Activism is Going Global, Citi Warns Clients

Citigroup has a message for the international companies it advises: Watch out for the activists.

In a new report for its corporate clients, the bank’s financial strategy and solutions group took stock of the growing wave of shareholder activism, and concluded that what was once primarily an American phenomenon is spreading abroad.

“Shareholder activism has morphed from an occasional threat facing corporate management and boards to a sweeping trend that has spread to companies in all sectors and of all sizes, and increasingly, across all geographic regions,” the report said.

The report, entitled the “Rising Tide of Global Shareholder Activism,” showed that the number of activist campaigns overseas has jumped in recent years, from 22 in 2010 to 30 last year. What’s more, many activist situations remain out of the public eye, suggesting the actual numbers are likely much higher.

A combination of factors is pushing the activists into new regions. One main driver is the success of activist hedge funds, which have generated nearly 20 percent annual returns since 2009, outperforming traditional hedge funds and many markets. This performance has attracted new inflows to activist funds, which have grown by more than 50 percent in the last year. And because that new money needs to be put to work, activists are looking for new targets abroad.

The large activist war chests also mean they can go after larger targets. Big companies in the U.S., including Apple, Microsoft and PepsiCo have already come under attack.

Now large international firms are being targeted as well. TCI, an activist hedge fund, took a stake in French aerospace company EADS, encouraging it to sell its stake in Dassault Aviation. Third Point Management, run by Daniel S. Loeb, has a stake in Sony of Japan and is agitating for change. And activist investor Knight Vinke has called for a breakup of Swiss bank UBS.

The Citigroup report said a number of factors make companies vulnerable to activist attacks, including middling share price performance, a lack of top line growth, conservative financial strategies and conglomerate business models.

But while growing activism may prove a headache for management, it is a mixed bag for shareholders. The Citigroup report concluded that companies targeted by activists outperformed market benchmarks by an average of 15 percent in the year after the start of a campaign, and 34 percent in the two years after a campaign. Those numbers, however were skewed by a smaller number of outsize successes. Most companies targeted by activists actually underperformed the markets in the one and two years after a campaign.

“This points to an important dichotomy between the goals of activists and companies,” the report said. “Since activists tend to invest in several firms at a time, they can achieve superior portfolio performance even if only a few of their targets outperform substantially. From a company’s perspective, however, the activist agenda may not necessarily always be in the company’s long-term interests.”