Yes Bank fired the first salvo this year, demanding Dish TV convene a shareholder meeting to reconstitute its board. Invesco followed, with a somewhat similar request. As these actions are seen as being more than just voting against a director’s appointment or approving changes to the articles of association, they are being labelled as “activist”. How should these instances be viewed? Importantly, when do investors
take such extreme steps? There are a few observations, mainly from the US market, that might hold for India.
While hostile takeovers hit the headlines, such instances are less prevalent than they appear. There are a few funds, such as Elliott Management, led by billionaire Paul Singer, Nelson Peltz’s Trian Partners, and Bill Ackman’s Pershing Square, that still do terrify boards, but it appears that funds increasingly engage, rather than grab control.
This is so for several reasons. First, few investors
have the appetite to fight — most prefer to sell and invest in the next opportunity they see.
Further, hedge funds
that dominated this space are making way for mutual funds/asset managers and even private equity. Importantly, there is a convergence between how the three behave.
For the last three decades, private equity has grown at a blistering pace. As the industry has matured and the gap between the returns has narrowed, public and private markets have begun to overlap. Private equity has invested more in the public markets (private investments in public equity or Pipes) and brought with it tighter oversight over its public market investments and the same deal-making as in private markets. Meanwhile, public markets seeing the higher returns that private markets were generating, borrowed from the private equity playbook and became more engaged with their portfolio companies, with a few seeing themselves playing an active role.
As fund managers have embraced stewardship, they see themselves as owners of business. Dodge & Cox, a fund founded during the Great Depression, said as much when it called itself “an active, long-term investors—not activists. Our approach is grounded in our commitment to advocating for what is in the best interest of our clients over the long term.”
The change in investor attitude is becoming widespread. “If I were asked to rank the most important moments of this era and name the one event that figures to have the most lasting impact, I would save the top spot for Wellington and its decision to become a public shareholder activist,” says Don Bilson, head of event-driven research at Gordon Haskett. “Corporate America had better take note, because the folks who actually pick stocks have finally decided to flex their muscles.” This means funds will now come knocking, without being labelled activists.
On which issues do funds step up their engagement, other than their routine monitoring? One is corporate governance reform. Then there is the firms’ payout policy and capital structure. Business strategy is often on the agenda — this may include operational efficiency, check excess diversification, play a role in a pending merger or acquisition, generally by asking for a better price or by trying to stop the pending acquisition. Increasingly, investors
are demanding more on sustainability — from disclosures to actual change. The socially conscious investors are the most recent to enter the fray, focussing on such issues as childhood obesity or screen time for children.
The tactics include, at one level, a meeting and communicating with the board or management on a regular basis with the goal of enhancing shareholder value to launching a takeover bid. In between these two are a host of options, including seeking board representation without a proxy contest or confrontation, publicly criticising the company and demanding change to making a formal shareholder proposal to appoint directors.
Firms that are undervalued— that is, the relationship between the market price and the intrinsic value of the business no longer holds, are most vulnerable. This undervaluation could be relative to the book value or relative to the cash flow being generated (and not being available to the business leading to lower payouts), and in some instances relative to the true “potential” of the business. The best defence is to ensure performance such that the value of shares remain well above where it rationally should be.
While being undervalued is a risk, being a large-cap does not always offer protection. True, it is difficult for funds to build a substantial position, but there have been instances of funds with very small holdings demanding and succeeding in driving change. Recently, Engine No 1 placed three climate-focused independent directors on the board of ExxonMobil.
Given that the average holding for the Nifty-500 is at 55 per cent, most seem to have a moat built around them: Investors are unlikely to shake down someone who owns a majority stake in the company. The ownership changes that we have seen have been forced through the Insolvency and Bankruptcy Code route, or owing to anemic performance with low shareholding — Fortis, CG Power and possibly Eveready. The coming wave of “promoter-less companies” will no doubt follow a different script.
Going forward, we will see funds more entangled in their investee companies. While the reasons are likely to be the same as in other markets, how they engage will be determined by the regulatory framework — which remains fuzzy. Only after aspects of the IBC regulation were taken to court was there greater clarity on its interpretation. Similarly, Zee Entertainment-Invesco-Dish TV-Yes Bank-type litigating will bring clarity on the respective rights and responsibilities, or what constitutes control, even as corporate India prepares to hold up under scrutiny.
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