Hedge Fund Activism Barry H. Genkin      SEC Hot Topics Institute     Wednesday, September 24, 2008     Philadelphia, PA
Recent Statistics <ul><li>Q-1-2 (08) – Record Volume of Proxy Fights </li></ul><ul><li>265 New Activist Campaigns Announce...
Current Trends <ul><li>Institutional investors and activists – common goals </li></ul><ul><li>Greater willingness to take ...
Current Trends (Cont’d.) <ul><li>Expansion of hedge fund activism </li></ul><ul><li>Displaced investment bankers or resear...
Current Activist Activities <ul><li>Developments embolding activist shareholder effective: </li></ul><ul><ul><li>Majority ...
Setting the Table <ul><li>Important Definitions and Confusing Terminology </li></ul><ul><li>Proxy Contest – Proposal, thro...
Setting the Table (Cont’d.) <ul><li>Scorched Earth Tactics – Throw everything, including kitchen sink </li></ul><ul><li>Ac...
Purposes of Proxy Contest <ul><li>Enhance Shareholder Value – Stock Undervalued </li></ul><ul><li>Influence Board/Manageme...
Legal/Regulatory Framework <ul><li>Articles </li></ul><ul><li>By-laws </li></ul><ul><li>State Law (Incorporation) </li></u...
Proxy Contest Team – Company Side <ul><li>Insurgent/Activist/Hedge Fund </li></ul><ul><li>Selected Company Officers </li><...
Due Diligence on Target – Vulnerability Assessment <ul><li>Undervalued – Stock Trading </li></ul><ul><li>Vulnerabilities  ...
Due Diligence on Target – Vulnerability Assessment (Cont’d.) <ul><li>Vulnerabilities (Cont’d.) </li></ul><ul><ul><li>Remov...
Strategy – From the Viewpoint of the Insurgent <ul><li>Knows company </li></ul><ul><li>Has been an investor for a while </...
Strategy – From the Viewpoint of the Insurgent (Cont’d.) <ul><li>Will operate in stealth mode as long as possible (13D loo...
Strategy – From Target’s Viewpoint <ul><li>Know thine enemy (do your homework) </li></ul><ul><li>Be vigilant to warning si...
Strategy – From Target’s Viewpoint <ul><li>Understand your shareholder base and monitor stock movements </li></ul><ul><li>...
Strategy – From Target’s Viewpoint (Cont’d.) <ul><li>Recognize time is not your friend </li></ul><ul><li>Commit necessary ...
Recent Studies <ul><li>The Conference Board (Hedge Fund Activism) </li></ul><ul><li>European Governance Institute </li></u...
Recent Studies (Cont’d.) <ul><li>Highest returns – when activist targets the sale of the company or business strategy chan...
Recent Studies (Cont’d.) <ul><li>Hedge fund engagement creates long-term shareholder value, especially when activist wins ...
Recent Studies (Cont’d.) <ul><li>Issue – does hedge fund activism create environment where boards do not have flexibility ...
<ul><li>11781950v3.ppt </li></ul>
HEDGE FUND ACTIVISM The Activist Investor Playbook
Less  likely to Publicly Press for Change More  likely to Publicly Press for Change Constructive Activist Operational Acti...
Timeframe: 1 – 1.5 years THE GAME PLAN  |   The Activist Process Model
ABOUT US  |   Hedge Fund Solutions, LLC Managing Activist Investors Strategy Consulting and Specialized Public Relations D...
HEDGE FUND ACTIVISM The Activist Investor Playbook
Less  likely to Publicly Press for Change More  likely to Publicly Press for Change Constructive Activist Operational Acti...
Timeframe: 1 – 1.5 years THE GAME PLAN  |   The Activist Process Model
ABOUT US  |   Hedge Fund Solutions, LLC Managing Activist Investors Strategy Consulting and Specialized Public Relations D...
HEDGE FUND ACTIVISM SEC HOT TOPICS INSTITUTE September 24, 2008 Philadelphia  Arthur B. Crozier
Activism By Traditional Institutional Investors <ul><ul><ul><li>Originated in response to widespread adoption of take-over...
Hedge Funds <ul><ul><ul><li>Largely unregulated funds that  can make more complex and risky investments  </li></ul></ul></...
<ul><ul><ul><li>Largely driven by investments by institutional investors, hedge funds have grown dramatically in recent ye...
Hedge Fund Assets
Number of Hedge Funds
Hedge Fund by Domicile
Currently, approximately 75 hedge funds with approximately $50bn AUM employ event-driven activist style investing PROMINEN...
Why Hedge Funds Are Well Suited For Aggressive Activism <ul><ul><ul><li>High fee structure mandates extremely strong retur...
Hedge Fund Activism <ul><ul><ul><li>Hedge Fund Accumulations </li></ul></ul></ul><ul><ul><ul><li>Can Occur  </li></ul></ul...
Hedge Fund Activism ABC, Inc. Preliminary Shareholder Composition
Hedge Fund Activism ABC, Inc. Shareholder Composition – Three Weeks Later
Hedge Fund Activism <ul><ul><ul><li>Significant increase in clientele following 2003 voting disclosure regulations promulg...
<ul><ul><ul><li>RiskMetrics recommendation is frequently outcome determinative. </li></ul></ul></ul><ul><ul><ul><li>In the...
Glass Lewis, Although Less Influential, Also Supports Hedge Fund Activism <ul><ul><ul><li>In the 52 relevant proxy contest...
RiskMetrics Group & Glass Lewis Recommendations Hedge Fund Activism, cont.
RiskMetrics Group & Glass Lewis Recommendations Hedge Fund Activism, cont.
<ul><li>Endnotes : </li></ul><ul><li>Includes contests later settled, if still contested at time of RiskMetrics recommenda...
Hedge Fund Activism Activism is not limited to the United States
Hedge Fund Activism Activism is not limited to the Hedge Funds
Dealing With Hedge Fund Activism -- Preliminary *Source: RiskMetrics Group <ul><ul><ul><li>Identify and understand shareho...
Winning The Battle <ul><ul><ul><li>Establish timetable allowing sufficient time to gather favorable votes </li></ul></ul><...
APPENDIX: PROFILES
Profiles <ul><ul><ul><li>Trian is an operational activist hedge fund </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Trian “se...
Profiles <ul><ul><ul><li>Former Chairman of the Securities and Exchange Commission </li></ul></ul></ul><ul><ul><ul><li>Has...
Profiles <ul><ul><ul><li>Purchase significant block </li></ul></ul></ul><ul><ul><ul><li>File 13D indicating intention to i...
Profiles <ul><ul><ul><li>An active activist: recent targets have included, among others Ligand, Salton, Western Gas Resour...
Profiles <ul><ul><ul><li>To Irik P. Sevin: Chairman, President and CEO, Star Gas Partners L.P (2/14/05): </li></ul></ul></...
Profiles <ul><ul><ul><li>Purchase Founded in 2002, Pirate is an aggressive activist and event-driven hedge fund which repo...
SOUND ADVICE FOR EXTRAORDINARY CIRCUMSTANCES Windsor House 39 King Street London EC2V 8DQ Tel  44 (0)20 7710 9960 Fax  44 ...
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Hedge Fund Activism

  1. 1. Hedge Fund Activism Barry H. Genkin SEC Hot Topics Institute Wednesday, September 24, 2008 Philadelphia, PA
  2. 2. Recent Statistics <ul><li>Q-1-2 (08) – Record Volume of Proxy Fights </li></ul><ul><li>265 New Activist Campaigns Announced during Q-1-2 </li></ul><ul><li>57 of These Were New Proxy Fights (most in any 6 month period) </li></ul><ul><li>During Q-1-2 Activists Attained Board Seats at 29 Companies </li></ul>
  3. 3. Current Trends <ul><li>Institutional investors and activists – common goals </li></ul><ul><li>Greater willingness to take aggressive positions </li></ul><ul><li>Stockholder focused governance as opposed to director focused governance </li></ul><ul><li>Greater stockholders demands on board of directors and management </li></ul><ul><li>Shareholder activism garnering greater support in courts and marketplace </li></ul>
  4. 4. Current Trends (Cont’d.) <ul><li>Expansion of hedge fund activism </li></ul><ul><li>Displaced investment bankers or research analysts augmenting hedge funds </li></ul><ul><ul><li>Hedge fund joining forces – emergence of “wolf pack” </li></ul></ul><ul><ul><li>Greater press coverage </li></ul></ul><ul><ul><li>Established relationships with financial community </li></ul></ul><ul><ul><li>More sophisticated strategic approach </li></ul></ul>
  5. 5. Current Activist Activities <ul><li>Developments embolding activist shareholder effective: </li></ul><ul><ul><li>Majority voting is becoming the norm </li></ul></ul><ul><ul><li>Withhold/against vote campaigns increasing with greater frequency </li></ul></ul><ul><ul><li>Defensive provisions repealed with increased frequency </li></ul></ul><ul><ul><li>Stockholder proposals still prominent </li></ul></ul><ul><ul><li>New eProxy rules will make proxy solicitations much less expensive for dissidents </li></ul></ul><ul><li>Success breeds success – good activist track record </li></ul>
  6. 6. Setting the Table <ul><li>Important Definitions and Confusing Terminology </li></ul><ul><li>Proxy Contest – Proposal, through use of a proxy, not supported by management </li></ul><ul><li>Election Contest – Proposal, through use of a proxy, but relates to election of directors </li></ul><ul><li>Consent Solicitation – Shareholder action not through proxy – no meeting, notice, or vote </li></ul><ul><li>Hostile Takeover – Majority Voting Control (often used incorrectly) </li></ul>
  7. 7. Setting the Table (Cont’d.) <ul><li>Scorched Earth Tactics – Throw everything, including kitchen sink </li></ul><ul><li>Activist Shareholder – Voice heard – take action </li></ul><ul><li>Hedge Fund – (Hedging, Arbitrage, Swap) - Now generally privately offered managed capital funds (unregulated) </li></ul><ul><li>Full Slate/Short Slate – All directors/less than all </li></ul><ul><li>e proxy rules - New SEC Rules re: electronic proxies </li></ul>
  8. 8. Purposes of Proxy Contest <ul><li>Enhance Shareholder Value – Stock Undervalued </li></ul><ul><li>Influence Board/Management – Take Action - “Sell” </li></ul><ul><li>Gain Control (Without Buying Stock) – of BofD </li></ul><ul><li>No Premium to Shareholders </li></ul><ul><li>Quicker Timing than Other Methods – Short as a Couple of Months (Consent Solicitation) </li></ul><ul><li>Lower Cost – Several Hundred Thousand </li></ul><ul><li>Achieve a Quick Settlement </li></ul>
  9. 9. Legal/Regulatory Framework <ul><li>Articles </li></ul><ul><li>By-laws </li></ul><ul><li>State Law (Incorporation) </li></ul><ul><li>Change-in-Control Documents – Employment Agreements </li></ul><ul><li>SEC Rules and Regulations </li></ul><ul><ul><li>§13 – Schedule 13D – Filing “Group”) </li></ul></ul><ul><ul><ul><ul><li>Derivatives – UK – Cash Settled Derivative Positions (“CFDs”) – (i.e. Contracts for Differences) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Children's Investment Fund v CSX Corporation </li></ul></ul></ul></ul><ul><ul><li>§14 – Proxy Rules </li></ul></ul>
  10. 10. Proxy Contest Team – Company Side <ul><li>Insurgent/Activist/Hedge Fund </li></ul><ul><li>Selected Company Officers </li></ul><ul><li>Board of Directors (or Committee) </li></ul><ul><li>Lawyers (and Local Counsel) </li></ul><ul><li>Investment Bankers </li></ul><ul><li>Investor Relations </li></ul><ul><li>Public Relations </li></ul><ul><li>Proxy Soliciting Firm </li></ul>
  11. 11. Due Diligence on Target – Vulnerability Assessment <ul><li>Undervalued – Stock Trading </li></ul><ul><li>Vulnerabilities </li></ul><ul><ul><li>Shareholder Action by Written Consent </li></ul></ul><ul><ul><li>Advance Notice Provisions (CNET) </li></ul></ul><ul><ul><li>Advance Notice Nomination Provisions (CNET) </li></ul></ul><ul><ul><li>Rights Plan (“Poison” Pill) </li></ul></ul><ul><ul><li>Staggered Board </li></ul></ul><ul><ul><li>Cumulative Voting </li></ul></ul>
  12. 12. Due Diligence on Target – Vulnerability Assessment (Cont’d.) <ul><li>Vulnerabilities (Cont’d.) </li></ul><ul><ul><li>Removal of Directors With and Without Cause (and definition) and by Whom </li></ul></ul><ul><ul><li>Size of Board </li></ul></ul><ul><ul><li>Filling Vacancies </li></ul></ul><ul><ul><li>Calling Special Meeting </li></ul></ul><ul><ul><li>Amending Company By-laws (super majority) </li></ul></ul><ul><ul><li>Other </li></ul></ul>
  13. 13. Strategy – From the Viewpoint of the Insurgent <ul><li>Knows company </li></ul><ul><li>Has been an investor for a while </li></ul><ul><li>Recognizes company undervalued </li></ul><ul><li>Has done a vulnerability analysis </li></ul><ul><li>Has a game plan in mind </li></ul><ul><li>Believes he can be successful (or is a great card player) </li></ul><ul><li>Will not easily go away </li></ul>
  14. 14. Strategy – From the Viewpoint of the Insurgent (Cont’d.) <ul><li>Will operate in stealth mode as long as possible (13D loophole for swaps) </li></ul><ul><li>Has likely left a trail of warning signs </li></ul><ul><li>Has spoken to others (institutional investors) who may share his views </li></ul><ul><li>Willing to commit time and financial resources to the cause </li></ul><ul><li>Likely has a track record of having done this before </li></ul><ul><li>Understands benefits of e proxy rules </li></ul>
  15. 15. Strategy – From Target’s Viewpoint <ul><li>Know thine enemy (do your homework) </li></ul><ul><li>Be vigilant to warning signs </li></ul><ul><li>Be realistic (don’t put on blinders or be in denial) </li></ul><ul><li>Be prepared, be organized and have a strategy </li></ul><ul><li>Know your vulnerabilities </li></ul><ul><li>Fine tune strategic plan </li></ul>
  16. 16. Strategy – From Target’s Viewpoint <ul><li>Understand your shareholder base and monitor stock movements </li></ul><ul><li>Be alert to communications from Hedge Funds </li></ul><ul><li>Have a Plan A, B and C </li></ul><ul><li>Maximize communication opportunities with RiskMetrics Inc. (ISS) </li></ul><ul><li>The best defense is a good offense </li></ul><ul><li>Be nimble - ready to turn on a dime </li></ul>
  17. 17. Strategy – From Target’s Viewpoint (Cont’d.) <ul><li>Recognize time is not your friend </li></ul><ul><li>Commit necessary time and resources early on </li></ul><ul><li>Get support of Board/management early on </li></ul><ul><li>Keep Board (or Committee) up to speed – communicate regularly </li></ul><ul><li>Don’t take eye off running the business </li></ul><ul><li>Have your team ready to hit the ground running </li></ul><ul><li>Consider pre-emptive communication plan </li></ul><ul><li>Managing pressure to settle </li></ul>
  18. 18. Recent Studies <ul><li>The Conference Board (Hedge Fund Activism) </li></ul><ul><li>European Governance Institute </li></ul><ul><li>New York University </li></ul><ul><li>Harvard Business School </li></ul><ul><li>Conclusions </li></ul><ul><li>Upon announcement of hedge fund involvement – </li></ul><ul><li>Activism generates significant “abnormal” returns for 4 week window around announcement that do not dissipate over the subsequent year </li></ul>
  19. 19. Recent Studies (Cont’d.) <ul><li>Highest returns – when activist targets the sale of the company or business strategy change – not governance. </li></ul><ul><li>Over subsequent 2 year period operating results improve </li></ul><ul><li>Activist skilled at identifying good takeover targets – less skilled at creating value relating to governance or operations </li></ul><ul><li>What’s the harm – “costless” upside option, no real downside </li></ul>
  20. 20. Recent Studies (Cont’d.) <ul><li>Hedge fund engagement creates long-term shareholder value, especially when activist wins board seats </li></ul><ul><li>No study – concludes hedge fund activism destroys shareholder value </li></ul><ul><li>All studies – activists achieve good results at least in short-term </li></ul><ul><li>Governance activism creates little value </li></ul><ul><li>“ Sell the Company” activism creates the most value </li></ul>
  21. 21. Recent Studies (Cont’d.) <ul><li>Issue – does hedge fund activism create environment where boards do not have flexibility to invest for the long-term </li></ul>
  22. 22. <ul><li>11781950v3.ppt </li></ul>
  23. 23. HEDGE FUND ACTIVISM The Activist Investor Playbook
  24. 24. Less likely to Publicly Press for Change More likely to Publicly Press for Change Constructive Activist Operational Activist Reluctant Activist Pure Activist THE PLAYERS | Categories of Activist Investors
  25. 25. Timeframe: 1 – 1.5 years THE GAME PLAN | The Activist Process Model
  26. 26. ABOUT US | Hedge Fund Solutions, LLC Managing Activist Investors Strategy Consulting and Specialized Public Relations DAMIEN PARK Mr. Park is the President and CEO of Hedge Fund Solutions, a Philadelphia-based strategy consulting firm focused on providing substantive solutions for companies on issues relating to shareholder activism. He is widely considered an expert on activist hedge funds, consults to numerous multi-billion dollar corporations, frequently speaks at seminars and events, and is often quoted in leading business publications like The Wall Street Journal , the Financial Times , BusinessWeek , Bloomberg , The Deal , CNN Money, The Nikkei and Newsweek Japan . In addition, Mr. Park’s firm distributes a free weekly research report called the Catalyst Equity Research Report™ , which highlights US-based companies where activist investors have taken sizeable investment positions and are pressing for change. The company also administers a blog on activist investing called The Official Activist Investing Blog™ which can be read at http:// activistinvesting.blogspot.com / Contact Information: Damien J. Park [email_address] telephone: +1.215.325.0514 Subscribe for FREE to receive the weekly research reports on activist investing http:// www.hedgerelations.com/research.html BIOGRAPHY & CONTACT INFORMATION
  27. 27. HEDGE FUND ACTIVISM The Activist Investor Playbook
  28. 28. Less likely to Publicly Press for Change More likely to Publicly Press for Change Constructive Activist Operational Activist Reluctant Activist Pure Activist THE PLAYERS | Categories of Activist Investors
  29. 29. Timeframe: 1 – 1.5 years THE GAME PLAN | The Activist Process Model
  30. 30. ABOUT US | Hedge Fund Solutions, LLC Managing Activist Investors Strategy Consulting and Specialized Public Relations DAMIEN PARK Mr. Park is the President and CEO of Hedge Fund Solutions, a Philadelphia-based strategy consulting firm focused on providing substantive solutions for companies on issues relating to shareholder activism. He is widely considered an expert on activist hedge funds, consults to numerous multi-billion dollar corporations, frequently speaks at seminars and events, and is often quoted in leading business publications like The Wall Street Journal , the Financial Times , BusinessWeek , Bloomberg , The Deal , CNN Money, The Nikkei and Newsweek Japan . In addition, Mr. Park’s firm distributes a free weekly research report called the Catalyst Equity Research Report™ , which highlights US-based companies where activist investors have taken sizeable investment positions and are pressing for change. The company also administers a blog on activist investing called The Official Activist Investing Blog™ which can be read at http:// activistinvesting.blogspot.com / Contact Information: Damien J. Park [email_address] telephone: +1.215.325.0514 Subscribe for FREE to receive the weekly research reports on activist investing http:// www.hedgerelations.com/research.html BIOGRAPHY & CONTACT INFORMATION
  31. 31. HEDGE FUND ACTIVISM SEC HOT TOPICS INSTITUTE September 24, 2008 Philadelphia Arthur B. Crozier
  32. 32. Activism By Traditional Institutional Investors <ul><ul><ul><li>Originated in response to widespread adoption of take-over defenses, particularly poison pills, during M&A wave of mid to late 80’s </li></ul></ul></ul><ul><ul><ul><li>Primarily led by extremely large pension funds, particularly CalPERS, due to their inability to exit investments in companies adopting such measures as the result of their largely index based investing </li></ul></ul></ul><ul><ul><ul><ul><ul><li>The “Wall Street Walk” no longer feasible </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Primarily seeking structural reform (elimination of poison pills, classified boards, adoption of majority voting in the election of directors) through shareholder proposals in managements’ proxy materials </li></ul></ul></ul><ul><ul><ul><li>Highly successful in achieving structural reforms, at least among large cap issuers </li></ul></ul></ul><ul><ul><ul><li>Such activism has produced little additional value for institutional activist </li></ul></ul></ul><ul><ul><ul><li>More aggressive activism such as proxy fights, extremely rare </li></ul></ul></ul><ul><ul><ul><ul><ul><li>High cost compared to relatively small investment </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>“ Free rider” problem </li></ul></ul></ul></ul></ul>Background
  33. 33. Hedge Funds <ul><ul><ul><li>Largely unregulated funds that can make more complex and risky investments </li></ul></ul></ul><ul><ul><ul><li>Investment parameters established by investment contract, rather than laws or regulations </li></ul></ul></ul><ul><ul><ul><li>Until recently, largely directed towards high net worth individuals </li></ul></ul></ul><ul><ul><ul><li>Goal is to seek absolute return under all market conditions, or “alpha” </li></ul></ul></ul><ul><ul><ul><li>Significantly more flexibility than traditional investment funds and can aggressively pursue leverage, short-selling, margin, derivatives and other strategies </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Diversification requirements and limitations on illiquid investments much broader than other managers </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Usual fee arrangements: 1-2% of assets under management (AUM) and 20% of profits </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Can be higher, e.g. SAC Capital (equity funds 2% AUM, 50% of profits) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>“ Compensation scheme masquerading as an asset class” </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Drives necessity for outsized returns </li></ul></ul></ul></ul></ul>Background
  34. 34. <ul><ul><ul><li>Largely driven by investments by institutional investors, hedge funds have grown dramatically in recent years </li></ul></ul></ul><ul><ul><ul><li>$1.8 trillion managed by 9,000 hedge funds worldwide, as of September 30, 2007, according to 2007 Databook, Pension & Investments 2007 </li></ul></ul></ul><ul><ul><ul><ul><ul><li>87% of hedge fund assets are managed by funds with $1bn AUM or more </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>60% of hedge fund assets are managed by funds with $5bn AUM or more </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Hedge funds represent approximately 5% of all U.S. AUM, but 30% of total equity trading volume, according to SEC Chairman Cox </li></ul></ul></ul>Hedge Funds Have Grown Dramatically Background
  35. 35. Hedge Fund Assets
  36. 36. Number of Hedge Funds
  37. 37. Hedge Fund by Domicile
  38. 38. Currently, approximately 75 hedge funds with approximately $50bn AUM employ event-driven activist style investing PROMINENT ACTIVISTS Hedge Fund Activism Recent Targets Deutsche Börse; Arcelor S.A Gannett Company Inc. Applebee’s International, Inc. Deutsche Börse; ABN Amro Bank N.V.; J-Power; CSX Corporation; Chubu Electric Power Stork N.V.; Royal Ahold N.V. Endo Pharmaceuticals Inc.; Philips Electronics Pier 1 Imports, Inc. VW, Prudential plc, Italmobiliare Circuit City Stores, Inc.; Wendy’s International Inc.; Wallace-Reader’s Digest Funds Time Warner Inc.; Motorola, Inc.; Blockbuster Inc.; Biogen-Idec; Yahoo; ICT&G Tokyo Kohtetsu CNET Networks Inc.; Titan International, Inc; Philips Electronics HSBC Holdings PLC; Suez S.A., VNU Group b.v. (Nielsen) Mylan Laboratories, Inc.; Universal American Financial Corp. McDonald’s Corporation, Wendy’s International, Inc.; Borders Group, Inc.; Barnes & Noble, Inc Angelica Corporation, The Brink’s Company British Energy plc; Newcastle United Football Club; J Sainsbury plc The Home Depot, Inc.; Sovereign Bancorp, Inc.; Sprint Nextel Corporation i2 Technologies, Inc.; Take-Two Interactive Software, Inc. Pentax Corp. Conseco, Inc.; Rowan Companies, Inc.; Aderans Co.; Bull-Dog Sauce; Sapporo Brewing; KT&G DaimlerChrysler AG; General Motors Corporation; MGM Mirage Wendy’s International, Inc.; H.J. Heinz Company; Kraft Foods, Inc.; Cadbury Schweppes plc Activist Hedge Fund Atticus Capital LP Brandes Investment Partners LP Breeden Capital Management LLC Children’s Investment Fund Management (UK) LLP Centaurus Capital Ltd D E Shaw & Co LLC Elliott Associates LP Hermes Highfields Capital Management LP Icahn Partners LP (Icahn Enterprises Holdings L.P.) Ichigo Asset Management Jana Partners LLC Knight Vinke Asset Management LLC Perry Corp (Perry Capital) Pershing Square Capital Management LP Pirate Capital LLC Polygon Global Opportunities Master Fund Relational Investors LLC SAC Capital Advisors LLC Sparx Group Steel Partners II LP Tracinda Corporation Trian Fund Management, LP
  39. 39. Why Hedge Funds Are Well Suited For Aggressive Activism <ul><ul><ul><li>High fee structure mandates extremely strong returns </li></ul></ul></ul><ul><ul><ul><li>Can take significant positions in targeted companies </li></ul></ul></ul><ul><ul><ul><li>Flexible investment diversification policies </li></ul></ul></ul><ul><ul><ul><li>Lock-up provisions limit investors ability to withdraw capital </li></ul></ul></ul><ul><ul><ul><ul><ul><li>“ Roach Motels” </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Recent increase in redemption demands by investors </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Can continue to hold investment for sufficient time to pursue activism strategy </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Average holding period is 20 months, Hedge Fund Activism, Corporate Governance, and Firm Performance </li></ul></ul></ul></ul></ul>
  40. 40. Hedge Fund Activism <ul><ul><ul><li>Hedge Fund Accumulations </li></ul></ul></ul><ul><ul><ul><li>Can Occur </li></ul></ul></ul><ul><ul><ul><li>with Extreme Rapidity </li></ul></ul></ul>RiskMetrics Group & Hedge Funds:
  41. 41. Hedge Fund Activism ABC, Inc. Preliminary Shareholder Composition
  42. 42. Hedge Fund Activism ABC, Inc. Shareholder Composition – Three Weeks Later
  43. 43. Hedge Fund Activism <ul><ul><ul><li>Significant increase in clientele following 2003 voting disclosure regulations promulgated by SEC for mutual funds and money managers. Currently approximately 1,700 clients. </li></ul></ul></ul><ul><ul><ul><li>RiskMetrics clients typically hold 20%-30% of a public company’s voting power. </li></ul></ul></ul><ul><ul><ul><li>Many public pension funds, who are in turn ISS clients, are investors in activist hedge funds: </li></ul></ul></ul><ul><ul><ul><ul><ul><li>CalPERS </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>PSERS (Pennsylvania) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>New Jersey PERS </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>TIAA-CREF </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>CalSTRS </li></ul></ul></ul></ul></ul>RiskMetrics Group (formerly ISS)
  44. 44. <ul><ul><ul><li>RiskMetrics recommendation is frequently outcome determinative. </li></ul></ul></ul><ul><ul><ul><li>In the 55 relevant proxy contests where RiskMetrics issued recommendations regarding the contest, RiskMetrics supported AT LEAST ONE dissident in 39 (or 70.91%) of cases. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>In the 10 contests where board control was at risk, RiskMetrics supported the full dissident slate in 1 contest and partial dissident slates in 5 others. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>In the 45 contests where board control was not at risk, RiskMetrics supported all of the dissident nominees in 13 cases (28.89%), partial dissident slates in 20 cases (44.44%) and management in 12 cases (26.67%). </li></ul></ul></ul></ul></ul><ul><ul><ul><li>In the 39 proxy contests in which RiskMetrics supported dissidents, at least one dissident gained a board seat in 27 of them (or 69.23%). </li></ul></ul></ul><ul><ul><ul><li>RiskMetrics’ decision regarding the number of dissident nominees to support is influenced by their understanding of board dynamics, and their view that one dissident director is unlikely to have much of an effect on board deliberations. </li></ul></ul></ul>RiskMetrics Group (formerly ISS) Supports Hedge Fund Activism Hedge Fund Activism
  45. 45. Glass Lewis, Although Less Influential, Also Supports Hedge Fund Activism <ul><ul><ul><li>In the 52 relevant proxy contests where Glass Lewis issued recommendations regarding the contest, Glass Lewis supported AT LEAST ONE dissident in 29 (or 55.77%) of cases. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>In the 10 cases where board control was at risk, Glass Lewis supported the full dissident slate in 1 contest and a partial dissident slate in 4 others. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>In the 42 contests where board control was not at risk, Glass Lewis supported all of the dissident nominees in 10 cases (23.81%), partial dissident slates in 13 cases (30.95%) and management in 19 cases (45.24%). </li></ul></ul></ul></ul></ul><ul><ul><ul><li>In the 28 proxy contests waged by hedge funds in which Glass Lewis supported dissidents, at least one dissident gained a board seat in 22 of them (or 78.57%). </li></ul></ul></ul>Hedge Fund Activism, cont.
  46. 46. RiskMetrics Group & Glass Lewis Recommendations Hedge Fund Activism, cont.
  47. 47. RiskMetrics Group & Glass Lewis Recommendations Hedge Fund Activism, cont.
  48. 48. <ul><li>Endnotes : </li></ul><ul><li>Includes contests later settled, if still contested at time of RiskMetrics recommendation. </li></ul><ul><li>Recommendation/Result refers to full slate unless otherwise noted. </li></ul><ul><li>Dissident sought to remove all directors, reduce Board size, and elect 7. </li></ul><ul><li>Company settled 5 days before meeting, agreeing to reconstitute Board with Dissident nominees, 1 Incumbent Director, and 1 mutually agreed upon Nominee. </li></ul><ul><li>Company and Dissident litigated the issue of how many seats were up for election, and therefore how many seats were available for Dissident nominees. Ultimately the Company’s agenda prevailed and only 2 seats were available to the Dissident nominees. RiskMetrics recommended for 2 of the 3 nominees originally proposed by Dissident. </li></ul><ul><li>Settlement included expanding Board to 10, Management support of Dissident’s 3 nominees. </li></ul><ul><li>Dissident ran 5 nominees under the “Short-Slate” Rule. </li></ul><ul><li>Common shareholders entitled to elect 3 directors only. </li></ul><ul><li>Settlement reached post meeting. Two Dissident nominees elected by common holders; 1 Dissident nominee withdrew. The 2 Dissident directors then appointed 1 Management director. </li></ul><ul><li>Dissident ran 3 nominees under the “Short-Slate” Rule. </li></ul><ul><li>Three days before the meeting, Company announced settlement, with 3 incumbent nominees withdrawing and the appointment of all 3 Dissident nominees. </li></ul><ul><li>Company settled a week after the initial RiskMetrics recommendation, with company replacing its 2 nominees with 1 Dissident nominee and 1 nominee jointly representing the Dissident and the Company’s second largest shareholder (AWM). </li></ul><ul><li>Dissident did not present proxies at the meeting. </li></ul><ul><li>Dissident ran 1 nominee under the “Short-Slate” Rule. </li></ul><ul><li>Dissident ran 2 nominees under the “Short-Slate” Rule. </li></ul><ul><li>Two Dissidents ran two 3-nominee slates, with Western Investment’s slate fully supported by RiskMetrics. </li></ul><ul><li>Meeting of preferred holders to elect third nominee was adjourned for lack of quorum. </li></ul><ul><li>Dissident ran 3 nominees under the “Short-Slate” Rule. </li></ul><ul><li>Dissident ran 7 nominees. </li></ul><ul><li>Management and Dissident each named 3 directors, with balance named by large shareholders. </li></ul><ul><li>Parties reached an agreement shortly before the meeting whereby Dissident withdrew from contest, Management expanded Board from 7 to 11, and 4 Dissident nominees were added to the Board. </li></ul><ul><li>Dissident sought to remove and replace 4 directors, fixing Board size at 7. </li></ul><ul><li>Settlement included Dissident support of Management nominees, Management agreed to provide dissident with a board observer. </li></ul><ul><li>Settlement included expanding Board to 15, adding 2 dissident representatives. </li></ul><ul><li>Expand board to 11 directors, appointed 2 dissident nominees. </li></ul><ul><li>Settlement included appointing 1 dissident nominee, select and appoint to its Board an additional director from a pool of candidates to be nominated by the major stockholders of the Company, reimburse Shamrock for up to $350,000 of their reasonable out-of-pocket expenses incurred in connection with soliciting proxies </li></ul><ul><li>Settlement included increasing the size of the Board to 8, appointing a new independent director to the Board submitting a binding proposal to the Company’s stockholders at the 2009 Annual Meeting for the declassification of the Company’s Board, separating roles of CFO and President, and undertake to hire a new CFO. </li></ul><ul><li>2 Dissident nominees appointed to the Board, 2 Dissident nominees are currently undecided pending resolution of litigation. </li></ul><ul><li>Settlement included expanding Board to 9, adding 3 dissident representatives. </li></ul>Hedge Fund Activism, cont.
  49. 49. Hedge Fund Activism Activism is not limited to the United States
  50. 50. Hedge Fund Activism Activism is not limited to the Hedge Funds
  51. 51. Dealing With Hedge Fund Activism -- Preliminary *Source: RiskMetrics Group <ul><ul><ul><li>Identify and understand shareholder base on an ongoing basis. </li></ul></ul></ul><ul><ul><ul><li>Be informed as to investment strategies pursued by any activists that take a position </li></ul></ul></ul><ul><ul><ul><li>Don’t panic -- remember that not all hedge funds are activists </li></ul></ul></ul><ul><ul><ul><li>Evaluate corporate strategy in light of shareholder base </li></ul></ul></ul><ul><ul><ul><li>Ensure corporate strategy has been communicated clearly and concisely to buy side and sell side analysts </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Negative sell side comments in particular can be important third party validation for activist </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Review all legal and regulatory remedies available </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Carefully consider ramifications of each remedy </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Review corporate governance structure and proxy proposals well in advance of meeting to determine if changes would be advantageous </li></ul></ul></ul><ul><ul><ul><li>Prepare vote projections to evaluate activist's likelihood of success and probable tactics </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Vote projections will serve as road map for solicitation strategy by identifying strong and weak constituencies </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Prepare for potential attacks against records of Board members and management, if a director fight </li></ul></ul></ul>
  52. 52. Winning The Battle <ul><ul><ul><li>Establish timetable allowing sufficient time to gather favorable votes </li></ul></ul></ul><ul><ul><ul><li>Prepare communications tailored to concerns of key constituencies </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Messaging must be consistent across constituencies </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Personal visits with key investors </li></ul></ul></ul><ul><ul><ul><li>Be proactive, not defensive </li></ul></ul></ul><ul><ul><ul><li>Maximize turn out from individual shareholders </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Fight letters </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Advertisements </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Telephone Calls </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Meet with the relevant proxy voting advisory services. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Even if they are likely to vote against, such meetings can blunt activist’s criticism and can soften what might otherwise be an extremely harsh recommendation </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Track votes as they come in to identify voters </li></ul></ul></ul><ul><ul><ul><li>Be prepared to adjust strategy during solicitation period </li></ul></ul></ul>
  53. 53. APPENDIX: PROFILES
  54. 54. Profiles <ul><ul><ul><li>Trian is an operational activist hedge fund </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Trian “seeks to invest in undervalued and under-performing companies and to work closely with the management of those companies to enhance shareholder value through a combination of strategic re-direction, improved operational execution, more efficient capital allocation and stronger focus” </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Trian often publishes a “white paper” outlining its investment thesis in a target and a roadmap for value creation </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>“ The form of activism he's practicing is legitimate,” says Heinz's lead director, Tom Usher, the retired CEO of U.S. Steel. “[Peltz has] been a positive force at Heinz.” (Fortune, March 16, 2007) </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Past targets include </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Wendy’s – After the threat of a proxy fight in 2006, obtained 3 of 15 board seats. Has recently agreed to acquistion </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Heinz – Obtained 2 of 12 board seats in a 2006 proxy contest </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cadbury-Schweppes – After Trian acquired a large stake in the company in early 2007, Cadbury-Schweppes announced its intention to separate its confectionery and Americas Beverages businesses </li></ul></ul></ul></ul></ul>Trian Fund Management (Nelson Peltz & Peter May)
  55. 55. Profiles <ul><ul><ul><li>Former Chairman of the Securities and Exchange Commission </li></ul></ul></ul><ul><ul><ul><li>Has served as corporate monitor of KPMG, WorldCom, Hollinger and Fannie Mae </li></ul></ul></ul><ul><ul><ul><li>Launched a hedge fund in 2005 with CalPERs as a principal investor </li></ul></ul></ul><ul><ul><ul><li>Breeden will “seek quiet reform where possible and become as actively involved as necessary to achieve desired transformations and prevent value-diminishing corporate actions” </li></ul></ul></ul><ul><ul><ul><li>Applebee’s – After threatening a proxy contest in 2007, obtained 2 (of 14) board seats in a settlement </li></ul></ul></ul><ul><ul><ul><li>H&R Block – Obtained 3 (of 11) board seats in a 2007 proxy contest </li></ul></ul></ul><ul><ul><ul><li>Currently targeting Zale Corp., a specialty jewelry retailer, in which Breeden recently met with management and plans to continue discussions with executives and directors regarding the company's financial performance and strategic options, including an auction of key assets </li></ul></ul></ul>Breeden Partners L.P. (Richard Breeden)
  56. 56. Profiles <ul><ul><ul><li>Purchase significant block </li></ul></ul></ul><ul><ul><ul><li>File 13D indicating intention to influence direction of company </li></ul></ul></ul><ul><ul><ul><li>Threaten or wage proxy contest and/or tender offer </li></ul></ul></ul><ul><ul><ul><li>Obtain representation on Board </li></ul></ul></ul><ul><ul><ul><li>Force sale, buyback or other extraordinary action </li></ul></ul></ul><ul><ul><ul><li>Kerr McGee, Temple Inland, ImClone Systems, MedImmune, Blockbuster, Fairmont Hotels, Lear, Time Warner, Motorola, WCI Communities, Circuit City, Yahoo! </li></ul></ul></ul><ul><ul><ul><li>New stakes include BEA Systems, Biogen-Idec </li></ul></ul></ul>Carl Icahn: Pioneered Strategic Block Investing
  57. 57. Profiles <ul><ul><ul><li>An active activist: recent targets have included, among others Ligand, Salton, Western Gas Resources, Star Gas Partners, LP, Massey Energy, Potlach, Intercept, Warnaco and Penn Virginia </li></ul></ul></ul><ul><ul><ul><li>Claims 28.9% return since ’95 </li></ul></ul></ul><ul><ul><ul><li>Known for his “take-no prisoners” approach and letter writing style </li></ul></ul></ul><ul><ul><ul><li>To the Warnaco Board of Directors (8/21/03): </li></ul></ul></ul><ul><ul><ul><ul><li>“… Do not confuse our significant equity stake with a vote of confidence in the Company’s Chairman, C.E.O. or certain members of the Board of Directors. In fact, we have grave concerns about the competency, judgement and motivation of these individuals…Stuart Buchalter, Chairman of the Board of Directors, extracted $500,000 as a non-executive Chairman in 2002 and currently receives the indefensible salary of $250,000 --- an outrageously high sum for a non-executive Chairman who had already been gifted 12,975 free shares. Appallingly, Mr. Buchalter also received a one-time cash bonus of $210,004 upon the Company’s emergence from bankruptcy in February, 2003…I knew little of Mr. Buchalter other than what he told me about himself. He informed me that he had known my father, a former partner at Irell and Manella in Los Angeles and had known my late, great-aunt, Ruth Handler, the legendary founder of Mattel, Inc. (NYSE:MAT). I met Mr. Buchalter in person at a Warnaco Annual Meeting, a handsome middle-aged gentleman, his shock of gray hair and beard and his bold red striped shirt and polka dot red tie made him look oddly like Burt Reynolds character, the pornographic producer, in the film ‘Boogie Nights’.” </li></ul></ul></ul></ul>Third Point (Dan Loeb)
  58. 58. Profiles <ul><ul><ul><li>To Irik P. Sevin: Chairman, President and CEO, Star Gas Partners L.P (2/14/05): </li></ul></ul></ul><ul><ul><ul><ul><li>“… Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America. (I was amused to learn, in the course of our investigation, that at Cornell University there is an ‘Irik Sevin Scholarship.’ One can only pity the poor student who suffers the indignity of attaching your name to his academic record…It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites.” </li></ul></ul></ul></ul><ul><ul><ul><li>To Ken Griffin: President, Citadel Investment Group (9/14/05): </li></ul></ul></ul><ul><ul><ul><ul><li>“… I find the disconnect between your self-proclaimed ‘good to great, Jim Collins-esque’ organization and the reality of the gulag you created quite laughable. You are surrounded by sycophants, but even you must know that the people who work for you despise and resent you. I assume you know this because I have read the employment agreements that you make people sign…Good luck extracting exorbitant management fees and generating mediocre returns with your bloated organization and ego. By the way, there is little I enjoy as much as watching from afar as your reputation and ‘organization’ declines at the same rate as your falling returns.” </li></ul></ul></ul></ul>Third Point (Dan Loeb)
  59. 59. Profiles <ul><ul><ul><li>Purchase Founded in 2002, Pirate is an aggressive activist and event-driven hedge fund which reportedly grew from $300 million at the end of 2004 to $1.8 billion in 2006. </li></ul></ul></ul><ul><ul><ul><li>Activist investments include Angelica, Brinks and Pep Boys </li></ul></ul></ul><ul><ul><ul><li>In 2007, the fund’s assets reportedly declined by 80% </li></ul></ul></ul><ul><ul><ul><li>Pirate has recently barred investor withdrawals from two of its funds by designating four stocks held by those funds as “special investments” </li></ul></ul></ul><ul><ul><ul><li>In an August 31st letter to investors, Pirate stated “[i]n view of the activist nature of the funds, prior redemptions, market turmoil and their effect on the funds' individual positions and portfolios as a whole, we determined that the best way to manage the positions is through the Special Investment designation” </li></ul></ul></ul>Pirate Capital
  60. 60. SOUND ADVICE FOR EXTRAORDINARY CIRCUMSTANCES Windsor House 39 King Street London EC2V 8DQ Tel 44 (0)20 7710 9960 Fax 44 (0)20 7710 9961 501 Madison Avenue 20th Floor New York, NY 10022 Tel 1 212 750 5833 Fax 1 212 750 5799
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