A year ago, anyone attempting to name a FTSE 100 stock that was likely to chart a double-digit share price rise would have been unlikely to name Whitbread. With a big exposure to the British consumer, the owner of Costa Coffee and Premier Inns seemed to have too many chips stacked on the wrong part of the roulette board.
Yet those who did buy a slice of the former brewing giant in the autumn of last year have enjoyed a 30% return on their investment. Is that down to management actions? To some extent. More specifically the share price jump has been caused by the two activist investors that moved on to Whitbread’s register – first Sachem Head, and then more particularly Elliott, the New York fund that prompted a £3.9bn sale of Costa Coffee to Coca Cola.
The spikes on the Whitbread share price chart all trace back to moves made by the activists, and the decisions that they prompted. Whether those decisions were for the best in the long-term or not, the market has bagged a huge return. More timid investors, who would not have staged an aggressive, well-orchestrated campaign like Elliott, know exactly who to thank for perking up their portfolio performance. They are happy to repeat the trick.
A staggering 85% of British investors say they are willing to work alongside reputable activist investors to force change at stilted companies, according to the latest annual Edelman Institutional Trust Barometer. And 75% of fund managers say that they are interested in employing activist tactics themselves.
Investors also reckon that 82% of companies are ill-prepared to deal with this activist revolution – which gets bigger by the day. By the end of the third quarter of this year, 112 European companies had been subjected to demands from activist investors, according to research from Activist Insight, in conjunction with the law firm Skadden. And these are big businesses; 17% of them with a market value in excess of $10bn.
Activism is becoming the norm. Where the likes of Carl Icahn or Dan Loeb were once seen as short-term predators, out to destroy businesses in return for a quick buck, they are generating material returns for the market as a whole in some of these recent examples. As a result, the erstwhile guerrilla warriors of the capital markets are increasingly viewed as legitimised freedom fighters, out to liberate value pent up inside dozy old conglomerates.
“Recent memories are playing a factor here,” said one former star manager at a global hedge fund. “If you had asked this same question when, for example, HSBC was dealing with Knight Vinke a few years ago, then you would have got a different answer. The market did not take those guys especially seriously in that campaign. But Elliott’s success at Whitbread is fresh in everyone’s heads. So there’s a greater willingness to hear from activists.”
Barclays is the latest company caught in the cross-hairs of an activist attack, with veteran investor Ed Bramson agitating for change. Although he has said little publicly of his ambitions, Bramson is believed to be pushing for the bank to cut the amount of capital it deploys in its investment bank. Some investors think this would be a bad call. Others think he is not going far enough. Yet everyone wants to hear his views, and sees him as a credible voice in the conversation.
Many companies seem to be caught off guard by the speed with which activists gain traction. With more money being managed by tracker funds, the investors who do take an active view on value can often appear further down the shareholder register. It is possible for a management team at a blue chip company to speak to their top 10 investors without encountering any institutions that made an informed decision to own their shares. This can lead to a disconnect; a false sense of security.
Critical analysts may have once helped to raise the alarm for management, yet there are increasingly few of those in today’s market.
The MIFID II rules that govern the distribution and payment of equity research have led to an evisceration of analyst teams at the big banks. The Edelman survey found that only 44% of UK investors would rely solely on research from sell-side analysts when approaching their investments. Some 72% of the investors surveyed believe sell-side research to be of diminishing importance.
The connections between the City and the companies they own have become a little frayed at the edges. Increasingly, companies need to tell their own story. For no-one else will do it for them.
Interestingly, only 58% of investors say they place significant value on the musings of a chief executive when weighing up whether to buy a stock. They do, however, want to hear from the non-executives. Some 71% of those polled say they trust the lead independent director’s views. Building trust with the City is, therefore, a job for the whole board.
This piece first appeared in City A.M. on Friday 30th November