Lazard’s 1Q 2018 Activism Review

Jim Rossman is head of Shareholder Advisory at Lazard. This post is based on a Lazard publication by Mr. Rossman. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here);  Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Key Observations on the Activist Environment in 1Q 2018

Source: Activist Insight, FactSet and public filings as of 3/31/2018.
Note: All data is for campaigns conducted globally by U.S. and European activists at companies with market capitalizations greater than $500 million at time of campaign announcement.

1. Activist activity reached new heights in 1Q 2018 both in terms of capital deployed and campaigns initiated

  •  ~$25bn of capital was deployed in new campaigns in 1Q 2018—the most in any quarter on record
    • 1Q 2018 saw major campaigns by emerging activists such as SailingStone, Jericho Capital and Vulcan Value, while some traditional activists such as Corvex, Pershing Square and Trian were relatively inactive
  • 73 new campaigns were initiated in 1Q 2018—the highest quarterly activity on record
  • 65 Board seats were won in 1Q 2018—well ahead of 2016 YTD and 2017 YTD—while an additional 78 seats are “in play”
    • Starboard Value was the leading activist in forcing Board turnover, with 41 seats targeted in 1Q 2018

2. Activism in Europe continued to be robust in 1Q 2018, accounting for ~29% of capital deployed and ~23% of campaigns initiated

  • The $7.2bn of capital deployed in new campaigns against European targets was ahead of the prior year period, suggesting the possibility that 2018 may surpass the 2017 record
  • Elliott remained the most active global player, and the UK was by far the most targeted country

3. Influence of passive investors continued to strengthen as Vanguard, BlackRock, and State Street now own ~18% of the S&P 500 vs. ~14% in 2012

  • Increasing importance has driven these firms to materially expand their ESG efforts, with BlackRock pledging to double its stewardship team’s headcount and Vanguard establishing a European stewardship presence
  • ESG issues have attracted significant attention by passive investors, who are pushing companies to serve a broader social purpose in their communities
    • Active managers and activists have also begun pushing for ESG initiatives, as seen in ValueAct’s campaign at AES

4. M&A continued to be a core focus, with activists pushing for sales processes, intervening in announced transactions and forcing break-ups and divestitures

  • Interplay between activists and M&A is having global implications, with examples including Darwin Deason and Carl Icahn calling on Fuji and Xerox to terminate their joint venture and Sachem Head pushing UK-based Whitbread to separate its Costa Coffee business

Campaign Activity and Capital Deployment ($ in billions)

Source: Activist Insight, FactSet and public filings as of 03/31/2018.
Note: All data is for campaigns conducted globally by U.S. and European activists at companies with market capitalizations greater than $500 million at time of campaign announcement

1. Companies spun off as part of campaign process counted separately.

2. Calculated as of campaign announcement date. Does not include derivative positions.

1. Companies spun off as part of campaign process counted separately.

2. Calculated as of campaign announcement date. Does not include derivative positions.
3. 3-year average based on aggregate value of activist positions.

Activist Activity in 1Q 2018 ($ in billions)

Source: Activist Insight, FactSet and public filings as of 03/31/2018.
Note: All data is for campaigns conducted globally by U.S. and European activists at companies with market capitalizations greater than $500 million at time of campaign announcement.

1. 2018 YTD campaigns calculated as of campaign announcement date.
2. Based on country of incorporation.

Notable 1Q 2018 Campaign Launches and Developments

Source:Activist Insight, FactSet and public filings as of 03/31/2018.

Board Seats Won by Activists

Source: Activist Insight, FactSet and public filings as of 03/31/2018.
Note: All data is for campaigns conducted globally by U.S. and European activists at companies with market capitalizations greater than $500 million at time of campaign announcement.

1. Represents Board seats won by activists in respective year, regardless of the year in which the campaign was initiated.
2. Board seats “in play” includes currently announced proxy contests at upcoming shareholder meetings in 2018.

1. Represents Board seats won by activists in respective year, regardless of the year in which the campaign was initiated.

1. Represents Board seats won by activists in respective year, regardless of the year in which the campaign was initiated.

3. Challenged defined as Directorships won, nominated, or generally targeted.

1. Represents Board seats won by activists in respective year, regardless of the year in which the campaign was initiated.

The Growing Influence of Passive Managers ($ in billions)

Source:FactSet, P&I and Simfund as of 03/31/2018.

  1. Equity mutual fund flows include net new cash flow and reinvested dividends. Data excludes mutual funds that invest primarily in other mutual funds.
  2. ETF distribution channel.
  3. All mutual index funds (excludes ETFs).
  4. All mutual funds that are not index funds.
  5. Represents data through 4Q 2017.

Growing Ownership of Top Index Funds

The influence of the “Big 3” index funds in the global corporate landscape continues to strengthen as their ownership concentration escalates

Source: FactSet as of 03/31/2018.

1. Includes Bel 20 (Belgium) and AEX (Netherlands).

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The complete publication, including appendices, is available here.

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