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Evolving defenses against escalating activism

 

For more views and analyses of evolving activist practices, see
  • January 2014, Activist Insight in association with Schulte Roth & Zabel LLP: "Activist Investing Review 2014 | An annual review of trends in shareholder activism" (36 pages, 12,060 KB, in PDF format)

 

Source: Wall Street Journal, January 28, 2014 article

THE WALL STREET JOURNAL.  |  Business


Markets

Bitter Medicine in Store for Activists

As Hedge Funds Step Up Their Hunt for New Targets, Companies Are Bolstering Their Defenses

 

By Liz Hoffman

Jan. 28, 2014 7:25 p.m. ET

Ryan Etter

As activist hedge funds step up their hunt for new targets, companies are bolstering their defenses.

Some are fortifying their poison-pill provisions—measures that prevent an unwanted shareholder from taking a stake above a certain level. Others are speeding up their acquisition timetables to minimize interference from shareholders. And some are tightening rules for nominating board members to make it harder for activists to get board seats.

Activist investors, those who take stakes in companies with the aim of pushing management to boost returns through increased share buybacks, higher dividends or even a breakup of the company, have become a growing force in U.S. companies.

This year alone, activist investor Carl Icahn has demanded more share buybacks from Apple Inc. and taken a stake in eBay Inc. to push for a separation of its PayPal unit. Investor Daniel Loeb is nudging Dow Chemical Co. to split itself in two, and Jana Partners LLC is using its stake in Juniper Networks Inc. to push for cost cuts.

"Activism is clearly here to stay, and smart companies are rethinking their approaches," said M. Adel Aslani-Far, global co-chairman of Latham & Watkins LLP's mergers-and-acquisitions practice. "There is a time to engage, and there's a time to dig in."

How Penney, Chuck E. Cheese Took New Poison Pills

Associated Press

View Slideshow

Hertz Global Holdings Inc. and Aéropostale Inc. recently adopted tough poison pills that kick in when a shareholder takes a stake of 10%. On Tuesday, J.C. Penney Co. announced a type of poison pill that keeps an even tighter lid on how many shares investors can buy, citing tax reasons.

For decades, poison-pill defenses typically were triggered when a shareholder's stake reached 20% of the company's stock outstanding. Once that happened, the company could flood the market with shares, diluting the shareholder's stake and reducing the holder's influence.

But that threshold was most effective against corporate suitors wanting to wage a hostile takeover, not activists, who can often wield influence with much smaller stakes.

More than half of the poison pills adopted in 2013 are designed to be triggered when a holder gains a stake of 10%. In 2005, less than 8% of poison pills had a trigger of 10%, according to FactSet.

"Pills are being carefully crafted with an activist in mind," said Chris Cox, a Cadwalader Wickersham & Taft LLP lawyer who advises boards.

More corporate poison pills also now explicitly include swaps, options and other financial products as part of an ownership stake. About 59% of poison pills adopted last year counted these derivatives, up from just 4% in 2008, according to FactSet.

But these defenses also could backfire on companies. While activists can be an irritant to management, some have succeeded in helping bolster share prices and making companies leaner and more efficient, some investors argue. And activists often feel they are acting on behalf of other shareholders.

"The notion that activists are the enemy, or that companies have to put up walls, is illogical," said Greg Taxin, managing director of Clinton Group, an activist fund with about $1.5 billion in assets. "I'm an owner of these businesses, and I'm trying to make them more successful in a way that benefits everybody."

Still, companies are guarding their gates.

Big companies, including Pfizer Inc. and Agrium Inc., have changed their corporate bylaws in recent years to make it harder for outsiders to gain board seats. Some companies now require more advance notice and more details from shareholders seeking to nominate directors, including ownership of derivatives and the names of any other shareholders they are working with. Requirements that once ran for a few lines in corporate bylaws for nominations now take up several pages.

And when it comes to mergers—commonly a field that attracts activists' attention—some companies also are changing tactics. They have chosen a faster, more direct type of takeover, known as a tender offer. These deals are at their highest level since at least 2003, according to FactSet.

In a tender offer, buyers purchase shares straight from investors rather than seeking a vote of all shareholders. That means a deal can be completed in a few weeks rather than months, giving hedge funds little time to organize and seek a price bump.

Apollo Global Management LLC earlier this month agreed to buy Chuck E. Cheese's owner, CEC Entertainment Inc., for $950 million through a 20-day tender offer, the minimum amount of time allowed under securities rules. CEC also adopted a poison pill with a 10% threshold.

Almost 30% of deals in the second half of 2013 used a tender offer, compared with 9.6% in 2006, according to FactSet.

The deals became easier to do thanks to a legal change last year in Delaware, where the majority of U.S. companies are incorporated.

In tender offers, "there is less of an opportunity for someone to come in and create mischief," said Michael Carr, head of Americas M&A for Goldman Sachs Group Inc.

Write to Liz Hoffman at liz.hoffman@wsj.com

 

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