Global Shareholder Activism Activity

What’s The Deal? | Shareholder Activism

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David Freedman: Hello. And welcome to our What's the Deal? podcast. I'm David Freedman, the global head of shareholder engagement and M&A capital markets here at J.P. Morgan. I'm delighted to be here today with my partners, Alfredo Porretti and Darren Novak. Today, we'll be exploring the latest trends in global activism. To kick things off, I invite Alfredo and Darren to introduce themselves, before we dive into our discussion. Alfredo?

Alfredo Porretti: Thank you, David, for having us. I am Alfredo Porretti, and I am the head of shareholder engagement and M&A capital markets in North America. Darren?

Darren Novak: Thanks, Alfredo. This is Darren Novak. I head our shareholder engagement, and M&A capital markets practice for Europe. David, maybe I can ask you the first question here leading off. How has the shareholder activism landscape evolved globally and in the US over the past year?

David Freedman: Shareholder activism has continued to rise over the past year, but the composition of it has shifted a bit. The US-style activism has continued to spread globally with more public activism being seen in both EMEA and some countries in the APAC region. In the US specifically, we've seen more activity from investors with new names, but when we look under the hood of those investors, we frequently find that the principals are people who spun out of more established activists. And when we look at the activity in the US, a larger percentage has been targeted at companies with larger market caps. As this has happened, we're seeing multiple activists attack some of these companies simultaneously, but with different prescriptions about what the company should do. Campaigns like these with multiple activists, make choosing an optimum defense posture even more challenging. Darren, why don't you talk about specifically what you're seeing in EMEA?

Darren Novak: It's interesting in terms of the total number of campaigns in EMEA. Year-over-year, in the first half of this year, we saw a 29% increase in campaigns. And that's interesting because behind the scenes, we've seen a significant amount of activity over the last number of years. But there's almost been a pent-up demand. And mirroring what we've seen in the US, over the last number of years, really focused on the small cap and mid-cap space. A tremendous amount of public activism going on as a result, where activists have felt as though using the tools of activism that we've seen in the US, that the public posture is actually the most effective way in fact of pushing forward their mandates.

David Freedman: That's very interesting, Darren. Turning to you, Alfredo, which sectors are seeing the most activism? Please talk about in terms of what tactics we're seeing activists using the most to influence companies, and any new tactics that you've seen recently.

Alfredo Porretti: Thank you, David. I would say tech, diversified industrials and healthcare are the three sectors that represent a majority of the activity levels, around 60% of what we see going on at the moment. With prominent activists continuing to target larger caps, defined as 10 billion plus, and that represents about 20% of the activity as compared to a much lower percent in prior years. Given that the M&A in financing markets are still challenged at the moment, a lot of campaigns are currently focusing on operational matters, on capital allocation themes, as well as corporate clarity and business separations. An example of a frequent operational and capital allocation theme in tech, to pick one sector as an example, is one where activists are focused on whether boards and management teams have been effective in balancing profitability with growth. In terms of tactics, I would say many of the old tactics continue to be used. However, the universal proxy card, even though it did not radically change the playing field, has offered activists more leverage in terms of board seats sought, both in proxy fight context, as well as in general settlement negotiations. David, how are activists continuing to focus on M&A, despite quieter deal levels and what's motivating this trend?

David Freedman: Well, Alfredo, to your previous point, M&A related demands are actually a smaller percentage of activist campaigns in the last year, and that is related to the lower volume of M&A. In some industries, though where we've seen very significant stock price declines, we are seeing signs of activists pushing for strategic review processes and things like that, if not an outright sale. As M&A activity has begun to accelerate again, as we're entering the fall here, partially on the back of increased optimism of a soft or no-landing scenario, we do expect to see M&A related demands would increase as a percentage of activist campaigns as we head into 2024. Darren, when you look at EMEA, are you seeing a similar trend there?

Darren Novak: Absolutely. There is certainly a significant amount of activist demands for separations, potential sales, et cetera. But very often the type of dialog that they're having is that maybe you can't actually affect it today, but you need to be prepared and you need to be disclosing to the market that you're thinking about these things. That you're in fact, pursuing a review of a potential separation. And this is becoming increasingly important. So the M&A demand market in Europe is very ripe. The activists are very much looking at M&A solutions for undervaluation issues with companies. But the activists are taking a slightly different tactic than they've taken before. What's important is that the activist understands and has the company communicate to the market, that they are in fact, reviewing the strategic alternatives, and that they're open minded to a potential transaction. The activist understand that there may be challenges with executing an M&A transaction near-term, but they want to ensure that companies are prime to be able to execute a transaction when the markets are right.

David Freedman: Now Darren, I've also heard you speak about capital return as something that has been a theme in Europe recently. Do you want to talk about capital returns distinguished from M&A demands?

Darren Novak: Absolutely. So very often, the activists are coming in through the front door of companies and talking about capital returns and capital allocation more broadly. With the increased interest rate environment, the use of each dollar that a company spends is becoming more and more scrutinized. And that really is therefore translating into significant debates about whether money should be spent on growth capex, money should be spend on... both on M&A, or should the money be spent on capital returns to shareholders? And that's really where the f- activists are initially focused on. And then they tend to translate that particular narrative into the broader portfolio discussion. And ultimately then, do these various businesses belong together? Should there be a separation of any sort, whether it's a monetization of a particular business, or whether it's a spinoff of a particular business. But that capital allocation debate is front and center. That is how the activists are beginning their discussions. And as a result, it's becoming fundamentally important for companies to have very clear capital allocation frameworks in place.

David Freedman: Alfredo, you touched earlier on the universal proxy rules. Let’s dive into that a little deeper. Talk about how we've seen universal proxy have an impact in 2023 and maybe what it was, and what it wasn't.

Alfredo Porretti: Well, we did not observe a radical shift in the number of proxy fights targeting companies with market values above 500 million in 2023, there were 20 versus 34 in the prior season, there was an increase in the number of fights that went to a vote. About 35% of the fights went to a vote, versus 25 in the prior proxy season. The bigger increases were in the smaller caps, but there was quite an increase. Interestingly, the mix and match feature of universal proxy resulted in ISS and Glass Lewis increasing their support for activist candidates. This was also often followed by investor support, resulting in an increase in activist success rates at the ballot. 58% of activist nominees were elected to boards in 2023, versus roughly 28% in prior years. In particular, ISS supported at least [inaudible 00:11:01] 75% of the time, and Glass Lewis two thirds of the time. And I would say 70 plus percent of the nominees supported by ISS, and 60% plus percent of those supported by Glass Lewis were elected by shareholders, which was a significant increase compared to the past four years. I would say the new rules have heightened the focus on director's skills and backgrounds. And companies are increasingly expanding their disclosure to highlight the relevant contribution of each director to the board. Another interesting phenomenon that we saw in this proxy season, was that there was quite a bit more litigation around the new rules, And rejected nominations that companies had. And that is a trend that we see as being likely to continue, as people continue to push the boundaries of the new regulations. I think if we think ahead, a few of the likely trends going forward will be a further on board composition and skills, both as a preemptive tool for companies to avoid proxy fights, but also as one of the main items of contention when a proxy fight does occur. Secondly, I would say, a higher price for peace will likely be exacted out there. And the starting point of negotiations will be a little bit higher when you're talking about settlements as compared to the past. And then third, there will be an increase on the number of fights at large companies we believe over the next few years, as a result of all the players getting increasingly more comfortable with the intricacies and mechanics of the universal proxy rules.

David Freedman: Thank you for that insight. Turning back to you, Darren. As we look ahead for the remainder of 2023, what is your outlook for how activism will continue to evolve, either the pace or anything else? And how are you telling companies to prepare for this?

Darren Novak: Sure, David. So the pace we are expecting to be significantly elevated as it has been, throughout 2023. There's a lot of activity behind the scenes. We're going to see certainly a lot of this become public over time. And it's incredibly important for companies to be ahead of this, before the activist shows up at the register and before the activist even shows up at the offices of the investor relations department, or of course, the senior leadership. And what's fundamentally important for companies to understand is that these risks can be mitigated. They should be addressed proactively, both through communication and action. When we go through the process of assessing how a company could be attacked by an activist, we go through all the various aspects that an activist could think of, but also those aspects that could definitely resonate with other shareholders. And it's really addressing those concerns, and especially in this elevated interest environment where capital allocation is, as we said, the front door for many activists to pursue their campaigns. It's critically important that we are as crystal clear as we can in terms of our capital allocation policy, that we have a fundamental view in terms of why all of our businesses belong together. What are the synergies? We have a fundamental view in terms of, the competencies of our board? Especially as there is increased pressure, certainly in Europe, in the overall composition of boards, where it's not only activists, but institutional investors that are very closely scrutinizing the composition of boards, both in terms of expertise, in terms of diversity, diversity in terms of gender, but also diversity in terms of where they reside. Many large shareholders are concerned about companies being dominated by local directors when companies' businesses are in fact, international facing. And as a result, it really is fundamentally important to get ahead of this risk, and we certainly can. And assessing what the risk is, determining what our rebuttals are going to be, but more important than just determining what the rebuttals are going to be, what are our actions? As I said before, what are our actions in terms of communication? What are our actions in terms of capital allocation? What are our actions in terms of portfolio?

David Freedman: Alfredo, I'm gonna turn to you. Would you please share with our audience what our view is for the Americas in terms of activism outlook? 

Alfredo Porretti: Yes, David. The activity in the Americas will continue. There is a lot of private activity that we are seeing that will likely come to the public domain soon. If the M&A markets recover, there's going to be increased amount of activism that is targeting companies that have a transactional outcome down the road. I would say, although I don't view the universal proxy rules as a revolution, but more as an evolution of the playing field, it does encourage activists to be more active, and it will lead to more activity down the road. So when we're thinking about preparation in the longer term, we advise clients, just like Darren mentioned for Europe, that it is good housekeeping for both management teams and boards to regularly get updates on the latest trends in activism from universal proxy to voting choice at the index funds and the other trends that are really altering and effecting the playing field in a quite significant way. And also, making sure that they have a good sense of their own operational and governance vulnerabilities, because they want to have a plan in place and have a client core team assisted by advisors, so that they are ready if anyone comes and appears on the scene.

David Freedman: Well, I'd like to thank Alfredo and Darren for joining me today, and hope that you have found this discussion insightful. Collaborating with Alfredo and Darren, and all of our partners in coverage here at J.P Morgan, we bring our clients the best holistic advice and we look forward to speaking with you as you are facing these challenges. Thank you very much for your time today.

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