Dealmakers take note, the sectors with the most activism aren’t necessarily the ones with the most M&A action.
Q2 2021 hedge fund letters, conferences and more
Activists Push For M&A Demands
Comparing the sectors with the most companies publicly subjected to activist demands in our H1 statistics to those with the most demands pushing for M&A (mostly pushing to sell the company but including a handful of calls for acquisitions), highlights some of these discrepancies.
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In the first half of 2021, 11% of push for M&A demands took place in the energy sector, compared with only 5% of all activist demands worldwide in the same period. On the flip side, the consumer sectors, which together accounted for 20% of all activist demands, saw no push for M&A demands. That is an unusual twist – consumer cyclical companies have received 19% of all push for M&A demands historically, the joint highest.
Sectors that are used to plenty of activism have seen some diverging trends in the prevalence of M&A strategies. Technology and industrial companies each accounted for 14% of activist targets in the first half of 2021 but the former accounts for 13% of companies subjected to push for M&A demands, compared with 25% for industrials.
The difference may be that in some sectors, activists see more value to be gained by encouraging companies to catch up with their peers by tinkering with operations. Trying to profit from broad shifts such as consumer rebounds or work from home via a sale of the company could mean leaving long-term value on the table.
Opposition To M&A From Activists
Meanwhile, acquisitions may be too pricey for value investors in this climate. Opposition to M&A from activists is also soaring – especially in the consumer sectors (while remaining steady in technology).
It could be that activists are watching and waiting to see whether the earnings recovery continues at pace. Netflix is down 6% over the past five days thanks to a miss on its subscriber numbers and, for smaller companies, the punishment for such underperformance could be more pronounced and more perilous, given the competition.
In other sectors, particularly energy and financial services, ongoing opportunities for consolidation and challenges in scaling up may make M&A a more obvious exit strategy.
Josh Black, Editor-in-Chief, Insightia
Rise In Say On Pay Proposals
Opposition to European “say on pay” proposals is on the up, as shareholders closely scrutinize companies that have failed to take into consideration the impact of the pandemic when calculating executive compensation.
Average support for advisory “say on pay” proposals in Europe has dropped to 91.8% so far this year, compared to 93.1% and 94% support in 2019 and 2020 respectively. As many as 6.7% of these proposals received less than 70% support in the first half of 2021, compared to 5% and 3.9% in 2019 and 2020 respectively, according to Proxy Insight Online data.
The trend was echoed in BlackRock’s 2021 proxy season stewardship report, published Tuesday. The world’s largest fund manager opposed a hefty 33% of “say on pay” proposals in Europe, the Middle East, and Africa (EMEA) in the 2021 proxy season, compared to just 10% in the Asia-Pacific (APAC) and 5% in the U.S.
“The increase is largely attributed to COVID-19 related in-flight adjustments that companies made to reward executives despite missing financial performance targets, reducing their workforces, or taking government financial support,” BlackRock outlined in its report. “BlackRock opposed executive pay programs when companies were not able to explain how these adjustments supported long-term, sustainable value creation.”
The world’s largest fund manager noted that European “say on pay” votes were particularly affected by “companies’ slow progress in meeting the European Union Shareholder Rights Directive II’s enhanced executive pay disclosure requirements.” These new rules, effective September 2020, mandated that all European companies must hold advisory compensation votes.
Disclosure And Transparency On Executive Pay
The number of directors BlackRock voted against due to compensation concerns in EMEA also increased to 661 this proxy season, compared with 498 in the 2019-2020 proxy year, due to a lack of “disclosure and transparency on executive pay.”
BlackRock opposed Danske Bank’s remuneration report, and withheld its votes from three members of its compensation committee at the Danish bank’s March 16 annual meeting, due to the company’s use of “cash sign-on awards without a link to performance conditions which we believe is not best practice as it does not align pay outcomes with performance.”
Vanguard’s approach towards executive compensation mirrored that of BlackRock. Vanguard voted against Boohoo’s remuneration report at the U.K. fashion retailer’s June 18 annual meeting, owing both to human rights violations and concerns about the use of “excessive quantum without an adequate rationale or a clear link to pay for performance.”
Companies that offer excessive payouts to executives, without sufficient justification as to how such payouts benefit shareholder value creation and boost overall company recovery, will likely continue to face adverse voting action from investors.
“Some companies have carved out 2020 when analyzing company performance in their long-term incentives, rewarding good performance in 2018 and 2019 on the basis that any decline in performance in 2020 wasn’t the fault of management,” Peter Boreham, U.K. and European practice leader – executive reward, at Mercer, told Proxy Insight Online in an interview. “On one level this logic is understandable, but the whole essence of variable pay means it can fall, including to zero.”
Rebecca Sherratt, Corporate Governance Editor, Insightia