Valuable Advice for Companies from Successful Activists

FIRST Advisers hosted the ‘What Drives Activism?’ panel discussion at the AIRA 2018 Annual Conference held in Sydney on the 23rd of November. While the video of the Conference, including this panel session, can be accessed here, there were a number of interesting takeouts from the discussion that we have summarised below.

The panellists included three well known activists in the Australian market, each of whom represents very different styles of activism;

• Gary Weiss, Executive Director of Ariadne Australia
• Gabriel Radzyminski, Managing Director and Portfolio Manager, Sandon Capital
• Nick Paris, Director & Portfolio Manager, LIM Advisors.

The discussion was moderated by Victoria Geddes, Executive Director at First Advisers, who also published a white paper for release at the Conference titled “Activism Australian Style” available here.

The Process of Engagement

Activists or indeed any shareholder who has concerns about a company’s performance will first seek to engage with board and/or management in private to offer suggestions or explore strategic options for change. If this fails then two options emerge – for portfolio investors the next step is to go public and for M&A activists like Ariadne it could culminate in a takeover offer.

So what triggers the decision to go public?

The most common response when panellists presented suggestions to target companies was that they were summarily dismissed with the company taking the view they knew best. That would then be the trigger to go public and initiate multi-lateral discussions with other shareholders to build majority support for change.

Gary Weiss ran a highly public activist campaign against Ardent Leisure from a shareholding of 11% that had been accumulated over a period of 2-3 months. As a value investor, his preference was to acquire a significant stake in a company with a view to launching a full or proportional takeover offer. The campaign against Ardent turned activist and went public only because the Ardent Board forced his hand.

“We had no engagement with any shareholders of Ardent Leisure before buying or indeed before essentially moving into the public arena with our campaign for representation. We had sought privately to engage with Ardent.”

Nick Paris confirmed that LIM Advisors only went public with their high profile campaign against the AMP Capital China Growth Fund when they concluded the management team was merely paying lip service to addressing their concerns.

“They came out with, what we believed were, just minor improvements and were not addressing the real issue. So we actually took a fundamental stance to go active.”

Gabriel Radzyminski, whose Sandon Capital manages Australia’s only dedicated activist fund, frequently goes public with a campaign by publishing an in depth analysis of the target company, outlining an alternative strategy along with proposals for changes to board/management. However this approach, and the regulatory framework within which activists operate, is frequently misunderstood by both the company and the market.

“They think that when you are going public you are doing it to grandstand. It is actually the tool that allows you to go and have discussions with other shareholders without giving rise to that inadvertent creation of insiders.”

Short terms wins vs Long term investing

All three panellists rejected the idea that their activism is motivated by short term wins but acknowledged that this style of ‘Sugar hit’ activism is much more characteristic of the campaigns by high profile activists in the US.

By contrast they see themselves as catalysts for change, the outcome of which is to improve shareholder returns. In that context what they propose is designed with the objective of benefitting all shareholders and if they can’t convince the majority of shareholders that their alternative strategy has merit then the status quo will remain. To build the case for change is also time and resource intensive and not without risk, as Nick Paris noted.

“It is actually quite hard work, you have to spend a lot of money and you might lose. You could also end up with a PR disaster on your hands, so it is not something you want go into lightly.”

Identifying Activist Targets

Activists scour the markets looking for what, they believe, are underperforming companies where there is value to be unlocked. The next step is to form a view on what changes to a company, operationally, strategically or in capital management, could be made to improve the lot of all shareholders. A company becomes a real target if conflicts of interest can be identified e.g. a flawed remuneration strategy that hands disproportionate wealth to management without regard to the cost to shareholders.

There was, however, an acceptance amongst the panellists that there should be an element of risk taking in the running of a successful business and sometimes taking a risk doesn’t pay off. Gabriel Radzyminski stressed that their ambition was not to limit a Board or management’s ability to take risks.

“Sometimes you make a good investment decision about a company, that’s well researched, well thought out, well-conceived and it just simply doesn’t work out. We understand that. That’s not what you can hold a company to task for.”

Institutional Investors Alignment with Activist Agendas

There is no question that there has been a sea change in terms of the willingness of institutional investors to give activists a hearing. Gary Weiss’ 30 year career as an M&A activist places him in a unique position to comment on the significant changes that have occurred since his early campaigns in the 1980’s.  In his view the institutional investor’s greater openness to dialogue with activists in recent years makes the prospect of holding companies to account through fellow shareholder support possible, but not easy.

“It is still very difficult, unless there is dreadful destruction of value, to achieve wholesale change of board members, but you certainly have a far more receptive audience today to alternative ideas about delivering and creating value.”

An overseas study of institutional investors attitude to activists conducted in 2014, revealed that 76% of those surveyed had a favourable view of shareholder activism and 84% thought that it added value to targeted companies.  There is no reason to suspect that this view would be different in Australia or that the level of support has diminished in the last 4 years.

Advice for Boards

Board level engagement with shareholders, particularly from the Chairman, was seen as the hallmark of successful companies. In their view it reflected a willingness by the Board to be exposed to ideas from outside the company on how to create long term value.

A bone of contention, among the panellists, was the sense that there was a bias amongst Independent Directors to maintain greater independence from shareholders than management. In their view Independent Non-Executive Directors should be engaging with shareholders, the owners of a company, because ultimately they should be looking for the same outcomes.  This sentiment was captured by Gabriel Radzyminski.

“Actively engaged shareholders presenting perhaps complimentary or sometimes dissenting views can be a valuable tool for independent directors to actually question what they are being told by management.”

All panel members were able to point to examples where an active, but private, engagement with a Board and management team had led to change with positive outcomes for shareholders.

“The companies that respond well to a private approach tend, fundamentally, to be the better companies because they are willing to do something. The ones that end up in the public arena do so because we were left with no other choice.”

Summary

The panellists emphasised that activist shareholders are first and foremost about restoring shareholder value in companies that have lost their way. While their interest may seem opportunistic, a move to engage is rarely spontaneous and typically necessitates a significant investment in time and expertise as well as a certain amount of risk. Having committed, you can assume that they are invested for the long haul so playing a delaying strategy in the hope that they’ll get bored and leave, is probably not well advised.

On the positive side, while an approach by a shareholder who has spent time and resources developing alternative ideas on strategy might at first feel confronting, it is not inconceivable that boards and management, by engaging privately and constructively with activists, can deliver positive outcomes for shareholders – the only measure, at the end of the day, that counts.