires investment that must be financed and be sufficiently profitable.’
The activist has been the instigator in a sense to show where the value really lies and once that’s shown to the public.
How activist hedge fund can pretend to understand the company better like the management?
Activist Hedge Fund simply engages its own due diligence on public company. Let’s thing about it, when a Private Equity Fund acquire a stake in a private company, a due diligence is realized. I would like to remember you that the shareholder of public company has the rights to inspect books and records of a corporation. But it does mean that the corporation will always comply. Shareholder must turn to the courts assistance. After the activist get a deeper understanding of the company can challenge the management and the Board.
In the coming years, Activism will adopt a more constructive approach by working closely with corporate boards in a cooperative way. Fund managers will have greater interaction with the companies they invest in, but retain their sense of Activism as opposed to asset-stripping. Finally, I see Activism becoming more sophisticated and spread across European and emerging markets such as Asia and the Middle East and Africa.

Kevin Romanteau, Mergers & Acquisitions at BNP Paribas, UAE


Kevin Romanteau is an M&A Analyst at BNP Paribas and is currently based in Dubai, United Arab Emirates. Since joining BNP Paribas in 2017, his team has won various high-profile awards including 'MENA M&A Financial Advisor of the Year' and 'Consumer M&A Financial Advisor of the Year' by Mergermarket. Previously, Mr Romanteau worked at Rabobank where he played a leading role on numerous cross-border projects in a variety of industries. Mr Romanteau started his career as a Hedge Fund Prop Trader and his focus includes formulating specialist hedge fund strategies. He has a passion for analysing and following Activist campaigns around the world and currently advises Middle Eastern hedge funds on how to apply tailored Activism strategies to their portfolios. He recently published a research report on the Activism topic and invited to speak at the Middle East Investment Summit and interviewed by FactSet. Kevin graduated from HEC Paris and ESLSCA, he is member of Institute of Higher National Defense (Paris), Lecturer at ESLSCA on Mergers & Acquisitions. He was also featured twice on France's popular trading competition TV show “Les Talents du Trading”.

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