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The Activist Playbook: a contest of investor "engagement"


Source: The Activist Investor Blog, March 18, 2014 posting


The Activist Investor Blog


The One Thing an Activist Investor Must Do Well: Engage Other Investors


Tuesday, March 18, 2014

Above anything else, an activist investor should engage other investors early and often. Surprisingly few investors do this at all, and even fewer do so early in the process, even before engaging a portfolio company BoD and management.


Why Engage?

You may have some brilliant and innovative strategic ideas for a portfolio company, founded on thorough, detailed, and rigorous research and analysis. You could have a perfect director candidates. You might insist you’re the owner, and the balance sheet needs considerable work.


Companies don’t care what you think.


Sure, they say they care, and act like they care, but they really don’t. They take your call or your meeting. But, you’re only one shareholder.


If they did care, far more would have investor-friendly bylaws and policies.


Instead, companies pile on poison pills and sue individual investors. They blow off shareholder ideas for strategy and operations. They hoard cash when shareholders plead for greater than money market returns.


Executives don’t respond to brilliant ideas or outraged owners. They respond to real (or perceived) threats.


You might own a considerable block of shares, but even with 5-10% or more, you’re not really a threat. Your having more votes than they do is a threat. If the company sees (or thinks) that enough shareholders want a given change, they respond.


Very few investors can alone advocate successfully for change at a company. A small number have the credibility to propose a strategy, director candidate, or balance sheet structure that management knows will resonate with other investors. So, ValueAct can gain a BoD seat at Microsoft seemingly only by its reputation, size of its investment, and force of its arguments. Yet, don’t underestimate the extent to which even it needed to consult with other investors beforehand.


Everyone else needs to build a case with other investors. Once you have engaged others, only then can you say with confidence to the BoD and management that many others support your view about strategy and tactics. That’s a credible threat.


Why Engage Early?

We can think of two reasons:


A credible threat means that the company knows (or thinks) other investors will support you. If the BoD calls other investors to test this, you want to have called these other investors first.

You can test your case for the company on the only people who really matter, other investors. You can then refine your ideas based on their early input.


So, engage early means dialogue with other investors before dialogue with the company.


How to Engage

First, identify the other investors. We like J3 Information Services Group (free with a registration). Many other sources do this (Bloomberg, Capital IQ). Start with the top ten, which conveniently allows for an exempt solicitation if it comes to that.


Next, figure out each investors’ PM for the name. This takes some sleuthing, on investor websites, LinkedIn, and other sources. Sometimes we just call the main number and ask for the PM that follows the name. For the largest investors (big mutual and hedge funds), you might need to work through the proxy department.


For each PM, ask three questions:

1.What do you think of the company these days?

2.What different strategy and tactics would you propose?

3.How, if at all, should governance and the BoD change?


Then, listen carefully to the answers. If other PMs agree with your perspective, you can represent to the company that your plan will likely win support from other investors. If they don’t, then you need to revise your plan, or even move on.


This discussion is perfectly legal. Law and SEC regulations allow investors to talk to each other. But, you can’t:


Act as a group, for companies with a poison pill, within the often broad definition of “act” in the shareholder rights plan document; which typically does not include mere discussions among shareholders.

Coordinate efforts with other shareholders to the extent your combined shareholdings exceed 5%, at least without filing a Form 13D.

Ask for the investor’s vote, which constitutes proxy soliciting.


Practically, “acting as a group” or “coordinating efforts” includes agreeing on specific plans for a company or sharing the costs (attorneys, proxy solicitors) for an activist project.


A fourth or fifth question helps engage other investors even more, as it approaches the border between lawful business discussions and more regulated coordinated efforts.


4.How would you improve our plan? which divisions to sell? how much cash to return?

5.What BoD nominees would you suggest?


This last question makes sense only for situations that could escalate to a contested BoD election. Then, if another investor suggests their PM or another employee, you likely cross over into acting as a group, with implications for triggering a poison pill or Form 13D disclosure. If the investor suggests someone independent, you have more latitude for recruiting that person. Either way, an investor that provides a BoD nominee is that much more likely to support your effort.


Not Proxy Solicitation

Some investors might leave this chore to their proxy solicitor. They should not:


The discussion with other investors takes place as review of the portfolio company, PM-to-PM, rather than as a request for the investor’s vote.

Engaging other investors should take place early in the process, long before you retain any needed proxy solicitor.

Dialogue with other investors does not, and cannot, entail soliciting their proxy for a shareholder meeting, or in other words asking for their vote for specific proposals.


Proxy solicitors have a proper place - after you determine that you indeed need to solicit proxies.


The Purpose of Engaging

You don’t necessarily want other investors to join you in a group. While you might welcome any offer to share costs and vote as a block, you don’t engage other investors early for this reason. Few shareholders will join a group based on a call or meeting with you, and you don’t need them to do that, anyway.


And, if it comes to that, you do want them to vote for your BoD nominees and your shareholder resolutions. But, it doesn’t come to that all that often. You probably don’t want it to come to that - you probably want to avoid even needing to take your case or nominees to a vote.


You absolutely want other investors to say to the company, if and when management calls, that they agree with and support your ideas. Thus, you want to represent to the company, confidently, that other investors agree with you, and will likely support you in any vote.


In this way, executives know (or think) that enough other investors agree with your plan for the company. This becomes the real (or perceived) threat that motivates action.


Why the emphasis on real or perceived? Because few companies can or will ascertain the exact level of support from all investors. Sometimes, no one knows that until a real shareholder vote. If they perceive, though, that enough investors do agree with you, then risk-averse BoDs and executives would rather settle with you, or risk losing their privileged positions.


Typically, risk-averse company leaders trouble us. In most situations, though, an activist investor can turn risk-aversion to their advantage, through early, effective engagement with other investors.


Copyright 2008-2014 Michael R. Levin - all rights reserved.


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