IR Monitor – 20 September 2023

In this week’s newsletter:

• FTI’s September 2023 Activism Vulnerability Report highlights significant changes in industry vulnerabilities over the second quarter and their impact on shareholder activism
• SoftBank has either reopened the IPO market or killed it, suggests Bloomberg. The Japanese tech firm has confidently priced Arm’s share sale at the top of its price range. But if the stock slips, successor IPOs will struggle to copy the playbook
• Companies ease off on share buybacks as rising interest rates push up costs, reports the FT. Growing pressure to invest has also deterred companies from purchasing their own shares
• Shareholder rights mustn’t become a victim of the digital age, in the opinion of the IC
• Is there a future for active investing? Yes, says Institutional Investor: active management is back. No, says the Wall Street Journal: indexing is still the best bet for investors
• And finally … I don’t like Mondays. The first day of the week is least-favoured day for AGMs, study finds. Data also shows that in-person meetings dominated the 2023 global AGM season 

This week’s news

The FTI Activism Vulnerability Report

FTI Consulting’s Activism and M&A Solutions team’s September 2023 Activism Vulnerability report highlights the significant changes in industry vulnerabilities over the second quarter of the year and their impact on shareholder activism and M&A. Concerns about a widespread banking crisis, continued interest rate hikes and rising inflation all seem to have subsided, although there are still whispers about the possibility of a recession. The report also sheds light on a noteworthy catalyst: regulators in Japan have recently announced requirements that is prompting a cultural shift in management tendencies and is driving a remarkable surge in activism in the nation. In addition, after a full year under the new Universal Proxy Card, we are seeing some signs of quicker settlements in activist situations. The report also features key insights from Lawrence S. Elbaum, co-head of Vinson & Elkins’ Shareholder Activism practice.

Arm flotation: SoftBank has either reopened the IPO market or killed it

Arm’s flotation last week made the headlines for a number of reasons; not least its bullish pricing at $51 per share. Whether the IPO can be seen as a barometer for the market is up for debate though. According to Bloomberg, analysts were already split on the equity valuation of the British chip designer. And if the company proceeds to drift below its issue price – and stay there – the impact on sentiment could be dire. Broader market conditions are middling, and while IPO activity is on the up, a significant chunk of indices is down from the beginning of last year. Arm enjoyed a unique combination of factors making it a particularly attractive proposition, but the prospects for other companies looking to go public don’t look so rosy. BBG suggest two key strategies from the SoftBank playbook that could enhance the IPO process. First, striking a deal for a stake in a company heading for IPO establishes a credible valuation and can reduce debt burdens. Second, enlisting cornerstone shareholders can validate price ranges and reduce the amount of stock that needs to be sold to the public. Yet the challenge for successors remains getting deals done — not maxing out on price.

Companies ease off on share buybacks as rising interest rates rise

Rising interest rates have taken their toll on share buybacks in the US, according to the Financial Times. Data shows that S&P 500 companies spent $175 billion on buybacks in the second quarter of 2023, marking a 20% decline from the same quarter last year and a 19% decline from the first quarter of 2023. This downward trend has put analysts on edge, many of whom worry this is the start of a longer-term trend. Structural reasons and rising interest rates are both at play – companies face increased investment demands, higher borrowing costs, and pressure to invest in areas like supply chain reshoring, automation, and carbon emissions. The crisis in the banking sector has also played a role, as many banks increased buybacks in the first quarter but slowed down after the collapse of smaller lenders and stricter capital requirements. Additionally, a new 1% tax on buybacks introduced in 2023 in the US – expected to increase in the future – could further influence companies’ spending decisions. If the buyback slowdown is here to stay, higher dividend pay-outs may be back.

Shareholder rights mustn’t become a victim of the digital age

In an opinion piece for Investors’ Chronicle, Val Cipriani has highlighted the consequences that may emerge as the use of paper shares comes to an end. These will be retired in the EU by 2025 and the UK government is also investigating how and when they can be removed from use. A plan to turn all certificated shares into nominee shares is one of the current leading options; however, there are key differences between shares with paper certificates and nominee shares which are held by an intermediary such as a broker, which means that shareholders have no direct relationship with the company. Although digital engagement through new platforms is offering investors new options, this is not a given for shareholders. Cipriani warns that as paper shares are phased out, it is important to ensure that shareholders are still able to actively engage with the companies that they have investments in. 

Is there a future for active investing?

The IR community will hope so. Institutional Investor reports on a return to active investing as market volatility – after years of bull market conditions – has seen stock-picking investors find increasing success. According to Morningstar’s semi-annual Active/Passive Barometer report, 57% of actively managed ETFs and actively managed mutual funds were ahead of their passive peers over the 12 months to June 2023. Small-cap managers performed particularly well compared to passive counterparts, beating them by 65%. However, the Morningstar report did note that this improvement “did little to change their long-term track record against their passive peers”. In an opinion piece for the  Wall Street Journal, Burton Malkiel suggests that indexing remains the best option over the long term. To support his point, Malkiel argues that even in difficult market conditions, for example during the 2007/8 financial crisis, indexing continued to outperform active management on average.

And finally… I don’t like Mondays

In-person meetings were the clear favourite for the 2023 AGM season worldwide – with new research showing that 70% of US AGMs were held in-person in 2023 as virtual meetings continued to fall in popularity. IR Magazine also reports that Monday was clearly the least popular day for these events. According to Computershare’s latest US Annual Meetings Report, Wednesday and Thursday were the most frequently chosen day for AGMs with only 6% of these events taking place on a Monday. The data shows that the continuing trend for in-person meetings is reflected outside of the US, with 79% of global respondents to the survey identifying this as their preference.

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