Dealmaking is coming back, but bullish CEOs need to beware a spike in opposition from activist investors.
Deals Opposed by Public Activist Demands
The number of public activist demands opposing deals was at record levels in the first quarter, according to Activist Insight Online, even as other forms of M&A activism have stayed in the background.
Electron Capital Partners' flagship Electron Global Fund returned 5.1% in the first quarter of 2021, outperforming its benchmark, the MSCI World Utilities Index by 5.2%. Q1 2021 hedge fund letters, conferences and more According to a copy of the fund's first-quarter letter to investors, the average net exposure during the quarter was 43.0%. At the Read More
So far this year, 21 companies’ deals globally have been opposed, an increase of 50% when compared to the same period last year, ranging from U.S. software company Pluralsight to Japanese drugstore chain Cocokara Fine. That compares to a 63% drop in companies publicly targeted by explicitly pro-M&A demands.
Volatile markets, which make premiums hard to calculate, and diverging opinions of the prospects for standalone companies after COVID-19 have ensured that management teams looking to sell and investors looking for stocks with an opportunity to survive or capitalize on the pandemic are not necessarily seeing eye to eye. Rushed processes, as a result of those conditions, also factor in.
Asia has been a particular flashpoint lately, with the four deals opposed in the first quarter of 2021 exceeding the total of the first quarters of the preceding four years. A particular focal point is South Korea, where a vote on LG’s spinoff of assorted businesses took place earlier today (opposed by Whitebox Advisors, as well as Institutional Shareholder Services and Glass Lewis). Whitebox said on its campaign microsite that the chaebol’s conglomerate discount had reached 69% – its largest in a decade – while there have been suspicions that the rationale is driven by the needs of the Koo family, not shareholders. Two other campaigns, at Kumho Petroleum and GS Group, include greater or lesser degrees of family drama among controlling shareholders.
Admittedly, the trend is less pronounced in the U.S. than two years ago, when Bristol-Myers Squibb, Medley Capital, and Penn Virginia were part of an upswell in activist opposition to deals.
Support In A Merger Vote
According to Proxy Insight Online, only one company in a developed market has actually received less than 80% support in a merger vote this year (TC Pipelines, with 70%). But institutional investors have shown their suspicions in other ways, with five other companies receiving less than 80% support on a golden parachute vote year-to-date.
The numbers may yet grow, as many recently announced deals have yet to schedule shareholder votes and SPAC transactions will start to ramp up as the deadlines two years after their initial public offerings fall due. Some take-privates or strategic deals may also make Pluralsight’s backup plan their first priority, and proceed by tender instead of merger agreement.
But while the usual rumors are swirling around the targets of activists like Starboard Value and Jana Partners, which are commonly associated with such outcomes, 2021 could be more about management teams scraping to get the deal done, rather than holding out for more benign times.
Josh Black, Editor-in-Chief, Insightia
Standardized Environmental Reporting
The demand for standardized environmental reporting, providing investors with comparable metrics to analyze portfolio companies against, is heating up thanks to the publication of the Climate Action 100+ Net-zero Company Benchmark on Monday.
The benchmark provides nine assessment criteria against which investors can compare portfolio companies, including greenhouse gas (GHG) emission reductions, environmental-related governance improvements, and strengthened climate-related financial disclosures in line with Paris Agreement goals.
It also provides investors with recommendations for how to engage companies to mitigate the environmental impact of their operations, whether this be through voting or shareholder proposals.
The initiative, which produces an annual list of companies for Climate Action 100+ members to engage with on environmental concerns, also published reports assessing each of 159 so-called focus companies against the Net-zero Company Benchmark. The report found that, despite the "growing global momentum" around companies setting ambitious climate targets, only 52% of focus companies have announced an intention to reach net-zero by 2050 or sooner, and half of these commitments do not cover the full scope of the companies’ most material emissions. While 139 focus companies have board-level oversight of climate change, only one-third tie executive remuneration to the company’s emission reduction targets.
As the world’s largest investor engagement initiative on climate change, Climate Action 100+ has the potential to drive considerable change, representing a significant number of investors, including the likes of BlackRock and State Street Global Advisors (SSGA).
Sustainability Scoring Metrics
Yet, Climate Action 100+’s engagement tool is hardly the only framework available to investors. The Task Force for Climate-related Financial Disclosure (TCFD) has been widely implemented in the U.K. and U.S., along with the Carbon Disclosure Project (CDP) and recommendations set out by the Sustainability Accounting Standards Board (SASB). Some data providers, such as S&P Global and AlphaValue, offer their sustainability scoring metrics for free, such is the competition for recognition.
Investors are, however, aware that the number of environmental-related disclosure and reporting frameworks currently in use may have a detrimental effect on corporate attempts to mitigate climate change, leaving investors and issuers unsure of the best method to implement. With so many frameworks and metrics available, all recommending subtly different strategies and targets, investors encounter problems getting issuers to disclose information in a comparable way, thereby making identifying opportunities for engagement all the more challenging.
"The market would benefit from a standardized disclosure and reporting framework, enabling companies to provide disclosure in a comparable way," said Lisa Harlow, head of investment stewardship for Europe at Vanguard, in an interview with Proxy Insight Online. "Whatever role you play in the market, comparable data points and disclosure enables you to understand things better, leading to improved decision making."
Rebecca Sherratt, Corporate Governance Editor, Insightia