London – July 13, 2017 – Leading global professional services firm Alvarez & Marsal (A&M) today announces the findings of a study identifying potential activist targets and the key levers that a company can utilize in reducing the risk of an approach.
The “A&M Activist Alert”, or “AAA”, is the most comprehensive statistical analysis of its kind and has predicted 60.8% of European activist targets within the last 3 years. It encompasses a wide range of variables and is primarily based on analyzing the financials of over 1,800 listed companies across Europe. A&M subsequently focused the findings and predictive model on 1,170 potential targets based in the UK, Germany, France, Scandinavia and Switzerland.
Key findings include:
- 111 companies in total have been identified as at risk of an activist approach either this year or next
- The typical activist campaign will go live after around two years of weakened performance – but that timeframe is shortening
- Weakened is not the same as weak – activists tend to prefer companies with underlying healthy profitability that could be significantly improved
- There are two categories of targets:
- ‘The Red List’: 79 companies that are considered at imminent risk
- ‘The Amber List’: 32 companies that have showed weakened performance, placing them at high risk if corrective actions are not taken in 2017
UK companies at greater risk
Of the 1,170 potential targets analyzed, 357 (30.5%) were based in the UK. However, of the 111 companies identified as being at risk, 52 (46.8%) were based in the UK, suggesting that UK companies are over 1.5 more likely to be targeted by an activist investor than those based in Germany, France, Scandinavia or Switzerland.
The largest predicted target sectors are Consumer, Industrial and Materials. The Materials sector is particularly interesting as it comprised 7.4% of the potential targets analyzed but 15.3% of the total companies identified as being at risk. Companies in this sector could therefore be seen as twice as likely to be subject to activist action.
Figure 1: AAA targets by country HQ and sector
Warding off activists: strategic levers
The key variables identified as having a statistically significant impact on the probability of an activist approach include the following:
- Negative influence – relative declines in share price, return on equity, EBITDA% and cash generation all encourage activists to take action, as does increases in Sales General & Administration (“SG&A”) expenses (as a percentage of revenue).
- Positive influence – activists generally avoid companies whose financial health is poor and so they prefer to see continued growth in enterprise value and net assets.
These variables have been found to predict activist actions with a 60.8% success rate, and therefore represent the levers that management can utilize in avoiding an approach. However, it should be noted that other, non-financial performance factors, are also influential. Examples not predicted by the model include activists taking issue with dividend policies, Board remuneration policies and potential mergers or disposals.
Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, said: “Activist approaches are growing in frequency in Europe and they should no longer be regarded as a ‘black swan’ event. Boards need to anticipate these scenarios, prepare and take pre-emptive action if necessary.
“Our AAA research confirms that there are several operational performance metrics, such EBITDA%, return on equity, SG&A% and cash generation, that management can focus on in preventing the wolves arriving at the door. Activists don’t target bad companies: they like good companies that could be doing better. Good is not good enough.”
About Alvarez & Marsal
Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to activate change and achieve results.
Privately held since 1983, A&M is a leading global professional services firm that delivers business performance improvement, turnaround management and advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action. Our senior professionals are experienced operators, world-class consultants and industry veterans who leverage the firm's restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage.
When action matters, find us at alvarezandmarsal.com.
The AAA model: a dynamic situation
The A&M analysis of activist actions over the past 3 years has shown that the key variables and timescales to action have evolved and continue to change. The effective “cure” space allowed for underperforming companies to demonstrate improved performance and ward off activist action was c2.5 years in 2015 but this had reduced to an average of 2 years by the end of 2016, and continues to fall. The importance of individual factors is also evolving.
A&M will be updating the AAA model on a quarterly basis to monitor for changed dynamics and to update the list of predicted targets.
Del Jones, Martin Robinson
Headland Consultancy PR, +44 (0)203 805 4828
Margaret Cameron-Waller, Director of Marketing U.K. & Europe
Alvarez & Marsal, +44 (0)207 7155202