M&A increasing in importance for activist investors
M&A is a favoured tool for activists, with 47 per cent of M&A activism since 2010 explicitly directed at pushing for the sale or acquisition of the target company, according to a report from Activist Insight and Kingsdale Advisors.
Yet the report, which provides a broad overview of the market and highlights groundbreaking campaigns, such as Carl Icahn at Dell, Pershing Square Capital Management at Allergan and Starboard Value at Staples and Office Depot, also highlights that volatile markets can increase the level of resistance to deals.
Opposition to M&A rose 81 per cent in North America from 2015 to 2016, as markets headed for a correction. Proxy advisers have also begun playing a significant role in increasing deal resistance, with institutional shareholder services more than doubling the rate of against recommendations on friendly negotiated deals between 2014 and 2016.
Concerns over deal pricing may have led the surge, with an increase in exits from activist positions led by both strategic and financial (including private equity) buyers. So-called “bumpitrage” appears to have been a profitable strategy for activists, with 18 of 68 mergers subjected to M&A activism seeing an increase in price between 2013 and Q1 2017, averaging an additional 21 per cent consideration.
The number of large cap targets in North America rose from an average of 7.3 in the years 2011-2013 to 15 in the years 2014-2016. In each of Canada and the U.S.A., however, most targeted companies across the whole period were valued at less than (USD) USD2 billion (71 per cent for the U.S.A. and 78 per cent for Canada).
“A friendly deal can no longer be counted on as a ‘sure thing.’ Boards need to understand they will be held to a higher standard as activists watch,” says Joe Spedale, president of Kingsdale Advisors, US. “When you consider the time, money, and effort that goes into just getting to the announcement of a transaction, it makes sense to understand, consider, and prepare for the risk that an activist can quickly derail your deal.”