• U.K. remains the most attractive hunting ground for activists
• Rising ESG concerns and energy security pressures to drive more activist attacks on energy companies
• Transformation campaigns deliver best relative returns for investors

London, 17 May 2022 – Global professional services firm Alvarez & Marsal (“A&M”) today announces the findings of its latest analysis and predictor of shareholder activism in Europe in 2022, the “A&M Activist Alert”, or “AAA”.

This update on its 2022/23 outlook predicts that 155 companies will be at risk* of activist attacks in the next 18 months, an increase of seven compared to A&M’s last update in November 2021. A&M’s previous report predicted that we were entering a ‘Golden Age’ of activism – and indeed 2022 has already seen a rush of activist campaigns in Europe, with a 30% increase in January and February compared to the same period in 2021.

The horrors of war in Ukraine gave pause for thought and a temporary slowing of activism in March and April. However, the resulting market turmoil has already begun to reveal market ‘winners’ and ‘losers’, thus increasing the number of corporates predicted to be activist targets over the next 18 months.

The U.K. remains the most attractive market for activists in Europe, with 59 U.K. corporates predicted to face a public campaign by an activist investor in the next six to 18 months, an increase of four compared to November 2021.

Activism driven by environmental, social or governance (ESG) concerns increased 20% in the first two months of the year, compared to 2021. This is expected to continue, particularly in the energy sector, where predicted targets have increased 60% since the last update. The sector is also under pressure from energy security concerns.

Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, said: “The impact of the war in Ukraine has given activist investors pause for thought, in part for fear of being seen as unsympathetic by launching public campaigns during such disruption. However, as market uncertainty abates, corporate underperformance will be exposed and will ultimately lead to an uptick in activism as value creation opportunities are highlighted more clearly.”

Regional trends 

• The AAA predicts that the U.K. will remain the preferred market for activists in Europe, with 21 corporates identified as being at imminent risk of public activism. The U.K. has already seen a significant uptick in campaigns this year; in January and February, the number of corporates targeted was up 50% year-on-year. Inflationary pressures and supply chain disruption, combined with Brexit, will continue to weigh heavily on UK corporates and drive more activist attention.
• Germany, France, and Switzerland also see a slight increase in the number of predicted targets over the next 18 months. Changes to corporate law in Switzerland are due to make it a more shareholder-friendly environment in 2023, leading to an increase in the predicted number of activist campaigns from nine to 11. 

Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, said: “As the most shareholder-friendly jurisdiction in Europe, with a transparent legal regime and robust governance practices, the U.K. remains the preferred hunting ground for activists. As we have seen in the early part of 2022, the arrival of an activist into a U.K. corporate is more likely to be accepted as good news by the market and a catalyst for change. The challenges that U.K. companies will face from inflation, supply chain disruption, labour challenges and Brexit will only solidify its position as the most favoured market, and we expect to see a further increase in activist activity in the later part of this year and beyond.” 

Sector and developing trends 

• The energy sector is likely to experience the biggest increase in activism, with eight predicted tar-gets compared to five in November 2021. This reflects the growing ESG focus of activist campaigns as European energy majors face pressure to move towards greener alternatives to oil and gas. At the same time, the strategic issues that these companies face due to the current dislocation in global energy markets and concerns around energy security may give rise to competing campaigns that support fossil fuel production in local areas.
• Corporates in the industrials sector are expected to face heightened interest from activists, with 52 predicted targets, up from 50 in the November 2021. Ongoing pandemic disruption and supply chain complexity has been exacerbated by the effects of the war in Ukraine.
• The consumer sector has also been affected by the war, with corporates operating in Russia forced to adapt their strategy and operations, meaning the number of predicted targets remains high at 32.

Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, said: “ESG continues to be a key driver of activism in Europe. The energy sector is coming under mounting pressure to cut back on carbon-intensive activities and seek renewable alternatives, with an increasing number of activists looking to make their voices heard. The war in Ukraine has also exposed Europe’s over-reliance on Russia for its gas supply, giving activists further impetus to push for more local fossil fuel production to achieve energy security. Boards of energy majors could therefore be faced with a Gordian knot of competing and contradictory activist demands.”

Share price performance

• Investment returns for activists themselves can be difficult to assess, with many investments ‘under the radar’ and through indirect instruments. Nevertheless, we can track the share price performance of corporates after an activist launches a public campaign, and therefore whether it pays to follow activists as an ordinary shareholder.  To that end, A&M has analysed the share price performance of 266 US and European corporates targeted by activists between 1 January 2018 and 31 August 2021.
• Initial findings show that over the past three years, following the average activist investment is unlikely to have been a market-beating strategy, with the share price of targeted companies underperforming the wider market. 
• However, performance differs by type of campaign and country in which the target is based. In particular, UK and transformation campaigns have both significantly beaten the market. In the first six months of a campaign, UK corporates saw an outperformance of 1.5%, likely due to a more positive outlook on activist campaigns among investors. After three years, the UK registered outperformance of 5% over the market average.
• Transformation campaigns demonstrate the highest relative returns compared to other forms of activism from 12 months onwards – and outperform by 14.8% after three years. By contrast, governance campaigns appear to perform poorly as boards struggle to address both external issues impacting the business and an activist attack focused on changing governance. 
• Activists typically have a pragmatic approach to exiting their investments – the majority (85%) either selling within the first 18 months if their objectives are achieved (or perhaps defeated), or remaining invested for more than three years to see the value generation come to fruition.

Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, said: “Transformation campaigns deliver by far the greatest outperformance compared to governance or M&A-led campaigns, particularly in the long term after three years or more. These campaigns take time to start delivering bottom-line results, but it’s clear that activists recognise the value of staying invested for the long-term, with 42% of activists waiting three years or more to exit as the de-manded transformations begin to yield net returns.” 

(*) Risk defined by inclusion in Red and Amber Lists from the AAA model, which highlights corporates facing heightened risk of activist targeting

-ENDS-

Contact
Ellen Johnson
Headland Consultancy, +44 (0)203 805 4816

Notes to Editors

Share Price Performance Methodology
A&M analysed the share price performance of 266 corporates across Europe and the U.S. (133 in U.S., 46 in U.K., 87 in Continental Europe) that had been publicly targeted by activist campaigns anytime within the period, 1 January 2018 to 31 August 2021. The share price analysis for each corporate began from the end of the week before the activist campaign started, tracked at intervals of 6 months up to 36 months (where applicable).

A&M then compared the share price performance of those corporates against market indices (S&P 500 and STOXX Europe 600).

Red and Amber Lists
The AAA model calculates a score for all analyzed corporates that predicts the likelihood of public activist action. Companies with high AAA Scores, and therefore with a higher predicted likelihood of public targeting, are classified as either Red or Amber alerts. These classifications are based on the AAA Score calculated on two bases: firstly an analysis of the past two years performance and, secondly, a “leading indicator” analysis focused on the past one year’s performance.  

Corporates with high AAA Scores on both the two year and one-year bases are considered to be at high short-term risk (next six to 12 months) of public activist action and may already be subject to non-public approaches. Such high-risk corporates feature on the Red Alert list. Companies with a high AAA Score on either the two year or one year basis are likely to be being monitored by activists. Such companies are considered to be at medium risk which will only increase if corrective action is not taken within 12 to 18 months. Such medium risk corporates feature on our Amber Alert list. 
 
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