Why investors should be concerned about a pushback against activist Elliott
First GlaxoSmithKline, then SSE, now Taylor Wimpey. Activist shareholder Elliott Advisors has taken aim at all three companies over the past year. In all three cases, he seems to have missed.
At GSK, he wanted a process to determine if chief executive Emma Walmsley was the right person for the job. She is always there. At SSE, he wanted a spin-off from the energy group’s renewable energy division. Instead, the company embarked on a one-year investment plan. At Taylor Wimpey, he wanted a CEO search to focus on “external candidates who have not been part of the underperformance to date.” The homebuilder on Monday appointed someone who has been with the company for eight years and on the board for four.
You can’t always get what you want. But it may seem like Elliott isn’t getting anything he wants. This perception is important, even if it is not necessarily true.
Share price growth among large UK companies has not been impressive. Valuations are lagging not only the US, but also the French CAC 40 and the German Dax. It could be the management, a Brexit discount or the old economy stocks that populate the FTSE 100 that are to blame. It’s probably a combination of all three.
But it’s not many good public markets investors who lament that UK-listed stocks are undervalued as private equity investors pick them. Someone has to shake up the company.
There is a rich debate about whether activists create long-term value. But it’s pretty clear that GSK, SSE and Taylor Wimpey are lagging behind with value creation potential, and Elliott is here to help. The shareholders of each should rejoice. Nor should boards of directors fire them.
There are a host of reasons the trio underperformed: a disappointing drug pipeline at GSK; conglomerate discounts at GSK and SSE; a misguided strategy at Taylor Wimpey, which prioritized growth over margins, and made a controversial capital raise to boot.
Unsurprisingly, there are also a diversity of views on how to solve the problems. Elliott won’t necessarily be right. In some ways, it doesn’t need to be, as long as the patch that works is performing well. They are there for the money, not for the glory.
Nor does it necessarily matter if Elliott fails to come up with quick reform. Although data on the length of activist campaigns is sparse – because investors tend to telegraph their arrival more clearly than their withdrawal – analysis by consultancy Alvarez & Marsal estimated that the average length of time activists hold an investment before selling is about 700 days in the past five years. .
Elliott can afford to hold on longer. This makes judging performance less than a year after the launch of campaigns at GSK, SSE and Taylor Wimpey undoubtedly premature. Campaigns are also complex. There will be successes and failures along the way.
Yet it still matters that boards regularly begin to ignore its demands. Elliott makes his campaigns public for a reason. Other activists take a more low-key approach, working with management behind the scenes. If Elliott is perceived to be repeatedly wrong in its analysis, it will damage its credibility, especially since the financial performance of its investments can take years to become clear. Unless he steps up the action further – potentially alienating supporting shareholders – he starts to look more like any other active buy-and-hold investor.
Of course, Elliott is far from the only activist targeting British businesses. There’s Dan Loeb’s Third Point at Shell, Nelson Peltz’s Trian Partners at Unilever and Cevian at Aviva, Pearson and now Vodafone. But last year, Elliott accounted for almost a fifth of all campaigns in Europe, according to Lazard.
Elliott may have missed the mark with elements of his campaigns at GSK, SSE and Taylor Wimpey. But UK investors disappointed by years of poor performance should nevertheless be happy with the pressure this is putting on management.
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