European companies are being told by their advisers to open up and engage more with existing shareholders to fend off the increasing threat from activist investors, who force strategy changes to push up a target`s share price.
Activist investors are mostly hedge funds managing tens of billions of dollars of capital. The largest ones are from the U.S. and, having had success in North America and benefiting from a stronger dollar, they are flush with cash and looking for opportunities further afield.
According to JP Morgan, activist investors have launched 119 campaigns in Europe in the 12 months to June 2017, compared to 100 a year earlier and 62 five years ago.
That has pushed corporate management teams across Europe to ask investment bankers for help preparing defences in case an activist crops up on their shareholder register.
"We have seen a significant increase in calls from clients seeking our advice on how to prepare for when these investors knock on the door, especially after the activists` stakes in Nestle and Clariant-Huntsman became public," said Hernan Cristerna, co-head of global M&A at JP Morgan.
New York-based fund Corvex is pushing for Swiss chemicals company Clariant
Though there are several well-known European activists, such as TCI Fund Management and Cevian, most of the world`s largest funds such as Third Point, Elliott Management and ValueAct are American. Their success has crowded the U.S. market.
Europe is seen as tempting as financial and political uncertainties have diminished. UK companies are thought to be particularly attractive targets due to corporate governance rules which give shareholders more influence, and the often large number of minority investors.
Anglo-Australian miner BHP Billiton
On Tuesday, BHP said it was looking at options to exit its U.S. onshore shale business, conceding to one of Elliott`s demands. [nL4N1L75D4]TACTICS
Often activist investors initially engage with target companies quietly, discussing possibly strategy changes with them. Some firms welcome them, as they can help secure wider support from shareholders or insiders for major change.
But mostly the funds are seen as a threat, especially when they start publicly calling for changes and criticising companies who will not adopt their recommendations.
"More companies in Europe feel the need to have a discussion with their advisers on activism - no one wants to fend off an activist attack in the public eye," JPM`s Cristerna added.
Bankers said they advise clients to engage with existing shareholders to potentially dissuade them from supporting an activist attack. They also look at companies` assets and advise them if any could be sold to improve shareholder returns.
These pre-emptive moves might explain why the success rate of activist campaigns in Europe has been falling since 2014. According to data from industry tracker Activist Insight in 2017 just 32.8 percent of campaigns have been "at least partially successful", compared to 43.2 percent in 2016.
Among those that emerged as clear victors this year in Europe is Nordic hedge fund Accendo Capital Managers, which became the largest shareholder in fibre optic manufacturer Hexatronic Group
U.S. bankers said that as campaigns targeting European firms increase, they are looking to cash in on advisory work.
"European institutional investors are less comfortable with the concept of activism from a cultural perspective, particularly when it`s a U.S. hedge fund coming over," said Chris Young, head of contested situations at Credit Suisse in New York.
"In the U.S., activists are often treated like rock stars, they get a lot of favourable press coverage and that`s not the case in Europe," he added.
"We had teams in the U.S. dealing with activist issues and we also have now people in Europe, working closely with their U.S. colleagues because more often than not, these activists are the same," Severin Brizay, head of EMEA M&A at UBS said.
For the funds themselves, this can also bring benefits.
Harlan Zimmerman, a senior partner at Anglo-Swedish activist firm Cevian Capital, said some European companies are becoming more willing to engage with activist investors.
"With the proliferation of activism, companies and their advisers have gained a much better understanding of the spectrum of activism and how to engage with activists of all sorts," he said.
"There`s no longer a stigma from having certain activists involved and on a board. In fact some boards see it as a validation and helpful to realising their own objectives for the companies."
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)