M&A is top of mind: Will dealmakers actually double down in a downturn? Shareholder activism changes everything

White & Case LLP

White & Case LLP Activism affects virtually everyone now—even those who may never have to deal with an activist

If you’re still nursing doubts about whether activism has a broad effect on M&A, it may be time to put them to bed. Seventy-eight percent of respondents to our survey said activism will be a major driver of M&A over the next year.

Moreover, 95 percent said that activism has an impact on their M&A strategy—with 46 percent of that group saying it has a significant impact. The figures are similar across regions, with a near majority of respondents from the US (49 percent), Europe (45 percent) and Asia-Pacific (42 percent) saying activism has a significant impact on their M&A strategies. Perhaps surprisingly, respondents who were most likely to say this were from Spain (64 percent), China (59 percent) and Germany (53 percent).

In some of these countries, particularly where family businesses are more common and companies tend to be dominated by controlling shareholders, conventional wisdom has held that activism would have a hard time taking hold. But activists are increasingly targeting companies with controlling shareholders, especially when corporate governance is perceived to be weak.

So why did only 22 percent of respondents select shareholder activism as a top-three choice among nine important drivers of M&A? We think this apparent discrepancy actually highlights the complicated nature of activism’s impact—which in a sense is felt virtually everywhere, even if only a small number of companies are targeted at any given time.


How big is the iceberg?

Some argue that disproportionate media coverage exaggerates activism’s impact. The press is obsessed with it because it makes for great stories. In fact, only public companies are subject to shareholder activism, only a small number of public companies are overtly targeted and only some of these situations involve M&A.

Though relatively few companies actually grapple with activists, there’s a sense in which virtually all companies are now affected by activism

In a recent report, Lazard, the investment bank, identified 209 public activist campaigns that targeted 187 companies around the world in 2019. That was down from 248 campaigns in 2018 but roughly in line with figures from other years dating back to 2015. Ninetynine of the campaigns launched in 2019—47 percent of the overall total—were focused on M&A, a record number.

But there were 19,365 M&A deals globally in 2019. Of course, Lazard only reports campaigns that were made public, and the majority are not. Lazard’s numbers may represent the tip of the iceberg— we know that a lot of activism is taking place below the surface, out of public view, but no one really knows how much.

In fact, non-activist campaigns may be more common than most people think. The Financial Times recently published a piece about the relative effectiveness of private versus public activism, noting that activists increasingly use the metric “return on time invested” (Roti) when considering which path to take. It seems they often conclude that private campaigns deliver higher Roti.

Yet even assuming that only a small portion of activist campaigns are public, the combined total that involve M&A is still tiny relative to the overall number of deals. And adding strategies such as bumpitrage to the count wouldn’t seem to change it that much.

So what explains the seemingly titanic impact that activism seems to have on M&A strategies and expectations? After all, virtually everyone we surveyed said activism affects their M&A strategy.

It's in the water

Activism’s greatest impact may be indirect. When talking with boards 20 years ago, the conversation tended to focus on operating the business—maintenance. They didn’t revisit strategy and capital allocation policy very often, and they didn’t regularly communicate their thinking to investors.

That has changed. In particular, boards now talk about strategy almost continuously. They are hyper-focused on questions like: What’s different now? What are the opportunities? How do we think outside the box? What are we missing? It’s no coincidence that these are the kinds of questions activists ask. Boards have a different mindset today, and the change has coincided with the rise of activism.

In part, this is because activists can turn things upside down for companies that aren’t prepared to deal with them. But it also seems that activists have been around long enough to have helped change how companies think in a more generalized way. Many if not most companies, including private companies, may have come along this path to keep up with competitors who have developed an edge through greater vigilance. By affecting a relatively small number of companies, activism may have helped bring virtually all executives to a more proactive, ownershiporiented way of thinking.

If true, this may help explain why 95 percent of our respondents said activism affects their M&A strategy—while only 22 percent said it is a primary driver of M&A. The rise of activism has led companies to bake a type of activist thinking into their strategies—to preempt activists but also just to compete effectively in their markets. If activists actually materialize, companies may present M&A as a way to address their concerns—but they may be likely to see these ideas as coming from the strategic possibilities they had already identified prior to the activists’ arrival.

In this way, though relatively few companies actually grapple with activists, there’s a sense in which virtually all companies are now affected by activism.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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