2014 6:17 pm
Corporate acquirors take early aim at
their target’s investors
By Ed Hammond in New York
To win investor support for last month’s $53bn takeover of rival drugmaker
AbbVie delivered a blunt message to
its target’s shareholders: if you want a deal, speak now or risk us walking
To stress the importance of their response, AbbVie pointed to the example of
AstraZeneca, the UK pharmaceutical
company that in May
fought off attention from US rival
Pfizer – and has faced disgruntled
shareholders ever since.
Abbvie’s tactic worked. Days later – and with its shareholders voicing
support for a deal through the press and directly to its board –
Shire agreed to sell itself to AbbVie.
The willingness of Shire’s shareholders to speak up so early in a takeover
fight highlights a shift in the relationship between companies and their
investors. The shareholder passivity that has long allowed companies to keep
the rump of serious decision making in the boardroom is ebbing.
Increasingly, shareholders want to be part of a wider discussion about what
is best for all those invested in the future of a company. The debate has
been enlivened by the recent surge in dealmaking and activist investment.
At the end of 2013, and with transaction markets still lumbering, the
thought of shareholders interposing their own views on to any M&A
decision-making process was not one stirring many company directors from
One example where it did happen was
Charter Communications’ $61bn
unsolicited – and,
ultimately, unsuccessful – offer for
Time Warner Cable. The two US cable
companies had been jousting for a full seven months when T Rowe Price, a top
20 shareholder in TWC, wrote to its board urging it to engage with its
suitor. Even so, the decision to communicate its views directly marked T
Rowe out as a dissenter in an otherwise largely submissive pool of
This year the game has changed: with M&A at healthy levels, shareholders –
and their opinions – have gone from sitting on the sidelines to centre stage
in transactions on both sides of the Atlantic.
The question is why has their role changed?
One explanation lies with exchange traded funds. Holding less than 3 per
cent of the market value of the US’s 500 largest public companies five years
ago, ETFs represent about 7 per cent of that shareholder base today. The
increase has coincided with a rich run for funds that passively track the
stock market – the S&P 500 has risen almost 50 per cent in the past three
years. The remainder of publicly traded stock is mostly held by asset
managers, such as BlackRock and T Rowe Price. They, too, have reaped the
fruits of the flourishing market.
But a big difference between ETFs and asset managers lies in the fees they
On average, ETFs charge investors an annual fee of 0.47 per cent, whereas
asset managers ask for 1.24 per cent, according to data from Thomson
To justify those higher fees, asset managers cannot passively hold the same
stocks as the ETFs. Instead, they are having to push the companies whose
stock they hold to make better decisions.
Jim Woolery, head of the Shareholder-Director Exchange, a working group that
hopes to foster better discussion between boards and shareholders, says
passivity among asset managers is a thing of the past.
“There has been a tectonic and permanent shift in the American shareholder
base that is creating an economic pressure for asset managers to be more
thoughtful and more vocal about how the companies they invest in should be
run,” said Mr Woolery, who is also chairman-elect of Wall Street law firm
Cadwalader, Wickersham & Taft.
Companies, for their part, seem increasingly willing to listen – and with
good reason. Activist investing and hostile takeover attempts, both of which
have soared this year, prosper when companies and their investors are out of
“The practice of using investor relations or other arm’s length methods for
speaking to your largest shareholders is fading fast,” says John Studzinski,
global head of Blackstone Advisory Partners. “Chief executives and directors
are realising that they have to be out there themselves, understanding and
addressing the key concerns of shareholders. It is morphing from something
that happens in a crisis towards being accepted best practice.”
An obvious benefit of these pre-event conversations is in learning the right
balance between the competing interests of different investor groups.
As news of deals reach the market, short-term investors known as merger
arbitrageurs often pile into the shares of the target company, betting on
the likelihood of a deal closing. Arbs are typically more vocal than
traditional long-term investors which can put disproportionate pressure on
boards and influence other shareholders to enact decisions that run counter
to what the board sees as being in the best interests of the company.
To defend against this, companies can redefine the rules that govern the
rights of their shareholders.
In July, the board of
Time Warner, the television and film
company (unconnected to Time Warner Cable), changed its bylaws to block its
own investors from forcing it into a $73bn takeover by Rupert Murdoch’s
21st Century Fox. In a move that
reflects that changing pace and degree of shareholder involvement – and the
expectation of it – Time Warner waited just five days after Mr Murdoch’s
public approach before rewriting its rule book.
It was, according to advocates of shareholder-director dialogue, an
indelicate solution to an unnecessary problem. Their hope is that the
increasing tendency of investors to voice their opinions, and of companies
to listen, will lead to decisions that better address the interests of those
stakeholders beyond the boardroom.
© The Financial Times Ltd 2014