Share this post via:

Activists are known to favor M&A transactions that allow them to exit at a quick premium and move on. But so far this year, they’ve opposed more deals than ever.

What is the trend?

Since records began in 2013, campaigns pushing for M&A had always outpaced opposition to deals, until this year. So far in 2021, only 20 companies have faced activist demands pushing for M&A as of June 8, while 32 companies had deals opposed in the same period, according to Activist Insight Online.

While demands pushing for M&A have been in decline in general, at less than half of what they were in the same period last year, opposition to deals has risen to its highest levels ever. The number of deals with activist opposition has increased in most regions, while the number of Europe-based companies facing opposition to deals has doubled this year versus the same period last year. Indeed, European takeover laws provide real opportunities for activists to push for higher prices.

Who is making it happen?

Activist investor Coast Capital recently ran a campaign at FirstGroup in opposition to the company’s 3.3-billion-pound sale of its U.S. businesses to EQT Infrastructure. Coast had the support of institutional investor Schroders, and together owned a combined 25%, but that was still not enough to win over shareholders in a vote on the deal.

In an interview with Activist Insight Online, Coast Chief Investment Officer James Rasteh blamed the loss on Institutional Shareholders Services (ISS), which endorsed the deal. The activist claimed that ISS’ process was incomplete, with the firm refusing to look at Coast’s evidence against the deal. “ISS takes whatever the company says as fact and everyone follows what ISS says. The whole corporate governance process in Europe is broken,” Rasteh claimed.

At Leaf Group, Osmium Capital and its partners called an $8.50 per share buyout offer from Graham Holdings “grossly insufficient,” and reckoned the internet services company is worth at least double that. The deal was supported by Glass Lewis and ISS while the activists slowly wound down their campaign.

Meanwhile, Tarsadia Capital has been campaigning against a deal at Extended Stay America, accusing Blackstone and Starwood Capital of trying to acquire the U.S. hotel operator on the cheap. Other shareholders have also come out against the proposed $6 billion sale. Hawk Ridge Capital Management, SouthernSun Asset Management, Cooke & Bieler, and River Road Asset Management all raised concerns about the value and process leading to the deal.

Across the pond, Petrus Advisers has been especially active in Europe. The activist successfully pushed for a higher price for its shares in Credito Valtellinese, and has been backed by Glass Lewis and ISS in its opposition of Moneta Money Bank’s deal with PPF Group.

Why is it happening?

The uncertainty stemming from the coronavirus pandemic has created opportunities for some companies and private equity firms to acquire strong assets on the cheap.

Olshan Frome Wolosky Partner Andrew Freedman told Activist Insight Online that when a company is selling itself during a “questionable time and absent a robust auction process,” investor pushback is natural, as at Extended Stay. “I don’t think we’re seeing investor opposition to the idea of M&A dealmaking, but rather targeted opposition designed to sweeten the offer and ensure full and fair value for shareholders that the board of the target may have left on the table in its negotiations with the acquirer,” Freedman explained.

Indeed, despite their recent opposition, both Coast Capital and Osmium Partners had previously pushed for a sale of their respective portfolio companies. But the timing of the sales processes meant that the price agreed was much lower than desired.

Coast’s Rasteh told Activist Insight Online that FirstGroup sold the assets for less than book value and should have waited for the end of the pandemic before initiating the sale process. The activist believes the process was flawed, while management misled investors with the figures they provided. “Any five-year-old would realize that this is not when you engage in a process to sell a big public transport business,” the investor said.

This sentiment was mirrored in the complaints regarding Extended Stay America’s sale, with SouthernSun, Cooke, and River Road reportedly seeing a fairly benign environment for the hospitality company as the coronavirus pandemic subsides and questioning the price and process that led to the deal. Compared to the halt in travel during global lockdowns over the past year, Tarsadia also believes that external tailwinds such as the COVID-19 vaccine distribution, pent-up travel demand, and the recently approved fiscal stimulus will create a “massively positive” backdrop for lodging companies over the next several years.

How sustainable is the trend?

As the world navigates its way out of the COVID-19 pandemic and visibility improves, push for M&A demands are likely to again outpace opposition to deals.