(Bloomberg Opinion) — Two of the best-known shareholder activists — Elliott Investment Management and Cevian Capital — are targeting companies with complex structures and second-rate governance. But even soft targets can be hard work.
The art of activism is to find a company that’s lost its way but has a good business at its core. The stock’s weak valuation may be a symptom of poor operating performance, which is in turn explained by the challenges of managing a conglomerate structure. Idiosyncratic governance is often a major concurrent factor. The board sets strategy, after all.
Take Elliott’s latest target, Hewlett Packard Enterprise Co., the tech firm with a market value of $21 billion. The activist has built a more than $1.5 billion position and plans to engage, Bloomberg News reported last month. It’s not hard to see why HPE is the name in the frame. For an activist, it’s like walking into Walmart — your shopping list is right there in front of you.
Firstly, HPE is clearly in attractive markets — artificial intelligence servers, networking and the cloud. Analysts expect revenue to grow 8% in the current financial year. The stock market valuation relative to earnings sits below server rival Dell Technologies Inc. and networking rival Cisco Systems Inc. You would want it to land between them. Lower profitability is one issue, as Morgan Stanley analysts point out. The tripartite structure arguably also gives HPE a conglomerate feel — and that’s ignoring an additional small financial services arm.
HPE stock cratered in March after management revealed it had mishandled server pricing in its financial first quarter. That reinforces the impression that conglomerates get punished more harshly than pure-play businesses when they slip up.
Meanwhile, the board looks stale. It’s been refreshed with four new appointments in the last six years. Even so, six of its 12 members have been there more than nine years. Chief Executive Officer Antonio Neri is a company lifer. Long tenures are a threat to objectivity and independent thinking. Age brings experience and wisdom, but board composition should be a balancing act.
HPE may believe there are advantages in being in areas with overlapping customers. If so, why isn’t it working for the share price? The pending $14 billion acquisition of Juniper Networks Inc. — now mired in an antitrust investigation — makes it hard to contemplate structural change, such as a separation of the networking business, in the short term. Nevertheless, HPE could arguably refresh its board at a faster pace.
Cevian’s most recent target, Swiss insurer Baloise Holding AG, embodies similar issues despite being in a wholly different industry and shows what activism can achieve. Baloise has a strong presence in its home market but suffered from governance flaws, in this case a 2% cap on shareholders’ voting rights regardless of their stake. The company had deviated from its domestic core, geographically into Germany and thematically into venture capital. In April last year, shareholders including Cevian mobilized to amass the support required to win a motion scrapping the voting ceiling at the annual meeting.
With governance normalized, Cevian raised its stake to 9.4% while pressuring the company to simplify. That meant a couple of public statements expressing dissatisfaction with the state of progress — positively shouty behavior for an activist that normally keeps a low profile. While Baloise looked like a takeover target for larger peer Zurich Insurance Group AG, last week brought a nil-premium all-share merger with Helvetia Holding AG instead. That’s a worse outcome for the activist than an all-cash bid. Fortunately for Cevian, Helvetia’s main shareholder agreed to buy its stake, providing a tidy exit.
What Cevian paid on average for its stake and achieved on the sale isn’t clear. Total returns on Baloise’s stock price since November 2023 (when Cevian’s interest became public) and the Helvetia transaction last week were more than 70% in US dollar terms. Even if Cevian’s gains were only around 40%, that would still have been twice the total return of European stocks in the period.
It’s not the best outcome for Cevian. But it’s still a good outcome. For activist investors, it’s a reminder that you can’t control the circumstances of your exit from a position, but you’ll probably do well from finding fundamentally sound businesses with scope for governance upgrades. For businesses, the moral is that if your structure and governance aren’t beyond reproach, you have no margin for error.
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
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