M&A, activism and shareholder dynamics--what has changed and what's ahead? Activists have been added to boards of 224 public companies since 2015.

Author:Anderson, Bill
Position:SHAREHOLDER ACTIVISM
 
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Evercore expects substantial activity in M&A, hostile activity and shareholder activism in 2017. Here's what we expect to be the key drivers.

M&A will increase significantly, driven by cash-funded deals: Recent surveys of leading U.S. executives indicate that over 75% expect to pursue M&A in 2017. What's driving this optimism? An overabundance of cash: Morningstar estimates that cash balances for the S&P 500 (ex-financials| are standing at the highest levels in at least 10 years. These cash balances will be turbocharged by additional firepower that is expected to result from Trump tax cuts. In addition, reduced corporate taxes are also expected to buttress corporate cash; investors expect this relief to be substantial and to occur in the near term.

The Power of Index Funds ... and the Impact on the Corporate Investor Relations Function: The massive shift of investments into index funds and out of actively managed funds continued through 2016. A much larger percentage of the shareholder register of U.S. public companies is now comprised of index funds.

As a result of this seismic shift, companies are reconfiguring their investor relations (IR) function. Shareholder engagement is being tailored to strengthen relationships with index funds and other proxy voting constituencies. Communicating long-term strategy--and how the company's board is configured to support that strategy--has now become a standard part of investor dialogues. In addition, director involvement in shareholder communications has sharply increased. In 2016, 66% of companies in the S&P 500 indicated that their directors engaged with shareholders, as compared with only 6% of companies in 2010, according to the Ernst & Young Center for Board Matters.

Activism Continues to Evolve:

Activists in 2016 remained incredibly busy, launching 319 new campaigns and 109 proxy fights, according to FactSet. Yet, despite many high-profile campaigns, activist performance continues to be mixed. Some funds have had substantial losses, which is not surprising given the concentrated nature of their investment portfolios and their investments in sectors facing serious headwinds (like energy), while other funds have had a strong year

In addition, even though activists have continued to outperform other hedge funds, by some measures they have underperformed the market. Regardless, their "success rate" continues to be high: activists have been added to boards of 224 public companies since 2015...

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