Capitalist invaders

Activist investors shake up German complacency

ThyssenKrupp helmet 1800px
In need of some tough love. Source: DPA

Just a few years ago, the “activist investor” was a rare breed in Germany. But as their power has grown on world financial markets – some estimates say major activist funds have $275 billion (€238 billion) at their disposal – they are shaking up more and more German companies, buying stock, making trouble at shareholder meetings, and muscling their way onto the board.

At ThyssenKrupp, one of Germany’s creaking industrial behemoths, activist shareholder Cevian Capital recently forced out CEO Heinrich Hiesinger, who propounded the merger with Tata Steel that, alas, is no cure for weak core profitability.

Activist investors have also transformed the pharmaceutical firm Stada, taking a small stake then using it to ram through a management and governance overhaul, drive up the stock price and usher in a takeover and new ownership.

Ruthless activist focus on short-term growth and rising stock prices seems to go against much of what German business prides itself on: a long-term outlook, equitable corporate governance, and a socially responsible attitude.

G S43 Activists in Europe-02

And on the face of it, a titanic battle is brewing. But not everyone sees conflict as preordained. Some observers see the activists as a shot in the arm for German business, bringing a salutary dose of growth-oriented thinking which can help shake companies out of complacency.

It’s no coincidence that ThyssenKrupp has been on the activist to-do list. In the last 10 years, the conglomerate has lost 42 percent of its market capitalization as it floundered in search of a viable business model.

Friedrich von Bohlen, a member of the Krupp industrial dynasty, sits on the family council that advises ThyssenKrupp. He says the arrival of the activists is a great opportunity: a clash of cultures allowing German business to affirm the value of its traditional social-market model, while remaining open to good ideas from the activist side.

From a financial point of view, there is no doubt that activists can be successful. The biggest funds promise impressive year-on-year returns, ranging between about 13 and 19 percent. One key tactic is to release “trapped value,” by breaking up larger conglomerates into component parts and selling off the most valuable.

One indirect sign of activist influence is a recent wave of demergers in large companies. Siemens’ spin-off of its medical engineering division Healthineers and its lighting subsidiary Osram can be seen as an attempt to preempt activists by shrewd use of their own tactics.

Siemens CFO Ralf P. Thomas notes that activist investors are increasingly coming to Europe and cannot be ignored. Bayer is another colossus that has tried to release value, most recently by spinning off its plastics division as Covestro in 2015.

The rise of the activists cannot be separated from the aftermath of the global financial crisis of the late 2000s. Since then, low interest rates and poor returns have prompted investors to get more aggressive. And as more and more stock was held in passive index funds, a relatively small stake in a company can be leveraged into real influence within companies.

May the disruptive force be with you

Activist interventions are winning increasing approval from other investors, who have come to appreciate the disruptive force. Ingo Speich, head of the more traditional investment fund Union Investment, has welcomed Cevian’s contribution at ThyssenKrupp. A survey of German financial professionals revealed that 60 percent backed activist tactics.

And nothing succeeds like success. Inside of a year, Active Ownership Capital, the group behind the transformation of Stada, boosted its share price from €28.60 to around €90 per share.

By comparison, Germany’s worst-performing industrial giants – Deutsche Bank, Commerzbank, ThyssenKrupp and energy companies E.ON and RWE – have lost up to 80 percent of their capital value over the last decade. No wonder so many observers increasingly see activist investors as a wedge to rattle consensus governance and renew focus on the bottom line.

Thomas Jahn is Handelsblatt’s New York bureau chief. Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is Handelsblatt’s chief correspondent for financial markets. Christian Rickens is a Handelsblatt editor in Düsseldorf. Brían Hanrahan adapted this story into English for Handelsblatt Global. To contact the authors: jahn@handelsblatt.com, koehler@handelsblatt.com, landgraf@handelsblatt.com, rickens@handelsblatt.com

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