Activists anticipate the coming recession

Jason Booth is Vice President of Activism Editorial at Insightia, a Diligent Brand. This post is based on his Insightia memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei JiangDancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

Activists often describe themselves as bottom-up stock pickers whose investments will outperform irrespective of wider economic trends. But with inflation and interest rates surging, geopolitical instability, supply chain disruption, and volatile energy prices, activists are tailoring their investment targets and demands to reflect the changing macro environment.

Demands for cost-cutting and debt reduction are on the rise, as well as greater scrutiny of merger and acquisition (M&A) deals, especially in the U.K and Europe, where weak currencies have cut into earnings forecasts.

Yet, in the longer term, U.S. activists in particular look to be taking advantage of the strong dollar to make big overseas investments with an eye to a market rebound in 2023.


The most immediate impact on activism may be caution as falling stock prices and higher interest rates threaten their own financial performance.

The caution became apparent in March after the Federal Reserve made its first interest rate increase in four years. Worldwide, 71 new investments were made by activists in the second quarter of 2022, versus 141 in the first quarter and 197 in the second quarter of 2021, according to Insightia’s Activism module.

Third Point’s highlighted the caution in their second-quarter letter to limited partners, stating that the fund had significantly reduced risk and took steps to protect capital in a “tumultuous market with an uncertain economic backdrop.”

Activists are demanding the same level of caution from their portfolio companies. In August, Third Point called on Walt Disney Co. to reduce debt by spinning off sports broadcaster ESPN and reduce costs by fully integrating streaming company Hulu. The two sides reached a settlement earlier with month, with Third Point gaining a board seat and dropping its ESPN demand.

According to Insightia Activism data, 23 companies worldwide faced demands for general cost-cutting as of September 30, 2022, already surpassing the 12 demands in all of 2021 and close to the 24 and 26 demands made throughout 2020 and 2019, respectively.

The trend was strongest in the U.S. and the U.K., where such demands were at their highest year-to-date on record.

After Kohl’s ended talks to sell its business to The Franchise Group, activist Macellum Capital called on management to trim its sails, writing in a letter that the board should “stop burning shareholder capital and enter into cash preservation mode until a deal is consummated.”

U.K. insurance company Aviva is facing cost cutting demands from activist Cevian Capital which reckons Aviva can cut at least 500 million pounds ($564 million) from its annual cost base by 2023.

Return cash

Cost cutting isn’t the only demand gaining prominence amid ongoing market turbulence, with Aviva also facing pressure from Cevian to return cash to shareholders. Indeed, demands for companies to return cash to shareholders have increased significantly, with 145 such demands worldwide year to date, up from 129 throughout 2021.

The surge of return cash to shareholders demands is one of the more surprising trends to emerge this year, given the economic uncertainty. Yet companies piled up cash reserves during the COVID-19 pandemic, so much so that cash held by U.S. companies is estimated to have skyrocketed from $1.6 trillion in 2000 to approximately $5.8 trillion today. And with growth slowing and interest rates rising, many activists appear to think they would be better off investing the money, rather than management.

In April, activist investor Osmium Partners called on home décor and furniture retailer Kirkland’s to repurchase 50% of its shares, arguing the business is strong and the stock undervalued, while in the same month Alta Fox Capital Management urged trucking company Daseke to buy back $60 million in shares, following steep stock market losses.

Do deals

The difficulty in valuing assets at a time of economic uncertainty is also fueling opposition to M&A, especially outside the U.S. where companies are struggling to deal with currency fluctuations and energy shortages.

Germany’s biggest power supplier RWE raised the ire of activist investor Enkraft Capital, which argued the German utility firm should focus on spending its capital at home, given the ongoing energy crisis.

Similarly, Philip Morris International’s proposed $16-billion takeover of Swedish smokeless tobacco company Swedish Match has faced staunch opposition from shareholders activists like Elliott Management, Farallon Capital Management, and Pentwater Capital Management.

Long-term shareholder Framtiden Management Co. opposed the plan on the grounds it does not factor in growth in the U.S. market, where a strong dollar should boost returns for the company.

Planning ahead

The true impact of the current market environment may not be seen until next year, or longer, as activists are now taking advantage of depressed stock prices to find companies that might be put in play at a later date, or possibly might work as platforms to launch takeovers.

With the pound sterling at historic lows and U.K. equities trading at a multi-year discount to the U.S., the U.K. tops many lists of markets where economic disruption may present future activist opportunities.

Real estate-focused activist Land and Buildings has never made a public demand at a company outside of the U.S. and Canada, but the fund’s founder Jonathan Litt sees opportunity in the U.K. market, noting in an October 7 tweet that U.K. property stocks are trading at nearly a 50% discount to net asset value (NAV) which could “turbocharge” returns in the long-term.

While there is growing interest in the U.K among active U.S. investors, anyone looking for value in the U.K and any other market needs to factor in wider economic variables. The same, currency aside, might be said for any potential activist target over the next few months.

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