Much has been made of the comparison between the coronavirus crisis and the global financial crash over a decade ago.
The pandemic has left dozens of listed UK companies in need of a lifeline, with the travel and leisure sectors devastated by government-imposed restrictions.
FTSE firms across all sectors have witnessed their stocks implode as the coronavirus lockdown has forced them to furlough staff.
The question now facing many boards is whether – as happened in 2008 – hedge funds and other activist investors will begin circling these distressed companies.
However, despite widespread fears of opportunistic actions, activists are biding their time – for now.
There has already been a slowdown in activist activity in 2020. Activists have acted on just 11 targets this year compared to 17 in the same period in 2019, according to Activist Insight data.
And they have gained just two board seats in the UK this year, compared to nine in the first quarter of 2019.
Coronavirus has forced boards to take drastic actions, seeking equity raises and cancelling dividends. UK banks have cancelled shareholders payouts as have struggling retailers and the vast majority of FTSE-listed firms.
Meanwhile the executive teams of the likes of Primark ownwer Associated British Foods have taken pay cuts over the coronavirus crisis.
Such drastic actions might normally spark movement from activists.
However, Stephen Nash, head of Eversheds’ public takeover group, says this time it is different.
Right now it is too early for activists to seek changes, Nash says, as boards grapple with more immediate problems. Those include the health and safety of employees and preserving cash.
Nash explains: “I think at the moment it is difficult for an activist to criticise a board looking to preserve cash.”
A survey of 20 institutional investors by shareholder advisory firm Squarewell Partners found investors largely believe boards “do not need further distractions at this moment in light of more immediate concerns”.
Activist investors to hold fire until crisis passes
There is a general consensus that activists will not begin campaigns in the midst of the pandemic, despite a crash in valuations.
In part this is down to an awareness among activists that new campaigns would generate a large degree of scepticism.
Ali Saribas, a partner at Squarewell, says: “I don’t think there’s a market for it. Activists know there would be some kind of scepticism. Adding another complicating factor when a company is in survival mode may not necessarily be the right timing for this type of campaign.”
Activists cannot enact change by themselves and need to win over other investors to support their campaigns.
Launching a new campaign in the midst of a global pandemic would be perceived as tone deaf, analysts believe. And doing so could even unleash a wave of criticism against such funds, as happened in the fallout of the financial crisis.
Squarewell partner Louis Barbier says this concern is at the back of activists’ minds: they are aware that going full pelt with a campaign could ruin their reputation.
Any action taken too hastily could also limit opportunity, Saribas cautions. “Activists could potentially limit their chances if they continue with the vulture approach.”
Coronavirus will create easier targets for activists
However, companies will not get this breathing space for long. Activist investors are certain to agitate once the fallout from coronavirus ends.
If the crisis drags on, the activist market could remain subdued into the second half of 2020. But Hady Farag, partner at Boston Consulting Group, predicts a lot more activity in 2021 as economies recover.
He says: “The vast majority of activist campaigns occur in market periods that are moderately positive. There is very little activity in a down market period, because activists are surprisingly quite risk averse.”
The crisis means historically tough targets for activists – fundamentally strong companies with few flaws – will be easier to attack due to the stock market carnage devaluing shares.
“Typical activist targets in such volatile times may actually not be in the most challenged sectors, where companies are fighting for survival,” says Farag. “[They will be] in relatively healthy sectors where some companies that have underperformed now are relatively cheap after the recent sell-off.”
He predicts activists will focus on industries they have already been pursuing, like consumer goods.
In 2020, a third of activist targets in the UK have been in the basic materials sector, followed by 18 per cent in the consumer sector.
Activists will target big equity raises
Once activists do go back on the offensive, the flurry of coronavirus-induced equity raises may open up opportunities for them to increase stakes in companies.
Tom Reeves, head of research at investor research firm Murano, explains: “Shareholders need to have confidence that the equity raise will be wisely used by management such that it unlocks shareholder value in the future.
“If that confidence is not there then the situation is ripe for activist funds to get involved with sceptical or disgruntled shareholders.”
And while raising concerns now is likely be met with scepticism, activists could use the current crisis as ammunition for future campaigns.
Activists may use the post-mortem of pandemic to shine a light on existing problems within businesses, analysts warn. Farag says management in particular will face scrutiny for how they worked through the crisis.
“There will be some socially motivated activism,” he says. “A lot of companies need to strike a balance between how they are treating employees and how they affect the business once things pick back up.”
Current efforts to ramp up communication with shareholders will go some way towards minimising activist aggression down the line.
In the medium term an “honest reflection from the board of what worked well and what didn’t would go a long way”, says Saribas. “There is little point in communicating if companies say they were fully ready, because that cannot be the case.”
He adds: “Companies can’t leave this crisis and say ‘we’ll be the same as before’. Things have to change and there is no harm in this crisis to say there were certain things you were not prepared for. Acknowledging weakness is better than trying to hide.”