Industrial companies are now predicted to be most in demand from activist investors, according to the findings of global professional services firm Alvarez & Marsal’s (A&M) latest analysis and predictor of shareholder activism in Europe, the “A&M Activist Alert”, or “AAA”.
In addition, of the 148 European companies predicted to be under threat from public activist targeting, 56 of these are U.K. companies. This cements the UK’s status as the most attractive market in Europe for activists.
The report reveals that throughout Europe, conglomerates face heightened likelihood of activism. Uneven performance by division increases the likelihood of being targeted by activists seeking to improve the performance of weak business units or force their sale. Key drivers of this trend are private equity firms eager to deploy capital on public to private spin-offs.
Industrials companies make up the largest number of entries on the target list (45 in total). This sector has the greatest concentration of conglomerates in Europe (while Industrials account for 26 per cent of the companies analysed by AAA, they make up 37 per cent of European conglomerates analysed).
The Consumer sector also scores highly on the activist radar (43 in total), but these companies are starting to fall out of favour, driven by two opposing forces. Many potential targets – particularly in Retail – have now simply become too weak to draw the interest of activists, while many others have already been publicly targeted.
Energy companies are also dropping off the activist radar, but for a different reason. As commodity prices recover, profits and share prices are improving. Only four Energy companies are now at risk; a sharp reduction from the 10 which were predicted in May 2018.
After the UK, Germany, France, Italy and Benelux are also particularly attractive countries/regions for activists.
Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, says: “The Industrials sector has become a magnet for activists. Many of its leading companies operate under a conglomerate structure, often reporting uneven divisional performance. At a time when private equity funds have record levels of dry powder to deploy, activists are well aware of the opportunities to spin-off underperforming business lines. Boards need to act fast in addressing such underperformance before the wolves come calling.”
For the first time, A&M has included the age of Board Directors within the AAA model. While the average age of a Director does not influence the risk of an activist approach, the age range of the Board is a statistically significant factor. Indeed, greater age diversity on a Board can help deter activists – but only if the age range isn’t too great.
There are continuing indications that increasing the number of women on a Board may be associated with a reduced risk of shareholder activism.
McKenzie adds: “A lack of diversity in the Boardroom leads to suboptimal decisions which in turn can prompt activist approaches. Our research shows that age range and gender are two factors to consider when appointing Directors. Boards that encourage diversity of thinking are likely to foster more resilient companies, armed with the right tools to stay ahead of the competition and avoid activist targeting.”