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Poor ESG performance increases likelihood of activist investor attention

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Companies ranked in the bottom 50 per cent of ESG performance are significantly more likely to attract activists’ attention, according to the findings of Alvarez & Marsal’s (A&M) latest analysis and predictor of shareholder activism in Europe, the A&M Activist Alert (AAA).

The study also predicts that the wave of activism across Continental Europe will continue to increase in 2020 as activists adapt their tactics to different markets and sectors, with tech companies a key growing target sector for activist shareholders. The UK however remains the largest market for activists and is home to 54 of the 158 European companies which are predicted to face imminent risk from public activist campaigns.

Since the publication of the last AAA report in April 2019, 33 of A&M’s predicted targets have faced public activist campaigns.
Using data on circa 1,300 European companies’ ESG ratings from Refinitiv, A&M created a ranking of four quartiles based on ESG performance. A&M then analysed how many companies in each quartile had been the subject of activist campaigns since 2017, with the results suggesting that poor ESG scores are an early warning sign that a company may come under activist pressure.

A total of 62 per cent of activist targets across Europe since 2017 fall into the bottom two ESG quartiles; companies in these groups are on average 24 per cent more likely to face an activist campaign.

For UK and Italian companies, being in quartile three roughly doubles the probability that they will be targeted by activists.

The opposite is true in Spain, where companies in the bottom quartile are two times more likely to face an activist approach.

This divergence may be explained by the differing levels of adoption of ESG investment practices across Europe.

Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, says: “As the focus on ESG grows in the minds of investors and the wider public, ESG performance has now clearly entered the sights of activist investors. This compelling link between ESG ratings and the likelihood of activist targeting should serve as a wakeup call to boards across Europe. Those who have overlooked ESG issues risk activist wolf packs closing in.”

Some 158 European companies are predicted to face imminent risk from public activist campaigns, up from 150 in April 2019. The UK remains the largest European market for activists, with 54 U.K. companies now at risk, up from 52 in April 2019.

However, the UK’s dominance is eroding as activism across Continental Europe gathers momentum. A key driver is activists honing their approaches to better align with specific market dynamics, exemplified by Elliott Management’s successful campaign against Pernod-Ricard.

Companies in France and Germany are likely to attract much greater attention from activist investors in 2020 and beyond. 25 German companies are predicted to be at risk (compared to 23 in April 2019), while the number of French companies at risk has jumped to 24 (up from 20 in April 2019).

As activism becomes more entrenched in European markets, shareholders are increasingly employing activist tactics against boards they disagree with, with traditional institutional investors also taking more vocal stances. 

Industrials retain the position as most at risk sector, with 52 companies predicted to be targeted (vs 51 in April 2019). This is in part due to many operating under conglomerate structures with underperforming divisions ripe for sale.

But other sectors are also gaining attention, with activists increasingly setting their sights on technology firms, following recent campaigns in the UK (JustEat) and Germany (Scout24). 24 tech companies are now at risk, up from 21 in April 2019.

Activist interest in tech companies may increase further if European stock exchanges move to relax rules on dual-class shares – a common feature of US-listed tech companies – in order to attract more international listings.

Calls for companies across all sectors to address underperformance through M&A activity continues to grow. Some 18 per cent of demands made by activists in 2019 related to potential M&A, a jump from 12 per cent in both 2017 and 2018.

Once the top sector for activists, consumer companies fall further out of favour, with firms at risk sliding from 35 in April 2019 to 32 now. This reflects sustained challenges in retail and the impact of digital disruption.
Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, adds: “As activism gathers momentum across Europe, activist investors are increasingly pushing the boundaries of what constitutes a ‘traditional’ target. No longer are tech firms or tightly held dynasties out of scope. As activist pioneers start to prove their worth in new markets, we can expect many more attacks on historical ‘safe havens’ going into 2020.”

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