At the start of 2019, Elliott Management, one of the world’s largest activist investors, raised its stake in Telecom Italia to 9.4%. It was a clear signal that the US hedge fund was not going to blink in its ongoing battle with Paris-based Group Vivendi over control of the Italian telecommunications company. For more than a year Elliott has been at odds with Vivendi over how to revive Telecom Italia, which is saddled with debt of $28.7bn.
Elliott’s move was also a clear illustration that European business culture is in the midst of change. Whereas at one time shareholders in European companies were often investors of long standing and likely to be connected to the company in some manner, newer shareholders are now taking stakes in these companies and pushing for change, sometimes regarding decisions such as to where to locate a headquarters or manufacturing plant.
Strong year for activism
This model is usually associated with the US, but it is making an impact in Europe as well. In the first nine months of 2018, for example, there were 40 activist campaigns against European companies with a market capitalisation of more than $500m, according to figures from Lazard, which were cited in a MarketWatch report. There were 42 campaigns in the same period a year earlier.
Late in 2018, London-based Amber Capital took a 1% stake in Suez, the troubled French water and waste group. Now, according to the Financial Times, Amber is pushing the company to make decisions regarding its governance, increase its asset sales and enhance shareholder returns.
Around the same time, Elliott Management announced it had built up a stake in French wine and spirits company Pernod Ricard, and called upon the company to boost profit margins and improve returns for investors.
Many of these companies are bowing to the pressure exerted by the shareholders.
Last year Unilever reversed its decision to close its London headquarters in response to shareholder criticism about its plans to streamline its corporate structure and run a single headquarters in Rotterdam. In our December2018/January 2019 issue, fDi Magazine reported that Unilever CEO Paul Polman was stepping down after losing this fight.
Another company that gave in to shareholder pressure was ThyssenKrupp, which agreed to separate its marine and industrial solutions divisions into two companies after a long and bitter campaign waged by Elliott and Swedish fund Cevian Capital. In this instance, both chairman Ulrich Lehner and chief executive Heinrich Hiesinger resigned.
The big question
As these examples become more plentiful, it is time to ask the question, much as companies in the US have been doing: are activist investors well suited to be making operational decisions for companies, such as choosing the location of a headquarters or spinning off divisions into separate companies?
“This is the fundamental debate about activism: do activists promote long-term value or do they stifle the corporation’s ability to make long-term investments that by their nature will cost money and may not pay off for months or years?” asks Jonathan Oestreich, a director and head of the shareholder activism practice at Grant & Eisenhofer, a law firm based in Wilmington, Delaware.
Often activist shareholders are thinking of long-term value but cannot agree with the company on how to achieve it. For example, many of Unilever’s institutional investors – funds such as Legal & General Investment Management, Columbia Threadneedle, Aviva Investors and M&G Investments – could not be convinced by Unilever’s promise that Dutch incorporation was the best option. The truth of that assertion will only become apparent in the months and years following the UK's departure from the EU.
An ESG mandate
While most activist shareholders push for change for financial gain, another facet to this trend is the environmental, social and governance (ESG) mandate that many investors have. In many cases this is indirectly influencing how corporate headquarters relocation decisions are made, says John Boyd, principal of location consultant the Boyd Company.
Specifically, social impact has become a focus of investors with an ESG mandate, which means they prefer to see headquarters or new site selections made in areas that are poorer and would be improved by a new headquarters or manufacturing plant, according to Mr Boyd.
“This is especially true among companies facing a backlash over large incentive packages and companies operating in highly regulated industries, as well as companies facing anti-trust scrutiny and bidding on large federal contracts,” he adds. Such companies would be particularly open to influence from activist investors to select poorer and more diverse markets in which to locate, in order to win favour with the public and lawmakers.
At the same time, economic development agencies have recognised this trend and are marketing their jurisdictions as ESG-friendly. “Markets such as Newark, Detroit and Oakland [in the US] are incorporating this theme into their industry attraction efforts based on the idea that attracting a major headquarters or office project will have a transformative effect on those poorer and more diverse areas,” says Mr Boyd.
Activist investors can also influence site selection decisions as part of a push to create value, which is the primary goal of most investors.
For example, an activist investor may want to improve the company’s capital allocation, which means changing where the company invests the capital that shareholders and bondholders have given to the company. “This can mean exiting a line of business by divesting it, or acquiring other businesses,” says Mr Oestreich.
Activists also frequently believe they can improve the profitability, and share price, of the business by improving operations, Mr Oestreich adds. He notes that Cevian trebled its money on a long-term investment in Danske Bank, which ultimately engaged in a cost-cutting programme and divested parts of the bank in Ireland and Finland.
Simply put, says Mr Oestreich, the decisions an activist investor pushes for depend on its motivations, how much research it has done and whether the activist is a long-term investor – or merely trying to change market sentiment for the sake of short-term gain.