(Bloomberg Opinions) – Two of the most well-known shareholder activists – Elliott Investment Management and Kvia Capital – targeting companies with complex structures and second-rate governance. But even soft goals can be hard work.
The art of activism is finding a lost company, but the core business is good. A weak valuation of stocks may be a symptom of poor operating performance, which in turn is explained by challenges in managing group structure. Trait governance is often a major concurrency factor. After all, the board has a strategy.
With Elliott’s latest goal, Hewlett Packard Enterprise Co., the company has a market capitalization of $21 billion. Bloomberg News reported that the activist has established more than $1.5 billion in positions and plans to interact with it. It’s not difficult to see why HPE is the name in the framework. For an activist, it’s like walking into Wal-Mart – your shopping list is right in front of you.
First, HPE is clearly in an attractive market – AI servers, networks and clouds. Analysts expect revenue to grow 8% in the current fiscal year. The stock market valuation relative to earnings is located at server competitor Dell Technologies Inc. and network competitor Cisco Systems Inc. You want it to land between them. As Morgan Stanley analysts point out, lower profitability is a problem. It can be said that the tripartite structure also gave HPE a group feel – which ignores another small financial services division.
HPE shares were slumped in March after management revealed that it had mispriced server pricing in the first quarter. This exacerbates the impression that when a purely gaming enterprise slips and falls, the conglomerates are subject to more severe punishment.
Meanwhile, the board looks stale. It has received four new dates refreshes over the past six years. Even so, six of its 12 members have been in more than nine years. CEO Antonio Neri is the life of the company. Long term term is a threat to objectivity and independent thinking. Age brings experience and wisdom, but the board component should be a balanced behavior.
HPE may consider that there are advantages in areas that overlap with customers. If so, why is it not suitable for stock prices? The $14 billion acquisition of Juniper Networks Inc., now trapped in an antitrust investigation, makes it difficult to consider structural changes in the near term, such as the separation of network services. Still, HPE can say the board is faster.
Cevian’s latest goal is Swiss insurance company Baloise Holding AG, which, despite being in a completely different industry, embodies similar problems and shows what action can achieve. Baloise has a strong influence in its domestic market but suffers from governance flaws, in which case shareholders have a 2% upper limit on voting rights regardless of their shares. The company deviates from its domestic core, geographically deviates from Germany and thematically deviates from venture capital. In April last year, shareholders, including Cevian, mobilized to accumulate the support needed to win the motion, lifting the cap on the voting at the annual meeting.
As governance standardized, Cevian increased its stake to 9.4%, while putting pressure on the company to simplify. This means several public statements express dissatisfaction with the state of progress – the act of yelling for activists who usually keep a low profile. While Baloise looks like a takeover target for big peer Zurich insurance group AG, it brought a merger with Helvetia Holding AG last week. For activists, this is a worse result than an all-cash bid. Fortunately for Cevian, Helvetia’s major shareholders agreed to buy its shares and provided neat exports.
The goals Cevian pays on average with its shares and achieves on sales are unclear. The total return on Baloise stock price has exceeded 70% since November 2023 (Cevian’s interest disclosure) and last week’s Helvetia transaction. Even if Cevian’s earnings were only around 40%, this is still twice the total return of European stocks during this period.
This is not the best result for Cevian. But this is still a good result. For activist investors, this reminds you that you have no control over the exit from a position, but you may do a good job in finding a basically reasonable business with scope for governance upgrades. For a business, ethics is that if your structure and governance are not beyond blame, you can’t go wrong.
More from Bloomberg Views:
This column reflects the author’s personal views and does not necessarily reflect the opinions of the editorial board or Bloomberg and its owners.
Chris Hughes is a columnist for Bloomberg that covers deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent.
More stories like this are available Bloomberg.com/opinion
