UK fund managers, needing cash to meet investor redemptions, pressure their portfolio companies to pay dividends. This ignores more accretive capital allocation strategies like share buybacks, contributing to persistent undervaluation across the market.
In a striking cultural difference from the US, some UK board members justify not owning shares by claiming it would create a conflict of interest. This reveals a fundamental misalignment with shareholders and a weak governance culture that tolerates such excuses.
Acquirers in the UK are consistently paying premiums of 40-50%, and sometimes over 100%, for public companies. This is significantly higher than the typical 20-30% and serves as a powerful, objective indicator that the public market is systemically mispricing assets.
Unlike the US, where shareholder activism is common, UK culture discourages confrontation, described as not wanting to "raise your head above the parapet." This cultural barrier contributes to board and management complacency, allowing undervaluation to persist without challenge.
Instead of using direct levers like share buybacks to fix their low stock prices, many undervalued UK companies hire brokers and fly management to the US for roadshows. This is criticized as an expensive, ineffective "box-ticking exercise" that fails to address the core problem.
ZigUp's management could earn a transformative £69M bonus through its Value Creation Plan by raising the stock price. Paradoxically, despite this powerful incentive, they continue paying dividends and investing in growth projects instead of executing highly accretive share buybacks at a low valuation.
UK software firm Craneware rejected a £26.50 per share takeover bid from Bain, arguing it undervalued the company. A year later, the stock trades at half that price. This serves as a stark warning to boards about the high risk of turning down significant premiums from acquirers.
A key risk for undervalued companies is not just a low stock price, but being acquired via an unsolicited bid at a price that is still far below intrinsic value. Passive boards effectively gift value to acquirers by not proactively managing their company's valuation.
While large UK funds are often passive, retail investors collectively own a significant free float (up to 50%) in many companies. Mobilizing this fragmented shareholder base can create a powerful voice to challenge boards and drive change, filling the void left by institutions.