Activism against large nonfinancial US corporates increased 9% to more than 600 campaigns in 2016, but it was slower than the double-digit growth in prior years going back to 2012. Other trends impacting shareholder activism detailed by Fitch Ratings in a recent report include the rise of first-time activists, fewer campaigns against large-cap firms, more settlements related to board seats, adding proxy access to bylaws, and regulators blocking activist led mergers.
Titled “Activist Activities II: Emerging Trends, Rising Influence,” the report also evaluated 17 large investment-grade firms that have faced activist campaigns since 2013 and profiled 12 notable activists.
Fitch noted that several factors may have contributed to the deceleration in shareholder activism, including activists shifting their focus to financial companies, which made up 21% of global public actions in 2016 compared to 17% in 2013. The rating agency references a Pension & Investments survey finding that 59% of hedge funds reported a decline in assets.
Despite the mild slowdown in activist activity, corporates faced an increasing number of activists; Fitch noted Activist Insight’s determination that 20% of 259 activists making public demands of US companies were staging their first campaigns. In addition, activists picked up the pace of campaigns launched against mid-cap nonfinancial companies, which increased by 54% last year to 108, compared to an increase of 9% against large caps, to 143.
“Fitch views this trend as due in part to the increase in first-time activists, the ability to build larger positions in targeted firms with less capital, and the potential ease of orchestrating mergers among smaller firms,” the report says. “Nonetheless, public actions against select large- and mega-cap companies are continuing.”
Another obstacle in 2016 to successful activist campaigns was anti-trust hurdles. Regulators blocked mergers between Staples and Office Depot and Baker Hughes and Halliburton, and potential mega mergers between Dow and Dupont as well as AT&T and Time Warner are now facing regulatory scrutiny.
“Fitch believes the modest decline in M&A proposals could reflect activists’ perception that there is a risk that larger mergers may not pass regulatory approval and could explain dissident investors’ shift toward more smaller mid-cap targets,” the report says.
According to Activist Insight, M&A proposals represented 17% of all US nonfinancial public actions in 2016, down from 21% the year before. The largest percentage of actions last year, 45%, were related to board-related demands—375 out of 630. Gaining board seats made up nearly half of the 375, and activists experienced a success rate, inclusive of settlements, of over 70% when seeking board representation.
The report notes data from data analytics firm Factset showing that proxy access, allowing shareholders to include their nominated directors in proxy materials, was a leading governance-related demand last year, with 191 of the S&P 500 adding it, up from only two in 2013. Allowing proxy access, especially at low thresholds of investors stock ownership, Fitch says, could increase a firm’s vulnerability to dissident investors.
The Fitch report reminds corporates that activists are typically attracted to cash-rich sectors whose participants are slow to adjust to shifting consumer preferences or secular changes, and those with assets to monetize and restructure. Sectors with the biggest increases in public actions last year included industrials, basic materials, telecom, media and technology, and utilities.