Cash-rich US activists are setting their sights on Europe. Bill Ackman, founder of New York-based Pershing Square Capital, said last month: "Europe is probably 10 years behind [the US] in terms of the degree of shareholder activism and how directors respond and precedent and so on so I think it’s harder here but I think it’s going to happen." Ackman was speaking to MBA students at Oxford’s Saïd Business School.
Gilberto Pozzi, head of European M&A at Goldman Sachs, said: "US activists are likely to target European opportunities in the short to medium term."
Nine of the 10 largest activist campaigns outside the US since 2012 have taken place in Europe, and were backed by renowned US activists such as Nelson Peltz’s Trian Partners and Carl Icahn. Last year Paul Singer’s US-based Elliott Associates pushed the UK’s BMC Software to put itself up for sale, and recently Elliott built up a stake in Kabel Deutschland in an effort to put pressure on Vodafone to bid a higher price.
Positive headwinds for activists have included rising equity markets, and a better environment for stock-picking and mergers and acquisitions.
Now activists are targeting multi-segment firms. The global conglomerate discount has widened from 5.5% in 2010 to 7.4% currently, and is at the highest among European companies at 9.3%, suggesting that diversified companies in Europe might be more vulnerable than their peers in other parts of the world, according to a report from Citigroup last month called "Rising tide of global shareholder activism".
Activist hedge funds have gained almost 20% a year since 2009, compared with 7.5% for hedge funds as a whole, according to Citi. Activist strategies are up 11.9% this year through September – more than double that of the average hedge fund, according to data provider Hedge Fund Research. Some individual funds have fared even better: Knight Vinke’s Europe-focused activist fund is up 24.7% this year through October, according to a person familiar with the firm.
As a result of this outperformance, money has poured into the sector, allowing funds to increase the size of their targets and fuelling the pace of campaigns. Assets run by activist strategies have grown from $36.2 billion at the end of 2009 to $89.1 billion at the end of the third quarter this year, HFR said. Since 2009, the number of campaigns targeting firms of $10 billion and larger has more than tripled, and 2013 has seen an average of two such large-cap firms targeted every month, said Citi.
On top of this, there is greater institutional support for activism. Harlan Zimmerman, senior partner at Anglo-Swedish operational activist Cevian Capital, said: "The financial crisis was seen as a failure of ownership by boards and shareholders. This created huge pressure on institutions to be better owners."
Following the financial crisis, politicians such as former City minister Lord Myners, who is now chairman of Cevian, accused investors of allowing "ownerless corporations", to develop, and failing to check poor governance. Professor John Kay’s report on long-term governance, published in July 2012, advocated that investors band together to improve governance. Passive managers such as L&G, BlackRock and Norges Bank are engaging on corporate governance issues behind the scenes.
Blake Nixon, founding partner of UK activist Worsley Associates, which launched this year, said: "Having institutional investors who are private supporters is an important factor in convincing a company to engage."
One of the issues preventing more outright activism in Europe is a lack of players willing to take it on. Dan Mannix, chief executive of RWC Partners, which runs three activist funds, said: "There has been a real lack of decent activist investors in Europe because it’s a very difficult market. You have to deal with multiple jurisdictions with different operating environments, languages and shareholder structures. It also requires a significant amount of scale."
The biggest players in Europe by assets are Cevian, which runs $12 billion, and has in the past three months revealed stakes in UK security company G4S, and ThyssenKrupp, a German industrials company; and Chris Hohn’s The Children’s Investment Fund, which runs $7 billion and is perhaps best known for pushing for a break-up of ABN Amro. This year TCI has been calling for French aerospace manufacturer EADS to sell its stake in rival Dassault.
European event-driven funds – the so-called "part-time activists" with a shorter-term time horizon, which pushed companies to pay out jumbo dividends in the run-up to the financial crisis – have largely retreated as a result of performance issues during 2008 and a lack of stable capital in their investor base.
Within Europe, activists are most likely to target companies in the UK, as these typically have higher institutional shareholdings and lower insider holdings, said the Citi report.
Companies within the Netherlands, Germany and Switzerland are at medium risk of being targeted by activists, while those in France, Italy and Spain are deemed to be low risk because of their shareholder structures, which have high levels of family and regional bank ownership.
Christopher Fawcett, senior investment officer at Permal Investment Management, which launched a fund of activist funds in September, said: "In most cases in asset management, things start in the US and then come across the Atlantic. The first stage is the UK and then it’s more widespread."
He added: "The key for US activists in Europe is who else is on the shareholder register. The more disparate it is and the more owned by non-domestic shareholders such as US mutual funds, the happier the activist will be. He will feel like he has a better chance than if the company is predominantly owned by domestic investors."
In economically patriotic countries such as France and Italy the establishment is more likely to close ranks against foreign investors. For example, the French government drafted a law to protect from takeover companies in so-called "strategic industries" such as food products company Danone. This has been dubbed the "Danone law".
A partner at a London-based event-driven hedge fund said: "In Europe, you pick your fights according to the odds. There’s no point fighting against the establishment. You have to look at the context, the local preferences, the history of the company, the stuff that hurts. You can’t just look at the merits of the case."
The US domestic approach to activism is audacious, public and pulls no punches. Rarely a day goes by in the US without a prominent activist lambasting a rival or a target’s management in the pages of the Wall Street Journal. This is epitomised by the public spat between Ackman and Icahn over Herbalife, a global nutrition company, where Ackman has a short position because he thinks it’s a "pyramid scheme", while Icahn has a long position because he thinks it’s "meaningfully undervalued".
On August 13, Icahn took to social media site Twitter to reveal his stake in Apple and last month he even launched a website – the Shareholders’ Square Table – to vent his views.
US company law means that activism in the country depends on publicity. Zimmerman said: "In the US, because the power of the board and the chief executive is very strong and shareholder rights are pretty limited, activist funds tend to be more hostile, whereas in Europe, particularly northern Europe, there is scope to work with boards."
Europe is characterised by a softer approach. UK shareholders with a 5% position can nominate someone to the board. Stephen Cohen, chief executive of Governance for Owners, which calls itself a "responsible activist," said: "We try to be discreet. A great engagement for us is one you’ve never heard of. We don’t want to be on the front page of the [Financial Times]. We think that in Europe clients are best served if we’re not aggressive."
He added: "European company law is more in favour of the shareholder and therefore companies are more predisposed to listen. In the US you have to go public; you’ve set up an adversarial situation almost to begin with."
Citi’s report suggests that in Europe, nearly 45% of all campaign activity is private.
Chris Young, head of the contested situations practice at Credit Suisse, said that an uptick in activism in Europe is likely to be led by US managers. He said: "Although their natural state is maybe too aggressive for European taste, they are smart enough to learn that when in Rome, you should do as the Romans." He said he expects to see US activist campaigns "customised for a European audience".
US investors are also likely to find that activism in Europe comes with more reputational baggage.
Nixon said: "Activism is still not as accepted in Europe as it is in the US. Some UK companies still treat activists as upstart investors who are not welcome at the party."
The event-driven partner said: "In France, Germany, Italy and Spain, activists are seen as locusts." He added that memories are still fresh of ABN Amro, where activist investor TCI successfully called for a break-up but three of the banks that bought the fragments of ABN – Fortis, Royal Bank of Scotland and Monte dei Paschi di Siena – needed a state bailout. He said: "Hedge funds made tons of money from it but the regulators were left to pick up the pieces."