Hunting returns

Activist investors go mainstream in Europe

Keith Meister, Managing Partner and Chief Investment Officer of Corvex Management, speaks during the Sohn Investment Conference in New York City
White Tale, bald head: hedge fund manager Keith Meister. Source: Reuters

The chemistry is not quite right these days between Swiss chemicals company Clariant and one of its key shareholders. Last month, the American activist investor group White Tale thwarted a planned $20-billion (€16.7 billion) merger between the Basel-based multinational and its US rival Huntsman Corporation.

Now White Tale, which holds 20 percent of Clariant, is demanding three seats on the board and an independent strategic review. Last week, Clariant’s management, fearing the firm could be broken up, told the investor group to take a hike. White Tale, which includes hedge fund manager Keith Meister and New York City-based investor 40 North, has hit back with threats of an emergency shareholder meeting.

The quarrel exemplifies how US activist investment practices are increasingly the norm in Europe. Across the continent, activist investors are hunting for targets. According to the information service Activist Insight, in 2009 there were just six activist campaigns targeting European companies valued at more than €1 billion; in 2016, there were 40, including high-profile moves on German firms including online bank Comdirect, industrial group Schaltbau Holding, pharmaceuticals firm Stada and machine maker Gea. All the signs point to a further increase this year.

One key shift has been that institutional investors, including investment managers and pension funds, are now more willing to support activist investors. Some have even begun to adopt their tactics, says Klaus Röhrig, a founding partner at Active Ownership Capital, among the most notorious of activist investors.

Activists have changed – where once they focused on ongoing mergers, now they try to directly influence corporate strategy.

Michael Schmidt, a leading executive at the large investment fund Deka Investment, agrees: “There is definite overlap between activist investors and funds like Deka.” Common interests include corporate governance and strategic direction, he says: “Both activists and mainstream funds want to increase their influence and ultimately to drive up value.” Even Larry Fink, head of BlackRock, the world’s largest investment fund, has invoked the specter of activists. In a letter to Europe’s 200 largest companies earlier this year, he said that if his governance suggestions go unheeded, he is prepared to “support long-term activists,” where their ideas are better than those of company management.

The activist formula is simple enough. They buy up a small minority stake – usually between 3 and 10 percent – then use their position to demand restructuring, changes to the executive team, and even the sale of whole divisions. Alexander Mayer, a partner with Goldman Sachs in Germany says activists have changed – where once they focused on ongoing mergers, now they try to directly influence corporate strategy.

Christian von Engelbrechten, a fund manager at Fidelity Germany Fund, says in many cases activist investors have forced through successful restructuring, and profited from it. For example, after private-equity firm Permira acquired a majority stake in Hugo Boss in 2007, the London-based investor pushed hard for the fashion retailer to restructure and increase its profitability. That strategy sent the Boss share price soaring from under €10 in 2007 to nearly €120 by the time Permira sold the last of its stake in early 2015.

There have been other success stories, none more than high-profile pharmaceuticals firm Stada, which first enjoyed a makeover, then a takeover, all to the benefit of outside activist investors. Just a couple of years ago, Stada was a staid provincial generic drug maker. But then pressure from Active Ownership Capital forced through changes in management and corporate structure, finally ushering in a takeover by financial investors Bain and Cinven. As the stock price was driven up, numerous activists and hedge funds did very well indeed from their intervention.

“Activist investors are focusing more and more on Germany and Europe because the US market has been over-exploited.”

Ingo Speich, fund manager, Union Investment

However, not all activism is profitable. Four years ago, Swedish investment group Cevian bought up 15 percent of ThyssenKrupp. But their investment goals have been slow to be realized. The Essen-based industrial group’s losses in 2016–2017 were “a matter for concern,” said Cevian founding partner Lars Förberg. The Swedes had hoped for a share price of €50 by now; in fact, the stock can be had for around half that.

With low stock prices and low earnings, Germany’s banks have long been in the cross hairs, although management has laughed off suggestions that activist investors could force a large-scale merger between Deutsche Bank and Commerzbank. But financial investor Cerberus now has a stake in both and is keeping a keen eye on the European banking landscape, convinced there are bargains to be had and profits to release through merger or demerger.

To keep activist investors at bay, management teams need to be hyper-vigilant on three main business features. First, activists often start to cluster after repeated profit or earnings warnings. Second, any company with chronic management problems will also draw attention. And third, a weak stock price will, above all, serve as a red flag. If a firm meets at least two of the criteria, it can expect to be preyed upon by activist investors.

“Activist investors are focusing more and more on Germany and Europe because the US market has been over-exploited,” explained Ingo Speich, a fund manager with Union Investment. As a result, senior executives of many German companies are trying to preempt activist interest by dealing with problems before they become the focus of attention.

For a fat fee, investment banks will advise on how to fend off unwelcome attention. Their main advice: Don’t ignore the activists. Instead, try dialogue. Some observers say there is a greater tendency among German firms now to listen to activists, since management and non-executive supervisory board members more often have a personal stake in what happens. “That increases their readiness to listen to activist shareholders,” said Matthias Horbach of the law firm Skadden, Arps, Slate, Meagher & Flom.

And some large German companies, like retail giant Metro, have demerged voluntarily, looking to reap the benefits of activist tactics without having to succumb to outside pressure. Management theory has firmly swung behind corporate break ups. Where conglomerates were once the fashion, seen as “greater than the sum of their parts,” now demergers are all the rage, seen as a way to unlock value from within.

Finally, there is very good reason to learn from activist investors. They make money. In 2016, the hedge fund TCI had a return of 13.5 percent on invested capital. Cevian, even with its ThyssenKrupp problems, showed 19.4 percent returns. Very few other hedge funds can compare with that kind of performance.

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 the financial markets. To contact the authors: koehler@handelsblatt.com, landgraf@handelsblatt.com

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