Monday, September 1, 2014

Shareholder Activism Coming to Europe

Shareholder activism involves a minority shareholder with a significant non control ownership, 5 - 10%, seeking to influence of a firm’s strategy. It is directed at firms suffering from performance and governance problems. It has been active in U.S. and to certain degree in the U.K. Its shareholder economic impact is deemed largely positive - although activism is somewhat controversial with management and directors who do not like being second guessed. The same forces that spurred its rise in the U.S. and U.K. appear to spreading supporting an increase of activism in continental Europe-at least in certain countries.

The slow European recovery and resulting lagging company performance is encouraging investor groups to become more aggressive in change proposals. The investor groups include well known U.S. firms like Pershing Square and Elliot Associates expanding into Europe. European groups including Cevian and The Children’s Investment Fund also exist and the list is growing. It is somewhat harder to gauge the level of Euro activity as much of it takes place behind the curtains compared to the more public U.S. activity.

The financial crisis traumatized firms. Survivors, understandably, focused solely on surviving to the detriment of performance. In the U.S. investors started asking about performance again in 2011/2012 resulting in numerous activist actions. These actions were at first remedial, focusing on the return of cash, divesting noncore subsidiaries and reducing expenses. Now they have turned to strategic growth concerns - including the possible sale of the firm itself to better owners.

Europe appears a few years behind the U.S. in this regard with the current focus on remedies, primarily the return of cash through record dividends, not strategies. In Europe there is probably some more room for remedies. Euro firms tend to be more unfocused than U.S. firms. Consequently, Euro firms suffer from a much higher conglomerate discount. Shareholders, including long term pension funds and not just the alleged locus short termers, want to know about management’s longer term growth plans-internal and external M&A. Thus, Europe appears to offer rich pickings for activists.

The problem with Europe is it is a set of countries each with different rules and cultures. Consequently, activists need to recognize the process will be different in Europe. Based on the following:

1)     Legal System(s): the proxy rules differ not only from the well developed U/S./U.K. legal system, but also by country. Legal predictability is most predictable in Holland, Germany and Switzerland, and much less so in France, Italy and Spain.
2)     Nationalism: French firms are less likely to meet with upstart brash American activist firms than fellow French firms.
3)     Shareholder Ownership Structure: many continental countries have concentrated ownership among founding families, governments, foundations, and banks. These types of investors will side with management and likely remain hostile to any outsiders.
4)     Strategic/White Knight Acquirers: will have the upper hand compared to activists. Management may size on a sweetheart deal to protect itself at the expense of minority investors.

My prediction is activism will continue to increase in Europe, but at a slow speed than hoped for by many investors. Next it is likely to be local affair - French activists for French firm. Finally, activism will supported increased Euro M&A activity - both offensive and defensive.


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