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Questions raised about activist negotiations of exits

 

The following video and graphics were added to the Wall Street Journal's website display of the article below after its distribution to Forum participants.

 

Markets

Going 'Greenmail' to Get Rid of Activist Investors

More companies are resorting to an old tactic to get rid of activist investors: Pay them to go away. The practice has raised concerns because it bears similarities to “greenmail,” a controversial strategy popular in the 1980s. David Benoit joins MoneyBeat. Photo: Getty Images.

6/12/2014 10:40:33 AM3:20

 

 

Source: Wall Street Journal, June 11, 2014 article

THE WALL STREET JOURNAL.  |  MARKETS


Markets

Activist Funds Dust Off 'Greenmail' Playbook

 

By Liz Hoffman and David Benoit

June 11, 2014 7:03 p.m. ET

More companies are resorting to an old tactic to get rid of activist investors: Pay them to go away.

The practice, which involves buying back shares from activist hedge funds, has raised concerns among some investors because it bears similarities to "greenmail," a controversial strategy popular in the 1980s.

Back then, aggressive investors such as Carl Icahn and the late Saul Steinberg bought company shares and threatened a hostile takeover. Eager to avoid a battle, companies including Walt Disney Co. and Goodyear Tire & Rubber Co. bought back their stakes above market price, giving the activists a quick profit.

The practice, widely criticized as corporate blackmail, largely died out by the early 1990s as companies beefed up defenses and lawmakers took steps to discourage it.

But in the past 12 months, at least 10 companies have repurchased blocks of shares from activist investors, including Daniel Loeb and William Ackman, according to FactSet SharkWatch. That is more than in the previous six years combined.

The practice differs from greenmail in two crucial aspects. The share buybacks aren't at a premium to the market but typically at or slightly below the last trading price. They also don't follow threats of hostile takeovers.

Advisers say these deals are likely to continue as activist hedge funds, which have targeted more companies in recent years, look to sell out of holdings.

Since the current wave of activism started in 2010, these investors have launched 1,115 campaigns, according to FactSet, and many are ripe for exits.

The buybacks have fueled a common criticism of activist investors: They chase short-term profits at the expense of other shareholders.

"You can call it greenish mail," said Spencer Klein, a lawyer with Morrison & Foerster LLP who advises companies facing activist investors. "These investors are getting an opportunity that others aren't, and that's not a terribly popular notion."

The trend is setting off alarms even among activists, who have sought to separate themselves from the "corporate raiders" of the 1980s and portray themselves as good for all investors.

"I'm the curmudgeon in the room. I see evidence of greenmail," Jeffrey Ubben, founder of activist fund ValueAct Capital Management LP, said at a conference recently. "We better be careful we don't kill the golden goose."

Defenders of these new deals say they offer a clean, amicable divorce. Large stakes can drag down a company's stock price if sold on the open market, and even the expectation of an exit in the near future can weigh on shares. Both sides make out better when the split happens quickly, said some activist investors and corporate advisers.

Buybacks also boost remaining investors' cut of future profits by reducing the total number of shares in the market, they said.

Damien Park, a consultant who advises both corporations and activists, said if the price makes sense for a company to do a large buyback, it can be a win for everybody.

"One of the most difficult aspects of being an activist is your exit strategy," Mr. Park said. "Once the stock moves in the right direction and things are going smoothly, you have a conundrum."

Still, the deals have drawn criticism. Home-security firm ADT Corp. in November bought back most of a 5.3% stake held by Corvex Management LP, a hedge fund run by Keith Meister. ADT paid the previous session's closing price, and Mr. Meister left the board.

ADT's stock has underperformed this year and, on an investor conference call in April, anger from one large shareholder spilled into the open.

"You guys have bought back…stock at very inappropriate prices, as far as I can see," said Leon Cooperman of Omega Advisors Inc. Mr. Cooperman said in an interview that companies should be held accountable for buybacks just as if they were spending on plants or acquisitions. "Management owes the shareholders an explanation," he said.

Chief Executive Naren Gursahaney responded on the call that ADT had worked with advisers and believed the price was a discount. "We feel that the valuation is significantly higher than where it is," Mr. Gursahaney told Mr. Cooperman. ADT declined to comment beyond the CEO's earlier remarks.

ADT shares closed Wednesday at $33.53, down 24% from the price Mr. Meister received.

In the past year, similar deals have been struck at or near market prices, between Mr. Ackman and General Growth Properties Inc.; Mr. Loeb and Yahoo Inc.; and Mr. Icahn and two companies, WebMD Health Corp. and Take-Two Interactive Software Inc.

Many of the deals came amid broader share-repurchase programs. In each of those examples, except ADT, the stock currently trades above the buyback price.

Messrs. Meister, Loeb and Ackman declined to comment. Mr. Icahn didn't respond to a request for comment. Yahoo, General Growth, WebMD and Take-Two declined to comment.

In its heyday, greenmail deals added up to big sums. In 1984 alone, public companies paid $3.5 billion in greenmail, with payments above market price accounting for $600 million, according to a study by the Securities and Exchange Commission.

Then the "poison pill" was invented. These corporate defense mechanisms, officially called shareholder-rights plans, defanged activist investors by thwarting the hostile takeovers they used as leverage to extract the buyback offers.

Regulators also stepped in. The Internal Revenue Service in 1987 introduced a tax of 50% on any profits from greenmail, while several states passed laws that made it hard for companies to buy back stakes from short-term investors at a premium.

Write to Liz Hoffman at liz.hoffman@wsj.com and David Benoit at david.benoit@wsj.com

 

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