Three reasons Brexit makes UK companies more vulnerable to activist investors
In the few weeks since Britain voted to leave the EU, a bevy of well-known UK companies have been targeted by a type of shareholder that has in recent years become the scourge America’s biggest businesses — activist investors.
These hedge funds not only try to invest in companies that they think can be changed for the better — they also want to be the catalyst for that change. They have won board seats and upended companies ranging from Microsoft and Yahoo to Pepsi and Kraft.
Their actions often bring huge profits for themselves and their fellow investors. But they can also significantly disrupt the companies they target. They are responsible for hundreds of chief executives and corporate directors losing their jobs, not to mention tens of thousands of ordinary workers who have been laid off due to activist-induced corporate restructures.
Now they are turning their attention to UK and Continental European companies. And Brexit makes British companies much more attractive to them.
Since the referendum on June 23, activists have revealed stakes in SABMiller, John Menzies, Poundland and Meggitt. These will not be the last British companies to be targeted.
But why will Brexit lead to UK corporations coming under further pressure from activist investors?
Reason 1: bargain hunting
The fall of the pound to the dollar and euro since the referendum has meant that British companies are now much cheaper for foreign investors. At the same time, the FTSE 250 — whose constituents are mostly domestically focused, which means the index is a better indicator of the resilience of the UK economy than the more international FTSE 100 — has experienced considerable volatility. There is little to suggest these market forces will lessen in the coming years, resulting in plenty of UK buying opportunities for overseas investors.
Foreign activists have already started taking advantage of the increased vulnerability of UK companies since the referendum. German Shareholder Value Management announced a 7 per cent stake in Edinburgh-based logistics company John Menzies soon after the Brexit vote. SVM joined another foreign activist, Lakestreet Capital Partners of Switzerland, in calling for John Menzies to split its aviation services operations from its newspaper distribution business.
Meanwhile, US hedge fund Elliott Management — through its UK offshoot Elliott Advisors — has revealed positions in brewer SABMiller and discount retailer Poundland. In both cases, the target company is in the process of being bought and Elliott is pushing for better terms — a strategy common among activists and dubbed “bumpitrage”. It also revealed a stake in engineer Meggitt.
Reason 2: political intervention
In the medium term, the response of policymakers to market uncertainty could unintentionally make British companies more attractive to activist investors. An additional Bank of England cut to interest rates, for example, could further weaken the pound, thereby making UK companies cheaper still. Elsewhere, should new chancellor Philip Hammond follow his predecessor’s lead and cut corporation tax in an attempt to incentivise companies to stay, the lower tax rate would make UK companies even more alluring to overseas activists.
Reason 3: corporate instability
But perhaps the most attractive feature of post-Brexit Britain for activist investors is the widespread instability UK companies will face and the tough choices their boards and executives will be forced to make. Activists thrive off such conditions.
Corporate leaders will have to decide whether to sell off overseas operations, relocate teams or close underperforming business lines altogether. These will be hard and uncomfortable decisions to make — especially where large-scale job losses are involved. But where a long-term executive or director may feel ill at ease forcing through such changes, an activist investor would have no such sentimentality. The activist would also have an easier job of convincing the company’s other shareholders that clinical restructuring was needed.
For the UK’s beleaguered boards and executives, life looks set to become a little bit harder.
Owen Walker’s new book on activist investing, Barbarians in the Boardroom, is released by FT Publishing. It provides an introduction to activist investing, discusses how activists have become so powerful, sets out eight in-depth case studies of some of the largest companies in the world to be targeted, and offers thoughts on how activism will develop and spread to the UK, mainland Europe and Asia.