UK activist targets outperform despite Covid-19

The share price of corporates in the UK targeted by activist funds have outperformed the market during the Covid-19 pandemic compared to flat or negative performance among European and US counterparts.

That's according to a new study from professional services firm Alvarez & Marsal (A&M) looks at the share price performance of 245 corporates following their public targeting by activist funds. A&M looked at activist campaigns started between 1 January 2017 and 28 February 2020 and compared the share price performance of the targeted companies to market indices (S&P 500 and STOXX Europe 600).

A&M says the average targeted UK corporate’s share price outperformed the market over this Covid-19 period by 1.5 per cent. This compares to flat performance of 0.1 per cent in Europe over this period, and significant underperformance of -5.8 per cent in the US.

In line with performance during the pandemic, the research also shows that UK companies targeted by activist campaigns have outperformed the market and also similarly targeted European and US corporates in the 24 months since their campaigns began.

Corporates in the UK outperformed market indices by 3.6 per cent in two years, compared to 2.7 per cent outperformance among US companies.

In Europe, activist targets saw their share prices underperform by -3.3 per cent in the same two-year period following the activist campaign.

UK campaigns meanwhile, largely matched market performance over the first year from the activist campaign being launched (with flat performance of 0.3 per cent), whereas US campaigns underperformed the market by -4.3 per cent and Europeans by -8.0 per cent over the same timeframe.

A likely driving factor for this trend is that US campaigns are typically significantly more hostile over a longer period than in the UK. This can lead to less focused management and greater uncertainty for other investors, which can undermine the share performance. Nevertheless, the performance of US targets markedly increased in the second year as campaigns came to fruition and rewards began to be reaped. The US and UK performance also shows that, on aggregate, activists are correctly identifying opportunity for improvement and adding value.

The challenges to successfully navigating an activist campaign in continental Europe are reflected in the European underperformance. Local understanding is key. Whilst there is a steadily growing acceptance of activist funds as potential constructive forces for good across Europe, negative corporate, market and public sentiment still prevails. The underperformance of share prices that are associated with activist campaigns will only exacerbate that negative sentiment.

Malcolm McKenzie, Managing Director at A&M, says: “The diverging performance of activist targets across the regions underlines that activists are playing by different national rules. The more collaborative approach UK-focused activists typically take with boards can leave corporates better equipped to react quickly to external shocks, such as Covid.

“In contrast, the generally more hostile nature of US campaigns has taken its toll on share performance amid Covid, distracting management desperately trying to navigate the Covid disruptions.

“This is true of activist campaigns in normal times, too. Taking into account the more combative context for targets in the US, and the less established activist market in Europe, it takes longer for activists in these regions to see progress, while UK companies outperform across the board, and do so earlier.”

Campaigns that include a transformation element, where activists seek to promote strategic or operational change, are associated with the best results, with an outperformance over two years of 3.4 per cent. Such Transformation campaigns were also associated with heightened performance during Covid-19, where performance remained flat (versus the other campaign types entering negative territory).

Activist campaigns including an M&A component also had a positive impact on target share price, which outperformed the market by 2.8 per cent over the two-year period, although slumped significantly to -2.9 per cent in the six months during Covid-19. This is in part due to the slowdown in merger activity during the pandemic, and the subsequent failure to deliver the share price increases that had been assumed by the market.

By contrast, campaigns focussing on Governance demands were comparatively disappointing with an average underperformance of -6.7 per cent after one year. However, this did improve significantly during the second year, with an average outperformance of 4.7 per cent, leading to a two-year underperformance of 2.0 per cent.

This marked ‘hockey stick’ performance may reflect the initial challenges and time required for new Board members to develop their plans of action, before delivering rewards in the second year.

The underperformance of Governance campaigns in the first year is a key driver of the underperformance of campaigns in US and Europe over the same timeframe. Overall, 74 per cent of European campaigns and 70 per cent of US campaigns against corporates included a demand for Governance changes, whereas just 41 per cent of UK campaigns did the same.

Malcolm McKenzie, Managing Director at A&M, says: “A key factor behind the outperformance of Transformation campaigns comes from the disruption in the corporate landscape accelerated by this pandemic.

“Corporates with an existing transformation mindset, catalysed by an activist campaign, have been in a better position to react to Covid-19 induced business changes, than if the activist-driven focus was towards M&A or Governance.”