Activist investors have a very mixed record depending on what type of changes they push for, new research has found, while the process has proved more effective in the UK than the US or Europe.

GlaxoSmithKline PCL, Barclays PLC (LSE:BARC), BHP Group PLC (LSE:BHP), Aviva PLC (LSE:AV.), WH Smith PLC (LSE:SMWH) and Hurricane Energy PLC have all been subject to activist investors in recent weeks or past couple of years.

A study of share price performance of 245 corporations that were publicly targeted by activist funds has been carried out by professional services firm Alvarez & Marsal (A&M).

The research examined campaigns started between 1 January 2017 and 28 February 2020, comparing the share price performance of the targeted companies to market indices.

Shares of UK PLCs targeted by activists outperformed market indices by 3.6% over two years, compared to 2.7% outperformance among US companies and an underperformance of -3.3% in Europe.

Targeted UK companies performed in line with the market over the first year from the activist campaign being launched, whereas US campaigns underperformed the market by -4.3% and Europeans by -8.0% over the same timeframe.

“A likely driving factor for this trend is that US campaigns are typically significantly more hostile over a longer period than in the U.K. This can lead to less focused management and greater uncertainty for other investors, which can undermine the share performance,” the researchers said.

But over the second year, the performance of US targets increased markedly, as campaigns came to fruition and rewards began to be reaped.

Looking at the effectiveness of investor activism by the type of change that was demanded, those funds that pushed a company to make some sort of transformation, such as a strategic or operational change, saw an average outperformance of 3.4% over two years, while campaigns with a merger or acquisition component outperformed the market by 2.8%.

A focus on governance demands by activists saw an average underperformance of -6.7% after one year, though there was an average outperformance of 4.7% in the second year, leading to a two-year underperformance of -2.0%, the research found.

“This marked ‘hockey stick’ performance may reflect the initial challenges and time required for new board members to develop their plans of action, before delivering rewards in the second year,” the A&M researchers suggested.

“The underperformance of governance campaigns in the first year is a key driver of the underperformance of campaigns in US and Europe over the same timeframe.”

Overall, activists push for governance improvements in 74% of European campaigns and 70% of US campaigns, the research noted, whereas just 41% of UK campaigns did the same.

“The diverging performance of activist targets across the regions underlines that activists are playing by different national rules. The more collaborative approach UK focused activists typically take with boards can leave corporates better equipped to react quickly to external shocks, such as COVID,” said Malcolm McKenzie, managing director at A&M.

“In contrast, the generally more hostile nature of US campaigns has taken its toll on share performance amid COVID, distracting management desperately trying to navigate the COVID disruptions.

“This is true of activist campaigns in normal times, too. Taking into account the more combative context for targets in the US, and the less established activist market in Europe, it takes longer for activists in these regions to see progress, while UK companies outperform across the board, and do so earlier.”

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