Activism by hedge funds and pension funds expected to rise in 2011

Activism is set for a continued rise. A recent study found a majority of corporate and activists expect hedge fund investors to increase their activism over the next 12 months.

Activists have a markedly more bullish outlook than corporate respondents when it comes to all investor groups, barring union funds.

The outlook for other investor groups is largely divided.

Regulatory reforms and other factors will trigger increased shareholder activism over the next 12 months, according to Shareholder Activism Insight, published by Schulte Roth & Zabel in association with mergermarket.

In addition to hedge funds, the majority of activist respondents (68%) expected to see increased activism by pension funds but only 38% of corporate respondents agreed.

Activists have a markedly more bullish outlook than corporate respondents when it comes to all investor groups, barring union funds. Under half (46%) of corporate respondents and 35% of activist respondents expect increased activism.

Based on a series of interviews with corporate executives and activist investors, the study examined the core issues affecting shareholder activism in the current market and provides a forecast for shareholder activism in 2011.

The majority of corporate (64%) and activist (60%) respondents expect an increase in shareholder activism in the upcoming 12 months. This is a significant change in corporate sentiment from the 2008 when only 40% of corporate respondents predicted an increase for the following 12 months.

Respondents were sometimes divided on what the specific drivers of activism over the next 12 months will be. While 68% of activist respondents said excessive cash on companies’ balance sheets will be a key driver, only 15% of corporate respondents agreed. Over half of corporate respondents (54%) identified financial performance as the key catalyst.

Over three-quarters of activist respondents (76%) but only 40% of corporate respondents expected activist investors to become increasingly involved in companies’ proposed merger and acquisition (M&A) transactions over the next 12 months.

Survey findings also suggested ‘say on pay’ rules and the elimination of broker discretionary voting will have an affect on shareholder activism in the future.

Referring to the Dodd-Frank Act, corporate respondents said the new regulation will not cause them to change their approach to executive pay structures, board composition or public relations.

The study also found that financial services and energy sectors are expected to see the most significant shareholder activism over the next 12 months.

Among investor types, hedge funds and pension funds are expected to become increasingly active in the next 12 months.

Three-quarters of respondents believed it is appropriate for shareholders to have board representation with only 25% of respondents considering shareholder representation to be inappropriate.

A majority of activist investors target annual returns between 10% and 20%, a decrease from respondents’ targets in the 2008 study.

“These survey results indicate a new wave of activist investing in the next 12 months for a variety of reasons,” said David Rosewater, Schulte Roth & Zabel business transactions partner and co-head of the activist investing practice.

Schulte Roth & Zabel is a law firm serving the financial services industry.

Mergermarket is an independent M&A intelligence tool used by financial institutions to originate deals. It provides proprietary intelligence on potential deal flow, potential mandates and valuations. Mergermarket is part of the Mergermarket Group, a division of the Financial Times Group.