13 Feb ‘Forceful tactics’ underpin bigger role in activist-fuelled M&A

Source: Financial Review

By: Aaron Weinman

Australian boards are weighing “forceful” and “aggressive” tactics to unlock greater value in merger and acquisition conversations as companies face heightened pressure from activist shareholders.

Activists like Grok Ventures’ Mike Cannon-Brookes have leveraged, and corralled, support from an influx of retail and institutional investors, to force through changes like shuffling boards or igniting asset sales at the public companies they are invested in, two managing directors at JPMorgan told The Australian Financial Review.

“Using forceful and aggressive tactics to unlock value” is a key component in activist investing, Alfredo Porretti, JPMorgan’s head of shareholder engagement and North American capital markets and M&A said.

“You need an outsized, or significant, return of the famous ’alpha’,” he said.

“There are few places where you can get that alpha, notably in private equity activism and a few other distressed investments.”

Passive investors

Passive equity ownership has also impacted how shareholder activism is conducted.

Passive investors – which typically hold shares in companies through indexed investing vehicles like mutual funds or exchange-traded funds – now make up about 15 per cent of public company ownership globally, data from the Investment Company Institute showed last year.

That is significant when activists need enough shareholder support to make operational changes at companies. And as passive investors gain clout, that puts activists in a position to be more assertive, Kierin Deeming, JPMorgan’s head of M&A for Australia said.

“[Activists] will always have a special relationship with index funds because they allow the index to improve performance by pushing the agenda and ignite change at companies.”

While passive investor ownership is still quite nascent in Australia, they have been pivotal in the US market, Gabriel Radzyminski, chief investment officer and founder of activist investment firm Sandon Capital said.

“From a passive investor perspective, they are interested in hearing what might happen that can help improve value. Even though they are index-constrained, if the value goes up, that is not bad for them at all,” Mr Radzyminski told the Financial Review.

Getting ahead

Last year’s activism campaigns – like Seven Group increasing its share in cement company Boral in October or private investment firm BGH Capital’s bid for Virtus Health last May – has led investment banks like JPMorgan to get proactive with how firms advise their corporate clients.

Activist investors – and their agendas – have become a bigger talking point between banker and client, especially when volatile sharemarkets can make publicly listed firms vulnerable to their investors when their share prices drop.

Mr Radzyminski described the process as a “contest of ideas” between what an activist might espouse versus company boards and management.

“That is what activism is. You try to get someone to do something they do not want to do,” he said.

For Mr Porretti, this dialogue has morphed the advisory process with banks’ clients into putting themselves and their clients in “the shoes of the activists”.

Bankers are constantly thinking of levers they can pull to create value for clients – and fees for themselves – through operational changes, transactions or returns on capital.

“We try to think what would be the attack theme or the main thesis, and then presenting that to management,” Mr Porretti said.

“It is a lot of proactive work. You do not want someone showing up to management and the board and challenging you.”

The ESG equation

When Mr Cannon-Brookes intervened in AGL last year, part of his rationale for a takeover was to speed up the company’s transition from coal-fired power to cleaner energy sources.

Environmental, social and governance matters like companies’ approach to carbon emissions has become a focal point for activists.

For bankers, ESG matters touch on all parts of their businesses from how their investment fund clients allocate capital to what corporate clients are doing to tackle climate change or create a more equitable workforce.

For Mr Porretti, ESG goes beyond activism because a lot of the money sloshing around the capital markets is being ring-fenced exclusively for ESG-related initiatives.

“[ESG] has indeed changed [the activism process],” he said.

“Companies do not want to be in a position where they cannot attract ESG friendly capital because that puts a tremendous amount of pressure on their stock price.”