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Has the shine worn off activist investment?

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A few recent cases suggest that the tide may finally be turning on activist investment, which until recently seemed as if it was becoming an entrenched part of the business world. Although the value of activist investor-held assets may have been climbing in recent years (in the UK, this figure grew 43% between 2017 and 2019 to reach $5.8 billion), the number of campaigns fell by 30% in the year leading up to September 2020. Of course, that drop-off can partly be explained by the fallout from the ongoing coronavirus pandemic, but the fact that more and more plays appear to be falling on deaf ears could signal a bleaker long-term outlook for activist agitators going forwards.

The latest case in point comes from England, where wealth management fund St James’s Place (SJP) were the subject of an attempted activist intervention on the part of PrimeStone Capital last month. After purchasing a 1.2% stake in the company, the fund sent an open letter to the SJP board of directors challenging their recent track record and calling for targeted improvements. However, the lack of incision or originality in the PrimeStone manifesto meant that it was brushed off with relative ease by SJP, with little impact being felt on its share price. The underwhelming nature and outcome of the campaign is indicative of a growing trend in recent years – and one that could be set to become more pronounced in a post-Covid-19 society.

PrimeStone unable to inspire

The PrimeStone play took the traditional form favoured by activist investors; after acquiring a minority stake in SJP, the fund tried to flex its muscles by highlighting the perceived shortcomings of the current board in an 11-page missive. Among other issues, the letter identified the company’s bloated corporate structure (over 120 head of department on the payroll), flagging Asian interests and tumbling share price (stocks have fallen 7% since 2016). They also identified a “high-cost culture” in SJP’s backroom and made unfavorable comparisons with other prosperous platform businesses like AJ Bell and Integrafin.

While some of the criticisms had elements of validity, none of them were especially novel—and they didn’t paint a complete picture. In fact, several third parties have come to the defence of SJP’s board, pointing out that equating the company’s downturn with the rise of interests such as AJ Bell is unfair and overly simplistic, and that when set against more reasonable touchstones such as Brewin Dolphin or Rathbones, SJP holds its own remarkably well.

PrimeStone’s admonishments over SJP’s high spending may hold some water, but they fail to recognize that much of that outlay was unavoidable, since the firm was forced to comply with regulatory changes and succumb to revenue headwinds beyond its control. Its impressive performance against its competitors confirms that the company has been dealing with sector-wide issues exacerbated by the pandemic, something which PrimeStone singularly failed to fully acknowledge or address.

Momentous vote imminent for URW

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It’s a similar story across the Channel, where French billionaire Xavier Niel & businessman Léon Bressler have collected a 5% stake in international shopping mall operator Unibail-Rodamco-Westfield (URW) and are adopting Anglo-Saxon activist investor tactics to try and secure URW board seats for themselves and push URW into a risky strategy to drive up its share price in the short term.

It’s clear that, like most companies in the retail sector, URW needs a fresh strategy to help weather the pandemic-induced recession, particularly given its relatively high level of debt (more than €27 billion). To that end, URW’s board of directors are hopeful of launching project RESET, which targets a capital raise of €3.5 billion in order to maintain the company’s good investment-grade credit rating and ensure continued access to all important credit markets, while gradually deleveraging the shopping mall business.

Niel and Bressler, however, want to forego the €3.5bn capital increase in favour of selling off the firm’s US portfolio—a collection of prestigious shopping centres which have by and large proven resistant to the changing retail environment—to pay down debt. The activist investors’ plan is being opposed by a number of third party advisory firms such as Proxinvest and Glass Lewis, with the latter calling it “an excessively risky gambit”. Given that credit rating agency Moody’s have predicted an 18-month slump in rental income that is likely to hit shopping centres – and have even gone as far as to warn that failure to implement the capital raise underpinning RESET could result in a downgrading of URW’s rating – it seems likely that Niel and Bressler’s ambitions will be rebuffed at the November 10th shareholder meeting, in the same way that PrimeStone’s have been.

Long-term growth over short-term gains

Elsewhere, Twitter CEO Jack Dorsey appears to have also overcome an attempt by high-profile activist investor Elliott Management to oust him from his role. Although a recent committee meeting did cede to some of Elliott’s demands, such as reducing board terms from three years to one, it chose to declare its allegiance to a chief executive who had overseen total shareholder returns of 19% prior to Elliott’s involvement with the social media behemoth earlier this year.

Alongside the atypically uninspiring campaigns conducted elsewhere in the market, and the retrogression of the sector as a whole, could it be that activist investors are losing their clout? For a long time, they have drawn attention to their ventures through flashy antics and bold prognoses, but it seems that companies and shareholders alike are catching on to the fact that behind their bluster, their approaches often contain fatal flaws. Namely, a focus on short-term inflation of the share price to the detriment of long-term stability is being exposed as the irresponsible gamble that it is – and in a shaky post-Covid economy, judicious prudence is likely to be prized above immediate profit with increasing regularity.

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