'Activists' ensure companies benefit shareholders more
There's a new brand of activist on the rise, but they aren't fighting for human or environmental rights. They're investors and profit-seekers, and they're out to ensure that companies are making the greatest possible returns for their clients.
This movement of so-called "shareholder activism" is growing in South Africa, according to in-depth research published this week by business advisory firm FTI Consulting.
Max Gebhardt, managing director of FTI Consulting South Africa Strategic Communications, said the group was made up of mainly institutional investors and fund managers "who had been active in seeking out greater [shareholder] value … since 2000".
An article from The Economist states: "Activist funds can be thought of as a cross between 'value' investors, who buy shares in basically sound but undervalued companies, and turnaround specialists, who buy and fix broken firms.
"Thus they invest in public companies that, they think, are lagging their peers because of poor management practices. Through tactics ranging from gentle persuasion to fiery proxy battles, they push these companies into making their corporate governance better, and sell at a profit when the market notices the improvement."
Data compiled by Hedge Fund Research shows that activist hedge funds managed over $93-billion globally in 2013, almost triple the amount managed five years ago.
'Agitated for a better deal'
It's part of a global movement that gained impetus following the banking crisis in the United States. "Concerns over mismanagement and governance sparked the so-called 'shareholder spring' of 2012 when big institutional insurers and pension fund managers refused to back pay awards and bonuses of executives at several companies, after accusing them of anaemic performances and poor returns," wrote Roger Barker of the Institute of Directors in a blog from Financial Director.
"Hedge funds have torn down the corporate veil, and have been able to prove that insiders don't necessarily know best. In doing so, they have also demonstrated that shareholders can and do hold opinions that they are entitled to voice."
And investor involvement in South Africa is following global trends. A recent high-profile example of this is Bidvest's counter-offer to pharmaceuticals firm Adcock Ingram's proposed takeover by Chilean competitor CFR. Gebhardt said Bidvest, acting on recommendation from its own shareholder, the Public Investment Corporation (PIC), put in a last-minute offer to become a 34.5% majority shareholder of Adcock and thus scuppered the proposed R12.8-billion merger with CFR.
"In that instance, the PIC would have been the activist shareholder; they agitated for a better deal."
In November, almost 50% of the shareholders of hotel and casino group Sun International voted against the group's executive pay policy at its annual general meeting.
"I don't think you would have seen that five or 10 years ago," said Gebhardt. "It's an indication that investors are actually scrutinising these things far more carefully."
"Activist" investment has been fuelled by returns that far outpace industry averages: last year's activist hedge funds got returns of 16.6%, whereas the average hedge fund returned just 9.3%, said FTI.
Research shows that there is a particular focus on ensuring that mergers and acquisitions (M&As) are carried out to their greatest advantage.
"Especially interesting is the activists' willingness to engage on the acquirer side of a transaction," said Steven Balet, an activism specialist at FTI.
"An acquirer will often use more aggressive balance sheet structures to execute M&A. An M&A activist may well look at this structure and the risk profile of the transaction and decide that they like the board's more aggressive balance sheet approach, but would like the cash returned rather than used for M&A.
"A surprising 43% of activists interviewed stated they would look for opportunities to discourage [a merger or acquisition] and instead push the acquirer to unlock value through share buybacks, dividends and divestitures, rather than go through with the transaction," said Balet.