Activist funds normally get involved in mergers and acquisition (M&A) activity by disrupting the target of a deal, buying a stake and then persuading other voters to hold out for better terms, but according to a recent survey from FTI Consulting they intend to get involved in the acquiring side this year as well.
“An acquirer will often use more aggressive balance sheet structures to execute M&A,” said FTI Consulting analyst Steven Balet. “An M&A activist may well look at this structure and the risk profile of the transaction and decide that he or she likes the board’s more aggressive balance sheet approach, but would like the cash returned rather than used for M&A. This type of activism will put more deals in jeopardy.”
Last year was a banner year for hedge funds in general, as the industry attracted $31 billion worth of net inflows, according to data from HFM. That total included a challenging fourth quarter, in which investors pulled more than $23 billion from hedge funds. HFM reported $12 billion in inflows for the first quarter following Read More
The survey found that 73% of activist investors would take the traditional route of pressuring the target of a deal, 43% would look for opportunities to disrupt a deal by pushing the buyer to return that cash instead (the overlap is presumably because some activists will simply follow the strategy that’s more likely to work). Overall, 89% of activists said that they expect M&A activism to rise in 2014.
Activism finding new allies in fights
The success rate of activist campaigns will probably also rise in 2014, as the strategy’s past success will make future wins easier to produce. Last year activist funds returned 16.6% compared to 9.3% for other hedge funds, and they have been rewarded with the strong inflows that you would expect. Now when an activist fund starts a campaign, some of the institutional voters that it needs to win over will be found on its client list.
Activist investors are also sticking together. According to the FTI Consulting survey, 69% of activists said that they will invest in a company to join in an ongoing campaign and voting along with their fellow activists. It doesn’t hurt that the media loves to cover activist campaigns, raising the stakes for a management team that would rather ignore the situation.
Activist focus moving to Europe
While 87% of activists say there are still plenty of targets in the US, 40% are now focusing on companies outside the US, especially in Europe. The UK currently accounts for about 50% of European activism where the laws are most activist-friendly, but this also implies that there is plenty of room for activism to grow in the rest of the continent.