Bankers Pitching Avoidance Advice as Activists Amass Record CashBeth Jinks and Laura Marcinek
Activist investors determined to shake up the way companies do business are amassing record cash for their campaigns. Now investment banks are advising clients how to anticipate and thwart such vocal investors before they even show up.
Deutsche Bank AG offers what it calls a “vulnerability assessment,” while Barclays Plc has developed a “proprietary model” that identifies companies most at risk for activism. Banks including Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. pitch similar services to head off activists like Bill Ackman and Dan Loeb who undertake campaigns aimed at shaking up management, increasing dividends, or spurring asset sales.
“It’s literally a matter of career life and death for management teams and directors who are subjected to activism,” said Chris Young, head of contested situations at Credit Suisse Group AG. “Many CEOs and directors have decided they’d rather go through the unpleasant process of taking a harsher look at themselves in private than a very unpleasant process in public.”
The preemptive services come amid a surge in activist campaigns that last year reached America’s biggest corporations, including Apple Inc., Microsoft Corp., PepsiCo Inc. and DuPont Co.
The number of individual U.S. companies targeted jumped 10 percent to 356 in 2013 from the year before, according to Damien Park, whose Doylestown, Pennsylvania-based Hedge Fund Solutions LLC compiles data and advises boards and investors on activism.
Funds that engaged in activist campaigns climbed by 17 percent last year to 448 as their war chests swelled, said Park. Assets held by activist hedge funds amounted to about $89 billion as of the 2013 third quarter, compared with $66 billion at the end of 2012, data compiled by Chicago-based Hedge Fund Research show.
Coupled with the increasing willingness of institutional shareholders to back corporate changes, the cash has emboldened activists to ratchet up their campaigns.
That has made companies receptive to strategies that head off activists early on, said David Hunker, the banker JPMorgan tapped for its activist group in 2011.
“What’s really increased over the last couple of years is the preparation work that we’re helping clients through as they see that activism is here to stay,” said Hunker, whose team has recently advised targeted companies including Clorox Co., Ingersoll-Rand Plc and OfficeMax Inc.
That includes asking, “What do I need to be doing today to make myself less of a target for an activist,” he said.
Credit Suisse has emphasized preemptive efforts since hiring Young in June 2010 from Institutional Shareholder Services, where he advised investors on contested takeovers and activist campaigns.
The Swiss bank’s advice to clients: clearly communicate the company’s strategy with current shareholders to build support before any activist attack, Young said. He recently advised Silver Lake Management LLC on its Dell Inc. bid amid challenges from Carl Icahn.
Deutsche Bank’s vulnerability assessment is offered to companies as part of a strategy “to make sure they’re protecting their flank,” said Sean Costello, who was named to lead the bank’s activist defense in April by global M&A Chairman Jim Stynes.
“We have frank conversations with our clients about things activists care about,” Costello said. He describes the assessment as asking such questions as: Is the stock valued correctly? Is it moving in line or better than your peers? Is their governance structure in line with 21st century market norms?
Barclays formed a strategic finance group in November 2011 advising clients on value-boosting transactions -- such as spinoffs, split-offs and carveouts -- to help deter activists.
The bank’s proprietary model identifies companies most at risk for activism as well as their specific vulnerabilities, according to Daniel Kerstein, who heads the group.
The conversation can’t be limited to a company’s stock price, Kerstein said. It’s more important to pinpoint the factors driving poor performance, such as the company’s balance sheet, operating performance, or corporate structure, he said.
Barclays advised Ralcorp Holdings Inc. when Corvex Management LP sought its sale to ConAgra Foods Inc., and Lear Corp. through a campaign by Marcato Capital Management LLC.
Such preemptive efforts often work, said Jason Truman, who was assigned to handle activist defense in early 2012 by Morgan Stanley global M&A chief Rob Kindler.
“A majority of the situations where Morgan Stanley advises clients never become public through regulatory filings or the media, as activists increasingly seek to work behind the scenes with management,” said Truman, whose team recently advised Agrium Inc., Transocean Ltd. and CF Industries Holdings Inc. in activist situations.
Smaller advisory firms have beefed-up their activist offerings, too. Moelis & Co. hired Jonathan Kaye in November as a managing director in its activist unit advising both sides, and Evercore Partners Inc. recruited Lyle Ayes in April to advise companies challenged by activists. Lazard Ltd., the biggest independent merger adviser, this year named Jim Rossman to head its corporate preparedness team, which is helping defend Bob Evans Farms Inc. from Sandell Asset Management Corp.
A company’s size alone is no longer a defense, with activists winning backing from some of the biggest asset managers, said Stavros Tsibiridis, who heads Wells Fargo & Co.’s corporate defense practice. Those large investors advocate for campaigns with management, and sometimes even suggest targets, he said.
Still, even as they’ve been emboldened by the backing of large funds, many activists have moderated their approach, becoming more constructive than the corporate raiders of the 1980s, said Gregg Feinstein, M&A chief at Houlihan Lokey, where his team advises both activists and targeted companies.
“Activists are now seen as being much more analytically based, much more thoughtful, much less inflammatory, and generally they go to companies first before making any announcement,” Feinstein said. “It’s seen as a more elegant effort today than it was years ago.”