This June, Third Point – a prominent US based activist investor – announced it had taken a $3.5 billion stake in the European food giant Nestlé, marking one of the largest investments of its kind.
Activist investors purchase large numbers of a public company’s shares to put public pressure on its management. By so doing, they hope to trigger a change in company strategy which unlocks shareholder value.
Other European companies such as AkzoNobel and Clariant have come under pressure from US activists during 2017. In fact, according to data collected by Lazard, Europe has garnered 20% of the total capital deployed by US activists in the year to date, up from roughly 10% in previous years.1
So why are US 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 US. This, coupled with stretched US equity valuations, has encouraged investors to look to other regions for potential opportunities. The strength of the US dollar relative to European currencies has provided US 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, in Europe the chief executive officer 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 and add items to annual general meeting agendas. By contrast, company management in the US largely controls the process for nominating new board members, and securing a board seat can require an expensive proxy battle.
David vs. Goliath?
While activism is a path less well-trodden in Europe, the US has been fertile ground for activist investors since corporate raiders such as Carl Icahn and T Boone Pickens gained notoriety in the 1980s. Today there are a number of multi-billion-dollar activist investors in the US jostling for investment opportunities. 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 US 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.
In contrast, European-based activist investors are typically 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 such companies will be merger & acquisition (M&A) candidates, and they are less well-covered in terms of sell-side research.
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.
The backdrop for European shareholder activism is healthy. While the European managers may not have the brand names or the size of their US peers, from a returns perspective at least, we could well see David overcome Goliath.
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