Executive summary
Six themes summarising predicted shareholder activism in 2023
A wave of activism is on the horizon – From its current suppressed levels, European activism will surge as we move through 2023.
The tenth edition of the Alvarez & Marsal Activist Alert (AAA) highlights six major themes that summarise our predictions for investor activism in 2023 and into 2024.
01. The predicted wave of activism will be partly driven by new entrants
Analysis of the activist fund universe reinforces our prediction that the current suppressed level of activism is temporary. In spite of the drop in the number of campaigns during 2022, we see a steady increase in the number of funds using activist strategies targeting European companies. Alvarez & Marsal is currently tracking 96 such funds, up from 93 in 2021 and 89 in 2020. Our analysis of these funds shows that the early dominance of US-based activist funds is giving way to a growing band of European funds, especially funds based in the UK. We also note the small but growing number of funds based in Asia/Pacific that are now targeting European companies.
The use of public activism as a tactic is gaining ground among investors, and we predict that the number of funds willing to pursue activist campaigns will continue to increase. With a growing number of funds circling the market for opportunities, there will be more pressure on corporates and their boards as financial visibility improves and activists decide on their targets.
HQ of funds adopting activist tactics against European corporates - Numbers by year
02. No pause in environmental and social campaigns
In contrast with the current suppressed levels of activism more broadly, environmentally and socially-focused campaigns show no signs of slowing down. Our predictions suggest that the number of environmental and social campaigns will continue to increase throughout our forecasting period (2023 and into 2024). However, we believe that tough economic conditions will encourage more investors to focus on shorter-term financial performance, making it more challenging for activists to generate wider shareholder support for longterm environmental and social goals. Successful campaigns will need to strike a careful balance between their ultimate priorities and the more immediate financial concerns that are top of mind for most investors.
Although the absolute number of "E&S" campaigns in Europe is relatively low, at the current run rate we could see a 22% year-on-year increase in the number of environmental campaigns during 2022 and a 14% increase in socially focused activism. Notable examples include Bluebell Capital Partners' campaign to persuade Glencore to divest its brown coal assets and ShareAction's effort to push J. Sainsbury to pay all its staff and contractors the UK Living Wage.
03. Financial visibility will improve through 2023 granting activists greater insights into preferred targets
Acute economic uncertainty and the resulting lack of visibility for corporate boards is giving activist investors temporary pause for thought. War in Ukraine has created a global energy shock and helped to push inflation across the industrialized world to 40-year highs, leading central banks to accelerate interest rate rises. Against this backdrop, the immediate outlook for companies across Europe and beyond has become unusually difficult to predict and activists are therefore watching and waiting longer before launching campaigns. In the first nine months of 2022, 13% fewer European companies were targeted than in the same period in 2021. In some regions, the falls were much sharper: 31% in Scandinavia, for example, and 28% in Benelux.
We believe the current suppressed levels of European activism will continue at least into the early part of 2023, with a strong resurgence of activism expected later next year and into 2024. Europe is therefore in a trough between waves of activist campaigning, providing underperforming companies with limited breathing space to address their challenges before pressures on them ramp up again. There are already signs that activism is set to rebound. Our latest predictions find a fall in the number of European companies at risk of activist campaigns of just 7%, compared with our interim snapshot in May 2022. This suggests that the 13% drop in campaigns in the first three quarters will moderate and reverse in the coming year. Overall, we have identified 144 European companies at risk of activist campaigns over the next 18 months, down from 155 in May, but with the rate of campaign launches building as we move through 2023.
04. Rising cost of capital will drive capital reallocation demands
With central banks in the US and Europe raising interest rates aggressively, the cost of capital for corporates has been rising. This will inevitably increase the pressure from activists for boards to improve capital allocation as well as encouraging a focus on asset-light operating models. We expect growing pressure on boards to lift returns on invested capital and, where companies fail to deliver on this, public calls for underperforming businesses to be sold and/or for capital to be returned to shareholders. However, a higher cost of capital will also increase borrowing costs for potential acquirers.
05. Low valuations will drive demands for M&A
Low valuation multiples will continue to offer M&A opportunities and associated demands from activists for corporates to seek buyers for underperforming business units. The increased cost of capital may reduce the number of potential buyers, but we predict that there will be sufficient interest, notably from private equity funds, to encourage activists to push for sales, or indeed acquisitions when prices fall to attractive levels. We will also see activists pursuing so-called "bumpitrage", where they pressure corporates to demand improved offers from potential acquirers of target businesses.
06. Spotlight on consumer and energy sectors
We predict that activist campaigns will increase their focus on the consumer and energy sectors as we move through 2023. While overall we find a 7% drop in predicted targets since our interim snapshot, the number of consumer companies identified as being at risk has dropped by just one, from 32 to 31, while the number of energy companies has risen from eight to 10. In keeping with our prediction that a wave of activism is on the horizon, we see the levels of public activism in these sectors building as we move through 2023.
Our analysis shows that consumer companies focused on household and personal products, packaged foods and apparel are particularly at risk, partly because they have failed to match their success in protecting revenues by sustaining margins and cash generation. The energy sector has the biggest percentage growth in the number of predicted targets, thanks both to growing environmental activism and pressure to justify capital allocation decisions during a period of rapid revenue growth. Energy companies must balance demands for greater shareholder returns in the near-term against expectations that they should accelerate investment in renewables.
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