Icahn’s EBay Talks Show Boards Listening to ActivistsJeff Green and Beth Jinks
Corporate directors, who for years often dismissed activist investors as quick-profit seeking gadflys, are starting to listen when opinionated shareholders like Carl Icahn, Nelson Peltz and Mason Morfit come calling.
EBay Inc. pre-empted a public lashing from Icahn yesterday by disclosing his proposal to spin off its PayPal unit before he did. Peltz on Jan. 21 was invited to join the board of Mondelez International Inc., the food maker he once urged to merge with PepsiCo Inc. The same day, Dow Chemical Co. said it welcomes “all constructive input” as Daniel Loeb’s Third Point LLC took a stake and called for it to spin off a petrochemical business.
Time was, companies typically resisted activists’ ideas and efforts to reconfigure boards. Now directors are increasingly engaging with would-be agitators, rather than risk losing control of strategy or the company itself. For their part, activists are more often aiming at healthy companies such as Apple Inc. and General Motors Co. that are sitting on a tempting $3.5 trillion pile of corporate cash and investments.
“Once upon a time, directors would be told, ‘There’s activists investors, put your head down,’” said Dan Siciliano, a corporate governance professor at California’s Stanford University. “It’s a complete sea change. More often than not, they are going to engage.”
The shift is evident at meetings Siciliano and other organizers have held for corporate board members. Crowding into auditoriums from Stanford to New York City, hundreds of directors at a time get advice straight from investors such as Peltz, David Einhorn and ValueAct Capital Management LLC’s Morfit. The lesson: Hear us out, and you may avoid a public battle.
Wendy Lane is one director who has seen the situation play out both ways, with one of her boards choosing not to talk with an activist and another taking a more receptive approach.
“The strategic issues about what to do with the business are front and center now,” said Lane, who was a director at Tyco International Ltd. in 2002 when activist Ralph Whitworth forced her and other directors off the board. The move came after her board ousted Tyco Chief Executive Officer Dennis Kozlowski ahead of charges he helped loot the company of $600 million.
Lane is now on the board of insurance broker Willis Group Holdings Plc, which in April nominated ValueAct’s Jeff Ubben to its board. ValueAct first disclosed an investment in 2009 and boosted the stake to 9.5 percent last year.
“You have the two kinds of activists,” she said in an interview. “You’ve got Dan Loeb and Carl Icahn and those guys that are very frontal swashbucklers. Then you get the more subtle model like the ValueAct guys who tend to work much more behind the scenes.”
Yesterday, after EBay said Icahn was asking for two seats on the board and the spinoff of the PayPal unit with less than a 1 percent investment, the activist said in an interview on Bloomberg TV that EBay “hasn’t done as well as it should have” and called a separation of PayPal from EBay a “no-brainer” that would improve the company’s value.
EBay said its board “has explored in depth a spinoff or separation of PayPal,” and opted against a breakup.
“Sometimes it takes me a few years to get anything done, three or four years,” Icahn said. “It’s getting less time though. Now I do believe that the large shareholders and institutions want to see results more and want to get more involved to some extent.”
Icahn nominated Icahn Enterprises employees Jonathan Christodoro and Daniel Ninivaggi for EBay’s board.
At Stanford, more than 200 directors attended a June 24 event featuring Einhorn, whose Greenlight Capital LLC recently targeted cash use at Apple, and Morfit, the ValueAct president who Microsoft Corp. recently said would be allowed to join its board this year without a public fight.
“It was a crowded, standing-room-only session in an environment where normally people are pretty picky in choosing how they spend their time,” Siciliano said of the June 24 meeting that was closed to reporters. “People perched on their chairs, jotting down everything that was said.”
At a similar discussion in November, activist Peltz transfixed an invitation-only crowd of about 20 directors who chair the governance and nomination committees at some of the largest U.S. corporations, said Peter Gleason, managing directors of the National Association of Corporate Directors.
“What Nelson talked about was ‘If we come knocking on the door, if you put up the fence, basically, or you don’t answer the door, we’re going to knock louder,’” Gleason said, paraphrasing the discussion. “The approach is really, have the discussion and listen to what they say. You may not agree with them, but at least have a conversation.”
Peltz declined to comment.
Mondelez on Jan. 21 announced Peltz will join its board, and analysts say he’s likely to push Chief Executive Officer Irene Rosenfeld to cut costs and improve profitability. He’s dropping a plan he pushed last year for PepsiCo to buy Mondelez and spin off PepsiCo’s beverages business. Peltz’s Trian Fund Management LP owned 2.3 percent of Mondelez as of September.
Trian in 2012 successfully pushed Ingersoll-Rand Plc to sell some of its businesses. In 2006, Trian waged a six-month proxy fight with H.J. Heinz Co. to win seats on the board and persuade management to execute a turnaround plan.
Loeb at Dow
The position in Dow Chemical that Third Point disclosed Jan. 21 is the latest activist effort by Loeb’s fund, which has also recently urged changes at Sony Corp., Sotheby’s and CF Industries Holdings Inc. The fund called for a spinoff of Dow’s petrochemicals business to improve profitability and urged Dow to consider “a meaningful” buyback of shares, which have lagged behind rivals such as LyondellBasell Industries NV and Westlake Chemical Co.
Loeb and other activists don’t always get everything they seek, even when the companies are responsive. In August, Sony CEO Kazuo Hirai rejected Loeb’s call to sell part of its entertainment business. In November, Hirai outlined cost reductions and investments in higher-growth businesses, with Loeb saying at the time that he was impressed with Hirai’s response to his concerns.
Sony proved wrong the naysayers who speculated that a “stodgy Japanese company” wouldn’t engage, said Chris Davis, who leads the M&A and investor activism groups at Kleinberg, Kaplan, Wolff & Cohen, a law firm that represents activists.
“Look at the way that CEO responded” to Loeb, Davis said. “He had meetings, invited the guy in, pulled him closer, didn’t push him away, hired top-notch advisers straight off the bat, took the time to seriously look at the suggestions.”
Many “American CEOs have a lot to learn” from Hirai, he said.
Activism is likely to stay strong, Davis said. “What you’ll continue to see is diversification in what the activists are doing -- it’s not going to be single playbook,” he said.
Activists who might have previously looked at the operational efficiency of a company now are turning attention to the balance sheet out of concern that companies might squander cash that would be better returned to the shareholders, said Pat Dooley, a former partner at Akin Gump Strauss Hauer & Feld LLP who has represented both companies and activists. Dooley this week was hired as general counsel at activist hedge fund Corvex Management LP.
With leveraged buyouts, the goal was to take the company private using its own assets to amass debt, he said. Instead, activists now often want to keep the company public and enhance value.
“You wouldn’t want a board of directors doing something foolish with that money,” Dooley said in an interview before he left the firm.
Companies in the Standard & Poor’s 500 Index had about $3.5 trillion in cash and marketable securities on hand through their most recent quarterly results, up from about $1.6 trillion at the end of 2007, according to data compiled by Bloomberg.
Activists are eager to be involved as some of that money starts to be put to use. Mergers and acquisitions are surging, with $130 billion in takeover offers already announced this year. And enterprises from Microsoft to Volkswagen AG are readying plans to step up capital spending.
Lined up against the cash-rich companies are funds managed by activists that have almost tripled over five years, to $93 billion at the end of last year, from about $32 billion in 2008, according to data compiled by Hedge Fund Research. The funds were at $73 billion at the end of 2013’s first quarter.
Activists targeted 369 companies in 2013, 12 percent more than in 2012 and 14 percent more than in 2011, according to Hedge Fund Solutions, which tracks investor activity.
“The cupboard is pretty bare for legal tricks out there that can slow down activists,” said William Lawlor, a partner at Dechert LLP in Philadelphia who heads up the law firm’s global corporate governance group. “If boards try to do something, there’s almost immediate blowback and if they don’t respond to the blowback, they may be replaced.”
Activists are also benefiting from a shift in the kinds of shareholders owning a company. Compared with retail investors, institutional investors now make up a bigger proportion of the pool. That makes it much easier for activists to corral votes, Martin Lipton, a founding partner of corporate defense firm Wachtell, Lipton Rosen & Katz in New York and a frequent critic of activist tactics, said in an interview. “I’m not sure the tide can be turned.”
The best defense now is to try and avoid boardroom behavior, such as poor oversight of the CEO, that might attract an activist. Another strategy is to routinely review assets and operations for typical activist targets, Lipton said.
A majority of boards are now communicating directly with institutional shareholders, according to a 2013 survey of corporate directors by PricewaterhouseCoopers LLP. Similarly, 32 percent of institutional investors said their level of direct communication with corporate directors has increased in the last 12 months in PwC’s 2013 investor survey.
Directors are taking initiative now to deal with situations more directly, said Lane, the Willis Group director who said she’s been asked at least three times in recent months to speak at conferences about shareholder engagement.
Ignoring Whitworth when he approached her former Tyco board was done “to our peril,” Lane said. Board members are now more likely to insist on having a more direct contact with activists, where it makes sense, she said.
“You want to hear what they have to say, and ‘hey, maybe they’re right,’” Lane said.