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Professional views of activist disruption in M&A transactions


The article below has been made available to Shareholder Forum participants with permission of the editor of Activism Monthly Premium, a private subscription publication of Activist Insight.


Source: Activism Monthly Premium, November 2015 lead article

Josh Black, Editor

How to protect your deal from an activist

Deals, deals, deals… and activism. Why companies shouldn’t be overly concerned about shareholders trying to wreck their big moment.


Deal-making isn’t what it used to be. Increasingly, the advisers corporate management teams and boards turn to when they announce a transaction are advising on how to deal with an activist showing up, and there is little chance of that threat receding. “In today’s environment every transaction comes under increased scrutiny, not just from activists but also from other shareholders,” says David Hunker, Executive Director at JP Morgan and head of the firm’s  activism defense practice. “The days when deals were decided on a handshake are gone.”


If activists are often seen as mostly pro-deal, there are a significant number of campaigns each year when the investors seek to hijack previously announced situations. Activist Insight has tracked “reactive” campaigns opposing either the rationale or the terms of mergers or takeovers at 112 companies since the beginning of 2010, with the overwhelming majority (97) facing criticism on the terms of the deal, rather than the strategic basis.







This year alone, Elliott Management has waged high profile campaigns at Samsung C&T—where it said fellow Samsung- group  company Cheil  Industries  was  underpaying—and Family Dollar Stores—where  a rival bidder had been frozen out of the auction process. Two years ago, Carl Icahn was railing against the leveraged buyout of Dell and Starboard Value publicly criticized Smithfield Foods over its planned acquisition by Shangui. All four examples highlight another key feature of so-called “deal activism”— they each completed, with only Dell adjusting its price to see off Icahn’s rival bid. As Sabastian Niles, of Wachtell, Lipton,  Rosen & Katz, the New York law-firm known for its corporate defense and M& A practice, says, “Value-creating deals continue to get identified, signed and done, regardless of activist intervention.”


How to prepare


“If you announce a deal in today’s environment, you should have a plan ready in case an activist emerges,” says Steve Balet, of the communications firm FTI Consulting. “You should also understand your shareholder base will change.” The acquirer will usually see its stock sink, while a target’s rises as arbitrageurs pile in. The first few days after a deal goes public are a treadmill of activity. During the “rollout,” a company and its advisers publish press releases, host conference calls, brief analysts, shareholders and reporters on the merits of the deal, and try to get the “story” widely heard before alternative viewpoints creep in. Gary Lutin, a former investment banker and now Chair of the Shareholder’s Forum, an advisory group, says economics should be foremost. “Focus on the real benefits of what you propose, and provide decision-makers with information they can trust,” he advises. “For example, an independent, peer-reviewed valuation is more likely to compel support from shareholders than a proponent-commissioned fairness opinion.”


“Issuers need to articulate the basis for value and deal rationale clearly, forcefully and consistently,” says Niles. “That also means focusing on the economic and, where relevant,    governance aspects of the deal to win the support of the proxy voting advisers.” Highlighting a robust process at board level—most comprehensively in the proxy statement if the deal requires shareholder approval—is critical, he suggests. And prudently structuring and protecting the deal, including by accelerating deal approval, regulatory and closing timelines, is also advisable.


When activists attack


“M&A activism requires a similar response to other forms of activism,” says Hunker. “It’s the same combination of theatre and politics on the activist side, and companies have to be able to sell the benefits of the deal.”


Broadly speaking, shareholders can raise three main issues with a deal. First, a class action lawsuit, which inevitably follows the announcement of any transaction. Second, an activist investor could run a hostile process—a withhold campaign or even a proxy contest— to force management to reconsider. Finally, appraisal funds pursuing a re- evaluation of the deal  price  through the courts, which has the potential to be an ongoing distraction. Icahn threatened to use this latter option at Dell, but the standard was instead taken up by a small number of funds patient enough to tie up their capital for long periods (two years later, valuation arguments have just been heard).






While a robust process can mitigate all three risks, the prospect of facing down an activist requires a more vigorous response from both the board and management team of the companies involved—especially since both the buyer and the acquirer may be targeted (as Virginia-based Media General recently found). Some companies have dealt with activists by bringing them inside the tent; OM Group offered FrontFour Capital Management board seats shortly before selling  itself, while TICC Capital appears to have bought the support of Raging Capital Management with a board seat and a couple of other concessions.




Activists are mostly looking for a bump in the price, some corporate advisers argue. Although target companies must be careful not to breach their fiduciary duties by leaving value on the table, acquirers can adopt precisely the opposite approach. “Leaving a few dimes in reserve to placate the inevitable activist agitator has become just as much a part of the standard playbook as reserving a few disclosure statements to buy off the inevitable class action lawyers,” says Lutin.


Both he and Niles argue that activists have plenty to lose from a deal falling through, since the target’s stock will typically sink. To Balet, however, yesterday’s dumped M&A targets may be tomorrow’s activist fodder, if one isn’t already present on the share register. “Activists get a free look at value when a deal is fended off,” he says. “If the company’s stock price sinks after the deal collapses, the activist knows what the upside is.”


Not all boards should be worried, however. Most advisers see deal-activism as a game of brinkmanship, in which the activist has as much to lose as the company. “Activists like to rattle the cage,” Lutin muses. “Anyone who can’t deal with that shouldn’t be doing deals in the first place.”■


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