To state the obvious, 2016 proved to be a turbulent year in terms of both politics as well as financial markets. The after effects from the seismic events we saw over the year will continue to create ripples in 2017 and there will be plenty of opportunities for activists looking to capitalise on this. Where their focus will be remains to be seen, so this month we look at some of the areas where we should expect to see some activity.
With the US election now firmly behind us all eyes will be peeled for what the president-elect’s policy changes for corporations will ultimately look like. He is said to be considering lighter regulation for the financial industry as well as a possible tax holiday on cash repatriation – both of which could have a significant impact on how companies will fare over this year. The cash repatriation tax holiday would bring large, one-off cash injections to US companies making use of the holiday; not all of which will be able to immediately find attractive investment opportunities for it. While more cash may be a beneficial asset from a corporate point of view, this could open the door for activists for whom the use of cash is a traditional hook.
With the first seeds of change sown in 2016, activist campaigns in 2017 look poised to continue the return to their roots of targeting companies at the smaller end of the market and to shift away from the mega campaigns seen in recent years. Some believe 2016 was the peak year for these strategies. As large and mega-cap campaigns have seen a significant rise recently, there has also been a step up in the skill set of the companies targeted. Most corporates now recognise that if targeted, dialogue with investors will produce a better result than aggressive anti-takeover tactics such as poison pills or litigation. As such, we will likely see campaigns move towards the smaller end of the spectrum where an activist’s scope for change is greater.
Within individual sectors, in 2016 we saw the beginning of a rebound in commodity prices which is set to continue into this year. While well-positioned and well balance-sheeted players will start to emerge from the troubles of the past few years stronger, it will mean that those on not as strong a footing will become all the more visible and, as such, prime targets for activist investors. If the stronger players recover quickly enough, we could well see increased M&A in the sector, driven by activists’ initiatives.
In the retail sector, the march of online continues and we will see increasing pressure on those who have not yet been able to adjust to this dynamic. Recent news from the retail sector has shown the increasing struggles at companies where online capabilities have not yet caught up to the market and performance has suffered in consequence. Given these challenges and the fact that many traditional retailers still hold significant real estate, this sector is likely to be an attractive one for activists.
Diversity is increasingly on the corporate and political agenda, and similarly being an element of focus for activists. In the US we’ve seen smaller activists such as Arjuna Capital and Trillium Asset Management successfully push for diversity at large corporates, and while it may take a while before diversity questions make it to an actual vote, the attention that activist campaigns are bringing to the subject means conversations between companies and investors on it could happen more frequently as a way to avoid formal engagement.
Finally, as early signs of interest rates rising start to trickle from both Europe and the US, we will see this impacting the whole investment landscape, including activism. Alternative investment strategies will be under increased pressure to perform, as other yield sources will start to look more attractive than they have been in the past couple of years. On the other hand, as interest rates rise, the debt loads of companies and how they are managed will also come under more scrutiny. With the period of cheap debt we have had for some years now, debt has perhaps been less of a focus – though that is about to change. With the higher rates and a lack of liquidity, companies will face higher debt burdens and possible difficulties refinancing their debt, although this is unlikely to be as bad as it was I 2008. Nevertheless, we might see more campaigns focused on managing debt loads as we move into the new year.
While we anticipate that 2017 is likely to be dominated by responses to events that occurred in 2016, the new year will bring plenty of challenges, not least the outcomes of the French and German elections which will have an impact on how European companies will come to be viewed. The only thing that is certain is that this will be another year of important events that will (re)shape our world.