Young, head of contested situations at Credit Suisse, assesses
companies’ vulnerabilities to shareholder activism.
Executives and board
members used to fear hostile bids above all else. In response, they
devised defense mechanisms like poison pills and staggered boards to
Today, hostile deals are
on the wane, but a new threat has emerged that has put boardrooms on edge:
“Companies now view the
threat of shareholder activism similarly to how they viewed the threat of
hostile takeovers in the 1980s,” said Gregg Feinstein, head of mergers and
acquisitions at Houlihan Lokey.
Until recently, many
companies responded to activists by simply refusing to meet with them and
hoping they would go away.
When Daniel S. Loeb of
Third Point Management took a stake in
Yahoo in 2011, the company was initially dismissive. In an early phone
call between Mr. Loeb and
Yahoo, the company’s chairman, Roy Bostock, reportedly hung up on him.
But a year and a half later, Mr. Loeb had forced out
Yahoo’s chief executive and was on the board.
After a string of such
debacles, and with activism today more established and prolific than ever
before, that approach has fallen out of favor.
“The bunker mentality that
had been advised in some quarters is fading as an approach,” said James C.
Woolery, deputy chairman at Cadwalader, Wickersham & Taft. “Today you need
real substantive preparation and real engagement.”
Now, with dozens of
activist hedge funds pushing for change at companies large and small,
executives, directors and advisers are scrambling to calibrate their
defenses to this new and in many ways more challenging threat.
“Activism is here to
stay,” said Paul Verbinnen, co-founder of Sard Verbinnen, a public relations
firm. “People are at a heightened state of readiness.”
But with activists varying
widely in their tactics and intentions, there is no one cookie-cutter
defense that works. Instead, companies and advisers are adopting more
Many companies are
preparing for activists before they even show up.
“Your defense today before
an activist shows up is all about blocking and tackling, dynamic
self-assessment, followed by really enhanced investor outreach,” said Chris
Young, head of contested situations at
Credit Suisse. “It’s a dialogue, not a monologue.”
Mr. Young is one of a few
bankers who spends almost all of his time advising companies on how to
prepare for and deal with activists. William Anderson of
Goldman Sachs has a similar role. Smaller investment banks, like
Evercore, are now devoting more resources to activism defense practices as
To prepare for activists,
who often show up with detailed white papers assailing a target’s
performance, companies conduct a handful of exercises to give management and
boards a better understanding of their perceived vulnerabilities.
Small teams that include
management, a banker, a lawyer and an outside public relations specialist
are often assembled to prepare a response in the event of an attack. The
goal, advisers say, is to see the company through the eyes of an activist,
especially at a time when activists have gone from being outspoken agitators
to rigorously analytical financial engineers.
“The level of
sophistication of the activists has increased,” Richard Grossman, a partner
at Skadden, Arps, Slate, Meagher & Flom. “They’re hiring headhunters, using
banks to help them come up with white papers, and the quality of their board
candidates is increasing.”
whether the company’s stock is trading at a discount to its peers, whether
it has excess cash on the balance sheet and the youth and engagement of its
directors. In a recent report,
Citigroup called this kind of preparation being “white paper-ready.”
“Boards are preparing for
the possibility that activists may come,” said Robert Kindler, global head
of mergers and acquisitions at
Morgan Stanley. “Part of it is proactively reviewing areas of
vulnerability and seeing whether or not there are things you should be doing
When vulnerabilities are
uncovered, companies sometimes take action, spinning off divisions or
instituting return of capital programs to quell the dissent before it
EMC, the data storage company, began paying a dividend earlier this year
in part because it was worried activists could focus on its large cash pile,
according to people with knowledge of the company’s thinking.
With paranoia at record
highs, some companies are going further.
One company invited an
activist investor into the boardroom to explain how he might think about
undertaking an assault. A multinational company had a banker write a mock
letter from an activist, then tested executives on their response.
preparation, what I call ‘the activist fire drill,’ is new technology, so to
speak,” Mr. Young said.
Part and parcel with this
more proactive assessment of a company’s own performance is communicating
better with passive institutional shareholders.
In recent years, many big
companies have put more money into their investor relations departments. And
instead of simply sending out the head of the department to meet
institutional investors, they are sending out the chief executive, chief
financial officer and chairman.
“It’s important that the
first time a shareholder hears from you isn’t when an activist files a
13-D,” the regulatory filing announcing an activist’s stake, Mr. Grossman
In the best case, the
situation never goes public and is resolved before a 13-D is ever filed.
“The tone of any dialogue will be much more constructive when you can have
that out of the public eye,” said Daniel Kerstein of the
Barclays strategic finance group, which advises companies.
When situations do play
out in public, companies have to be especially sensitive.
For example, when
Starboard Value singled out
AOL last year, agitating for it to sell patents and proposing a new
slate of directors, the company was able to withstand the assault.
Shareholders supported the strategy of the chief executive, Tim Armstrong,
and voted against Starboard’s board nominees.
And even though Starboard
was aggressive in its communications,
AOL remained relatively cordial throughout the exchange to avoid
appearing dismissive of overall shareholder concerns.
“Other investors are
watching,” Mr. Kerstein said. “You need to be mindful of the fact that you
are dealing with a constituency who is sensitive to how you are going to
treat that one shareholder.”
Another tactic is to
simply bring the activists into the fold, defusing tensions before they can
become public and affect a company’s reputation and share price. When
ValueAct Capital took a stake in
Microsoft, the technology company quickly vowed to work with the hedge
fund and gave it a board seat.
Of course, situations
between companies and activists still do become contentious. And when this
happens, new twists to old techniques can come in handy.
A new version of the
poison pill, which was originally devised to ward off takeovers, is being
tailored to prevent activists from acquiring too large a stake.
After Jana Partners, led
by Barry Rosenstein, took a stake in supermarket chain
Safeway and began agitating for divestitures and a return of capital,
Safeway adopted a novel shareholder rights plan. It stipulated that no
investor filing a 13-D, which designates an activist, could acquire more
than 10 percent of the company. Passive investors, however, filing 13-G
forms, could acquire up to 20 percent.
Even this tactic, however,
is of limited use. Like most activists, Jana has no interest in actually
owning the company. Instead, it needs only enough of a stake to get the
attention of other investors.
“There are no longer any
structural defenses,” Mr. Young said. “It used to be that you could set up
staggered boards and put in poison pills. But there is no moat to build
around your company anymore.”
A version of
this article appears in print on 11/12/2013, on page F10 of the NewYork
edition with the headline: Boardrooms Rethink Tactics to Defang Activist
This Forum program was open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the purpose of this public
Forum's program was to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
participant was expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.
This Forum program was initiated in 2012 in
collaboration with The Conference Board and with
Thomson Reuters support of communication technologies to address
issues and objectives defined by participants in the 2010 "E-Meetings"
program relevant to broad public interests in marketplace
practices. The website is being maintained to provide
continuing reports of the issues addressed in the program,
as summarized in the
January 5, 2015 Forum Report of Conclusions.
The information provided to
Forum participants is intended for their private reference,
and permission has not been granted for the republishing of
any copyrighted material. The material presented on this web
site is the responsibility of
Gary Lutin, as chairman of the Shareholder Forum.
is a trademark owned by The Shareholder Forum, Inc., for the
programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.