Activist investors eye bumper 2011 as market improves

THIS year has started well for activist investors, those outspoken stake-builders that push boards to buck up their strategy.

2011 has kicked off with a spate of high profile public exchanges between funds and their targets.

Activists claimed their first major scalp last month when Sherborne Investors ousted City veteran Nick MacAndrew from the chair of F&C Asset Management.

Elliott Advisors is eyeing transport group National Express; Kesa Electricals is under fire from Knight Vinke, and Alliance Trust is a target of hedge fund Laxey Partners.

And in January City A.M. broke the news that media group Mecom’s shareholders, including Aviva Investors and Legal & General, had followed the removal of its founder David Montgomery by dismissing the group’s chair, Alasdair Locke.

But the negotiations that make it into the public arena are the tip of the iceberg.

Discussions between activist investor and board can begin before shares are even bought and continue through degrees of pressure – Crystal Amber’s decision to publicly vent its concerns over film studio Pinewood Shepperton’s performance last year was the first and only time it has taken a dispute public.

Activism is bouncing back from a fall-off in deals in 2008 and 2009, and investors are piling money into activist funds as risk appetite returns.

About 60 pure activist hedge funds managed $47bn (£29bn) of funds globally at the end of 2010, up from to $36bn in 2009 but still a long way behind pre-crisis levels of more than $54bn in 2007.

And the stock market recovery has exposed companies that still trade at a discount to their peers – making them a visible target for activists.

“We find companies with good cash flows and strong asset backing that have been neglected by the market and try to engineer a re-rating,” Crystal Amber director Richard Bernstein told City A.M.

Large cash piles amassed by many corporates since the recession are another factor. Shareholders are keen these are put to good use, and prepared to speak out if not.

“If companies are sitting on a lot of cash and don’t deploy it to increase shareholder value they are going to attract the attention of activist investors to pressure them to engage in endeavours that will unlock that value,” Kenneth Heinz, president of Hedge Fund Research, told City A.M.

But regulation is also a factor – and it is broadening the base of investors that can arguably be named activist. After a financial crisis that threw corporate governance failings into sharp relief, governments are using new regulation and guidance to involve investors more in firms’ behaviour.

“There is rising investor activism – but there is a difference between it happening, and activist funds doing it,” Bernstein said.

From the revamped Corporate Governance Code to the new Stewardship Code to encourage better dialogue between boards and investors, regulators are trying to force even long term, blue-chip asset managers to think like activists.

“Shareholders are feeling they are being positively empowered to engage in talking to boards,” Richard Spedding of law firm Travers Smith told City A.M., adding that anecdotal evidence showed large companies increasingly putting directors up for election annually.

“It provides activists with an easy target as they don’t have to call an extraordinary meeting,” he said.

It means fund managers such as Neil Woodford of Invesco Perpetual, who stormed the board of Omega Insurance last year to oust chairman Walter Fiederowicz, and four directors, are just as likely as Laxey to be making noise.

And with more investors acting like activists, 2011 may prove to be the best year for the phenomenon yet.

February 2011:
F&C Asset Management
Sherborne Investors won the support of more than 65 per cent of F&C’s investors, including key shareholder Aviva Investors. Chairman Nick MacAndrew and director Brian Larcombe were ousted, replaced by Sherborne’s founder Edward Bramson and two others.

September 2010 / January 2011: Mecom
Mecom’s founder and chief executive David Montgomery said he would resign in September after more than half its shareholders applied pressure. He finally stepped down in January after investors threatened to call an extraordinary meeting to make him leave. Investors later sent chairman Alasdair Locke packing.

March 2010: Omega Insurance
Invesco Perpetual led a shareholder revolt against the Omega board after founder John Robinson left the firm in 2009. Chairman Walter Fiederowicz and four directors were ousted.

January 2010: Mitchells and Butlers
Rebel shareholders including billionaire Joe Lewis and Irish investment vehicle Elpida threw chairman Simon Laffin off the board after eight weeks. Two thirds of shareholders voted for his removal after he fired four directors.

2008 and 2005: Deutsche Boerse
Hedge funds Atticus and The Children’s Investment Fund Management (TCI) terrorised the exchange for four years, ousting chairman Rolf Breuer and chief executive Werner Seifert after disputing its bid for the London Stock Exchange. In 2008 chairman Kurt Viermetz resigned.

2007: ABN Amro
TCI also intervened in the Dutch bank, calling for it to sell assets or merge with another bank to unlock value. ABN was eventually sold – the bidding war for the bank led to its highly-leveraged €72bn (£61.3bn) sale to RBS, Fortis and Banco Santander. This was a good deal for ABN Amro shareholders but a disaster for RBS.

1990-2004: various
Arguably the leading lights of shareholder activism for more than a decade, Julian Treger and Brian Myerson tackled companies from Aquascutum to Pilkington through their Active Value fund.