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Hugging your activist investor to death

Taking Stock

Hugging your activist investor to death

In a popular sketch, the US television series Family Guy portrayed a 'drive-by argument' in which two bespectacled English gentlemen roll down their car window to shout at an acquaintance: "Oh, Reginald! I disagree!" A caricature it may be, but some conflicts are indeed conducted differently on this side of the pond. Consider shareholder activism.

The US has seen a series of high profile, and at times nasty, spats between a new wave of activist investors and their chosen targets since the financial crisis. Companies such as Allergan (US:ACT) and restaurant group Darden (US:DRI) have fought lengthy and costly battles with US activist hedge funds over corporate strategy and governance. These conflicts have formed the subject of a new book, Barbarians In The Boardroom, by Financial Times journalist Owen Walker.

The case studies are remarkable. Take Jana Partners, which managed to take effective control of a quarter of the board seats at US drugs retail group Walgreens (US:WBA), despite owning less than 1 per cent of its stock. The hedge fund had built a strong relationship with Stefano Pessina, then in charge of Alliance Boots, Walgreens' acquisition target. Ultimately, target and activist overhauled the acquirer. Or take San Francisco-based activist firm ValueAct, which used its relationship with dissatisfied institutional investors to get its president Mason Morfit nominated to the board of software giant Microsoft (US:MSFT).

Perhaps most fascinating is how activist hedge fund Starboard Value managed to take over the entire board of Darden, replacing it with 12 people nominated by the firm. This followed a very public dispute over the company's entire strategy, with Starboard's granular assessment of the chain Olive Garden even proposing a reform of its breadsticks policy. Darden's decision to sell its Red Lobster restaurant chain against the will of many investors was the final straw that broke the incumbent board.

UK shareholder activism has been quieter in a couple of senses. There were 24 campaigns in 2015, according to Activist Insight figures cited in the book, compared to 21 in 2014, 27 in 2013 and 38 in 2012. This is partly, as Mr Walker explains, because shareholder rights to nominate directors and call meetings are stronger here than across the pond, as are some governance standards. But the campaigns here - with recent, notable exceptions being Stock Spirits (STCK) and investment company Alliance Trust (ATST) - are also more likely to be closed-door affairs. At least publicly, it's a bit more nicey, nicey. With little furore, the afore-mentioned ValueAct took a board seat at Rolls-Royce (RR.) earlier this year, with off-record briefings to media seeking to reassure that the activist was not looking to overhaul the strategy or press for big cash returns.

The recent fall of sterling against the US dollar certainly improves the allure of British companies to US activists. Those stocks which have suffered at the hands of the electorate may also prove attractive, just as Rolls-Royce's struggle to respond to challenges in its end-markets left it vulnerable.

But what can companies do to deal with activists? Maarten Wildschut, co-head of European active ownership strategy at RWC Partners, says the best approach is to "hug them to death". That means inviting the activists in early, hearing their concerns and demonstrating to other shareholders the engagement made. As an activist, Mr Wildschut might be expected to say that, but his words are reflective of a wider attitude.

Retail shareholders will not be left out of this fight. Activist Elliott Advisors went so far as to employ its own registrar and send out proxy cards to shareholders in its battle with Alliance Trust. For those struggles that break cover, it may be down to you to decide whether to let the barbarians through the door.

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