Are Activist Hedge Fund Managers to Blame for Mega-Deal Failures?
04/26/16 - 03:50 PM EDT
past several years, a wave of huge mergers have been challenged and,
ultimately, blocked by the federal government.
from the Federal Trade Commission and
The Deal, a subsidiary of
TheStreet.com, TheStreet has discovered a pattern of increased
regulatory actions challenging mergers that dates back to the Reagan
administration. Under President Obama, the FTC, DOJ and other
regulatory bodies have challenged and blocked a higher proportion of
U.S. deals than ever before. At the same time, deals are getting
bigger and more complicated. Call it "Big
Business vs. Big Government."
Each administration since Ronald
Reagan has challenged a larger proportion of mergers, TheStreet
has discovered. Source: Hart-Scott-Rodino Act filings with the
government has certainly been more active in affecting deal activity
than in years past, is an overaggressive Uncle Sam the only culprit
for this new era of deal-busting?
hedge fund managers and, in some cases, analysts, are to blame, too.
antitrust-sensitive mergers were driven by activist hedge funds,"
contends Kai Liekefett, a partner and head of the shareholder activism
response team at law firm Vinson & Elkins. "Activists have the luxury
that they can take their profits and run following the announcement of
a proposed merger. By the time the merger experiences pushback from
the antitrust authorities many months later, the activists may have
already divested some or all of their position, leaving the merger
parties holding the bag."
the most explicit example of an activist fund that drove a deal gone
wrong involves activist Starboard Value's Jeff Smith (pictured)
2015 campaign at both Staples (SPLS)
and Office Depot (ODP)
to push for the two companies to consider a merger.
accumulated large stakes in both office supply companies and had been
eyeing a March 2015 Staples board deadline to nominate director
candidates, according to people familiar with the situation, as part
of an effort press the two companies into a combination. The two
office supply chain companies agreed in February, 2015 to combine in a
blockbuster $6.3 billion deal that was
subsequently challenged in December
by the Federal Trade Commission, which said the deal would
violate antitrust laws by reducing competition.
Starboard push, in retrospect, may have been motivated partly by a
much-publicized September 2014 Credit Suisse analyst report,
which said a combination between the two box-store office supply
giants "makes significant and operational sense." The note suggested
that a possible combination was "synergistic" and had been
"essentially blessed" by the Federal Trade Commission's wording of an
Office Depot-Office Max approval documents from 2013.
may still go through, most likely with concessions, but Starboard has
since liquidated its Staples stake and appears on the road to doing so
with Office Depot.
problematic deals are being driven by the activist push, said Deborah
Feinstein, director of the Federal Trade Commission's Bureau of
who is counseling that these [deal proposals] are going to be OK or
whether there is such activist pressure that [deal ideas] got out of
boardroom when they shouldn't have," Feinstein said. "In a lot of
these cases we're talking about the number one and two players in
industries merging. Most people would take a deep breath and ask, 'Is
this a good idea and is this one worth the risk?'"
now-rickety Halliburton (HAL)
is another good example. Activist investors Jeff Ubben from ValueAct and
his team had been key agitators seeking to drive the $35 billion
acquisition by Halliburton of Baker Hughes, a combination that earlier
this month was hit with a Justice Department
lawsuit seeking to have combination stopped.
In fact, the fund might have gone to improper lengths to push the
deal. Deep Dive: Will
the Halliburton-Baker Hughes Deal Survive Government Opposition?
days before filing suit against the deal, the DOJ filed a related
lawsuit against ValueAct itself,
arguing that it improperly purchased substantial stakes in both
Halliburton and Baker Hughes "with the intent to influence the
companies' business decisions as the merger unfolded." According to
the Justice Department, ValueAct sent a memorandum to its investors
outlining a strategy of being a "strong advocate for the deal to
close." It added that if the deal encountered "regulatory issues"
ValueAct "would be well positioned" to "help develop new terms."
activist investor Bill Ackman and his Pershing Square Capital
Management are also part of this costly trend. Ackman was a key
contributor to Canadian Pacific Railway (CP) lengthy
but ultimately cancelled hostile effort to buy Norfolk Southern (NSC).
Ackman, a major Canadian Pacific shareholder and a director on the
railroad company's board since 2012, had called Norfolk "an ideal
Pacific on April 11 cancelled its efforts after Bill Baer, head of the
Antitrust Division at the Justice Department, in March
raised concerns about pre-merger
coordination between the two companies. Four days before the bid was
called off, the chief lawmaker on the House Transportation Committee
piled on by also publicly taking issue
with the transaction, suggesting it is not in the best interest of the
U.S. freight industry. Ackman has long been an advocate of railroad
industry consolidation and was also behind Canadian Pacific's
unsuccessful 2014 run at CSX Corp.
Department last month announced it was extending its antitrust
investigation of the proposed $130 billion merger and later break up
of Dow Chemical (DOW)
and DuPont (DD).
The deal would
create the world's largest chemical company--at
least until the companies carry out their plan to break the merged
firm into three separate ones focusing on agriculture, material
science and specialty products. Opponents of that highly complicated
multi-faceted deal can look to activists Third Point and
Trian Fund Management as at least partly to blame there. Deep
Antitrust Regulator Debbie Feinstein Q&A
Nelson Peltz waged an unsuccessful proxy campaign against DuPont last
year. But he threatened to come back in 2016 and in the months
following his defeat DuPont stock price dropped and it subsequently
replaced CEO, Ellen Kullman. The companies said that merger
discussions began soon after that CEO switch. And separately, Third
Point's Dan Loeb, another frequent deal agitator, in 2014 settled with
Dow to install two dissident nominees on the chemical giant's board.
Upon the Dow-DuPont deal's announcement, Loeb said in a letter he
supported it but questioned the timing and called for Dow CEO Andrew
Liveris to be removed.
Shareholders and regulators should watch this development closely. The
costs of failure to obtain approval for a deal can be huge.
Halliburton, for example, agreed to pay a $3.5 billion reverse
termination fee to Baker Hughes if antitrust approval could not be
activists appear to be able to make money on deals even if the merging
companies end up being sued by the government. Starboard accumulated
shares to reach a 5.1% stake in Staples at prices ranging from $12.00
to $13.92 a share in October and November of 2014, according to a
December 2014 securities filing. The fund in February reported that it
had began liquidating its Staples stake --
shortly after the FTC filed its complaint to block the deal
-- by selling shares to bring it to below a 5% stake at prices between
$16.75 and $17.15 a share. Staples shares traded late Monday at $10.39
the blockbuster deal challenges, DOJ threats and cancelled deal
efforts, one wonders whether activist fund managers will still be
pushing for mega mergers in the months to come. And if they do,
whether corporate executives will push back harder.
McConnell contributed to this report
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