The Future of Public Companies: The Rise of Shareholder Activism - Stavros Tsibiridis

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Shareholder activism and corporate defense is back at the forefront given the continued growth of the hedge fund community and its related increase in activism …

Shareholder activism and corporate defense is back at the forefront given the continued growth of the hedge fund community and its related increase in activism
Both the number of activist funds and the amount of assets under management have reached near-record levels
Corporate trend to avoid proxy fight costs and settle for short slates has emboldened prospective activists

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  • 1. The Future of Public Companies: The Rise of Shareholder Activism December 6, 2013 Confidential – For Discussion & General Information Purposes Only
  • 2. Executive Summary  Shareholder activism and corporate defense is back at the forefront given the continued growth of the hedge fund community and its related increase in activism  Both the number of activist funds and the amount of assets under management have reached near-record levels  Corporate trend to avoid proxy fight costs and settle for short slates has emboldened prospective activists  The current environment provides a favorable backdrop for activists given a confluence of factors:  Corporates face a challenging organic growth environment given slowing global demand  Corporate balance sheets are flush with cash and many companies are arguably under-leveraged  Valuation multiples are in-line with long-term levels  Debt financing is very cheap as investors are flush with cash and yields are near all time lows across the curve and across markets 2
  • 3. Two Categories of Hostile Parties Activist Investors Hostile Strategic Acquirors Hedge fund activism is a growing phenomenon 3
  • 4. Hostile Strategic Acquiror vs. Activist Investor Activist Investor End Game Hostile Strategic Acquirer Cash profits Long term strategic acquisition Shorter Longer Significant influence / leverage other shareholders 100% ownership Willing to Partner with Others Yes; Often seek third-party support and join forces to form “wolf pack” No Tolerance for Negative Publicity Higher Lower Credibility with Investors / Public Depends on the Activist Generally higher Lower; can be creative and nimble Higher; many constituencies (management, Board, shareholders) High Higher Investment Time Horizon Control Aspirations Predictable Behavior Ability to Pressure Target Board / Management 4
  • 5. More Hedge Funds = More Activism Evolution of Hedge Funds Activist Funds ($ in Billions) 7,500 $1,500 5,000 $1,000 2,500 $500 $0 0 AUM Number of Funds Hedge Funds Managed by Activist Investors ($ in Billions) GAMCO Investors Barington Capital Number of Funds $2,000 Franklin Mutual Advisors Appaloosa Management 10,000 ESL Partners Altai Capital 12,500 $2,500 Assets Under Management Adage Capital Management Greenlight Capital Becker Drapkin Management HBK Investments Biglari Holdings Highfields Capital Blue Mountain Capital Highland Capital Management Casablanca Capital $3,000 Icahn Associates Corp. Heartland Advisors California Public Employees InterTech Group Retirement System Jana Partners California State Teachers Land and Buildings Retirement System Lane Five Capital Cannell Capital Management Carlson Capital Lawndale Capital Citadel Advisors Management ClearBridge Investments Mason Capital Management Red Mountain Capital Partners Relational Investors Roark, Rearden & Hamlot Royce & Associates S.A.C. Capital Advisors Sandell Asset Management Scepter Holdings Southeastern Asset Management Stadium Capital Starboard Value LP Steel Partners Stilwell Value Third Avenue Management Coppersmith Capital Marcato Capital Management Third Point Mgmt. Co. Tracinda Corp. Millennium Management Corvex Management OZ Management Trian Fund Management Crescendo Advisors Paulson & Co. $60 Discovery Group $40 Elliott Management Corporation Pershing Square Capital Management ValueAct Capital Management An estimated $84 billion of AUM is managed by high profile activists $100 $80 Clinton Group Private Capital Management Yucaipa Potomac Capital $20 Key Individuals $0 ($20) 2003 '04 '05 '06 '07 AUM Source: HFR, AIMI, and Wall Street Journal '08 '09 Net Asset Flow '10 '11 '12 YTD '13 William Ackman Sardar Biglari Ron Burkle Mario J. Gabelli Carl Icahn 5 Eddie Lampert Peter Langerman Warren G. Lichtenstein Daniel S. Loeb Keith Meister Nelson Peltz Tom Sandell Paul Singer Bruce Sherman Ralph Whitworth
  • 6. Over 100 First Time Activists in 2012 and 2013 Are Finding Success with Various Campaigns Selected First Time Activists in 2012 and 2013 Aim Cap Master Global Assets Limited Alpine Investment Management MFP Investors Baker Bros. Advisors MHR Fund Management Barron Partners MIT Capital Inc. BeaconLight Capital Nantahala Capital Management Birch Run Capital Nokomis Capital Caerus Global Investors Oskie Capital Management Castine Capital Management OTK Associates Chesapeake Capital Management Park City Capital Clear Harbor Asset Management PEEK Investments Cordoba Asset Sabby Capital Cove Street Capital SAF Capital Management Cray Group Sagard Capital Partners Crest Financial Limited Sandler O'Neill Asset Management Enclave Asset Management Scoggin Capital Management First Pacific Advisors Scout Capital Management LLC Fort Ashford Holdings SEACOR Holdings Galbraith Capital Silver Point Capital Helios Advisors Snowy August Management Highside Capital Management Somerset Capital Advisers Hirzel Capital Management Stonepine Capital Management Huber Capital Management Stratford Capital Hudson Bay Partners Templar Alliance Fund Iroquois Capital The Albury Investment Partnership Khrom Capital Management The Catalyst Capital Group KIT Capital Trigran Investments Littlejohn & Co. Vortex Capital Longkloof Limited Westham Capital Partners M4 Capital Yacktman Asset Management Maglan Capital Z Capital Partners Maguire Asset Management Campaign Success Rate Zuckerman Investment Group On-Going 12% Unsuccessful 25% Successful 63% Types of Campaigns Successfully Waged Return Cash to Shareholders 5% Other 5% Review Strategic Alternatives 11% Maximize Shareholder Value 23% Source: FactSet 6 Board Representation 56%
  • 7. Alliances Among Activists / Hedge Funds – “The Wolf Pack” Soros Fund Management Perry Corp Glenview Capital Management Sarissa Capital Management Source: FactSet and press releases 7
  • 8. What Can Make You a Target?  Undervaluation relative to peers  Deteriorating share price performance relative to peers  Low leverage / high cash balance  Failure to execute announced business plan  Multiple, distinct businesses  Turmoil within Board or management  Take-over target in consolidating industry 8
  • 9. What are Activists Trying to Achieve? Desired Goal Select Examples Strategic Alternatives / Force a Sale Return of Capital Portfolio Realignment / Asset Sales Influence Merger Change Strategic Direction Change of Management / Governance 9
  • 10. 2013 U.S. Proxy Contests – Very Large or Very Small 2013 Dissident Success By Target Size Market Cap of Target Under $100M Over $100M $1B $1B 7 2 5 1 1 4 5 1 3 13 4 12 45% 14% 41% Dissident… Won Seats Settled Lost Dissident "Win Rate" 2013 YTD Prior Year 62% 38% 75% 67% 75% 40% Total 14 6 9 29 100% 69% 43% Historical Proxy Contests By Size ($ in Millions) 57% 52% 41% 42% 38% 30% 21% 23% 21% 17% 21% 14% 10% 8% 12% 7% 4% 17% 14% 10% 7% 2009 (39 Contests) $1,000-$100 2010 (21 Contests) $100-$50 2011 (14 Contests) Source: Institutional Shareholder Services Note: 2013 data through September 10 7% 3% 0% >$1,000 24% $50-$25 2012 (24 Contests) <$25 2013 (29 Contests)
  • 11. The Activist Playbook  Overarching tactical goal is to create and exploit divisions between management / Board / institutional shareholders Least Aggressive Stock Accumulation  Activists will initially stay under 13D/F threshold  Rarely exceeds 10% to avoid triggering 16(b) short swing rules  Make request, such as: representation on the board and committees, return of cash “Activism on the Cheap” Private Communication – “The Ask” Most Aggressive Public Communications to shareholders, clarity regarding capital allocation strategy  Propose corporate governance reforms (expand board/add new directors, separate CEO/Chairman roles, etc.)  Recommend new management and/or board changes  Have no difficulty going public and are adept at using press  Certain activists prefer to engage privately before going public; other activists (e.g., Icahn) prefer to go public first  Can include changes to, or expansion of, existing board or changes to existing Shareholder Proposals Contested Proxy Solicitation corporate governance  Will argue for proposals that give shareholders a broader say or a “fresh voice” on the board (typically short slates)  May lobby third parties (other shareholders, other activists, ISS and other proxy advisory firms) Activist seeks to prey on company disunity and disorganization 11
  • 12. Advance Preparation is Crucial – “Best Practices”  Continually review the Company’s business portfolio and strategy and its governance and Anticipate Potential Threats executive compensation issues sensibly  Adjust strategies and defenses to meet changing market conditions and legal developments  Schedule periodic presentations by financial and legal advisors to familiarize directors with the current activist environment  Review with the Board basic strategy and the portfolio of businesses in light of possible Look at the Company the Way an Activist Would arguments for spinoffs, share buybacks, increased leverage, special dividends, sale of the company, or other structural and/or governance changes  An attack by a shareholder activist can be viewed as an attempt to drive a wedge between the Board and management by raising doubts about strategy and management performance  Lack of consensus on strategic issues may give an activist an opening to exploit  Revisit process for identifying and potentially recruiting new independent directors Pay Attention to Your Shareholder Base  Engage a third-party to proactively review your shareholder base  Monitor changes in hedge fund and institutional holdings, particularly ones that have worked together in the past  Visit significant shareholders, particularly index funds  May assist in determining early defense measures, such as a poison pill (Air Products, Safeway)  Encourage directors and management to increase their stock ownership  Create a team, comprised essentially of those that might respond to a takeover, to deal with shareholder fund activism (2-5 key officers, plus legal and financial advisors) Cultivate a Team of Advisors to Assist  Maintain up-to-date plans for contacts with media, regulatory agencies and political bodies in Preparation  Retain preferred proxy soliciting firm and PR firm to ensure advisors aren’t conflicted in a public campaign 12
  • 13. What Can Companies Do Now? Tactical        Build strongest possible advisory team  Investment banking, law firm, PR firm, proxy firm Prepare “fire drill” plan Aggressively monitor trading activity Implement actions to improve share price over the near term Establish base of support within public shareholders  Identify “opinion leaders”  Develop detailed plan to “take case to shareholders” through non-deal roadshow or other methods  Determine when to open dialogue with ISS  Consider visiting key index funds Conduct defensive preparations  Prepare responses to new approaches or potential proxy fight or shareholder proposals Be prepared to co-opt an activist by offering value-enhancing solutions and open dialogue Strategic        Evaluate strategic options and develop / refine management’s strategic plan on a regular basis Identify key weaknesses in corporate strategy and specific remedial action plans Analyze potential buyers / white knights  Strategic fit  Cultural fit  Ability to pay  Viability Review corporate governance profile Assess Board composition Encourage directors to buy additional shares to show support of management and strategy Initiate candidate search for potential new Independent Directors (may be needed in short order) Financial     Develop comprehensive financial plan  Conduct extensive due diligence and valuation analyses  Quantify profit maximization and cost-cutting opportunities  Review performance based on IRR / cost-of-capital Conduct benchmarking analysis of Company’s performance relative to peers Perform valuation analyses to quantify impact of strategic alternatives Prepare analyses / presentations to market management plan to public shareholders and research analysts  Test for weaknesses  Assess issues relating to credit and other contractual relationships Continuously Review Strategic, Financial and Tactical Preparations with the Board 13
  • 14. Appendix
  • 15. Stavros Tsibiridis – Managing Director Stavros Tsibiridis is a Managing Director in the Mergers & Acquisitions Group of Wells Fargo Securities, and the Head of its Corporate Defense/Anti-Raid M&A practice. Stavros has over 17 years of experience in Mergers & Acquisitions at Citadel, Citigroup and JP Morgan. Prior to joining Wells Fargo, Stavros was the Head of M&A at Citadel Securities. While at Citi, Stavros headed the Corporate Defense/Anti-Raid M&A practice since 2005, and the Gaming M&A practice since 2004. He also was responsible for Citi’s M&A effort in Paper, Packaging and Metals. Stavros Tsibiridis Wells Fargo Securities Managing Director Contact Information 375 Park Ave, 9th Floor New York, NY 10152 Phone: (212) 214-5273 Mobile: (646) 256-1242 stavros.tsibiridis@wellsfargo.com Stavros has advised on strategic deals across a variety of industry sectors, including TPG/Apollo/Harrah’s Entertainment; Gtech/Lottomatica; Koch Industries/Georgia Pacific; Severstal/WCI/Esmark; Gerdau/Quanex; Cemex/Southdown/RMC; Clear Channel/SFX Entertainment; PPR/Gucci; International Paper’s sale of wood products and purchase of 50% of Ilim Pulp; Canadian National Railways/Wisconsin Central; Solo Cup/ Sweethart Holdings/ Hugo Neu /SIMS/Mitsui. He has also provided defense advisory to IGT, Stillwater Mining, Nutrisystem, Temple Inland, First Isaac Corp., Volkswagen, and Sapporo, among others. Stavros holds an MBA from the Wharton School of the University of Pennsylvania. 15
  • 16. Disclaimer This document and any other materials accompanying this document (collectively, the “Materials”) are provided for general informational purposes. By accepting any Materials, the recipient thereof acknowledges and agrees to the matters set forth below in this notice. Wells Fargo Securities makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in the Materials. Information in the Materials is preliminary and is not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in the Materials represent the judgment of Wells Fargo Securities at this time, and are subject to change without notice. Interested parties are advised to contact Wells Fargo Securities for more information. The Materials are not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described herein. The Materials are not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. No person providing any Materials is acting as fiduciary or advisor with respect to the Materials. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the Materials. Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Securities, LLC, a member of FINRA, NYSE, NFA and SIPC, Wells Fargo Institutional Securities, LLC, a member of FINRA and SIPC, and Wells Fargo Bank, N.A. Notwithstanding anything to the contrary contained in the Materials, all persons may disclose to any and all persons, without limitations of any kind, the U.S. federal, state or local tax treatment or tax structure of any transaction, any fact that may be relevant to understanding the U.S. federal, state or local tax treatment or tax structure of any transaction, and all materials of any kind (including opinions or other tax analyses) relating to such U.S. federal, state or local tax treatment or tax structure, other than the name of the parties or any other person named herein, or information that would permit identification of the parties or such other persons, and any pricing terms or nonpublic business or financial information that is unrelated to the U.S. federal, state or local tax treatment or tax structure of the transaction to the taxpayer and is not relevant to understanding the U.S. federal, state or local tax treatment or tax structure of the transaction to the taxpayer. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in the Materials is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. ©2013 Wells Fargo. All Rights Reserved. 16