Defeat Activists by Giving Them What They Want

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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There are many pleasures in this story about investment banks pitching activism preparedness so I guess we might as well start with the cheapest of them, which is that people who work at investment banks sometimes use words funny:

"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. (CSGN) "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."

Ah yes, the stakes are career life and career death. Which in addition to being career dramatic raises the question: Who is the client here? Presumably Credit Suisse's engagement letter says that its client is Underperforming Corp., and its obligations are to do what is best for Underperforming Corp. But presumably that engagement letter is signed by a human at Underperforming Corp., and that human might worry more about his career life and death than he does about Underperforming Corp.'s stock price. (Though they are obviously correlated.) And he's the one looking into Chris Young's eyes and tearing up when he thinks about the impending approach of the doom that awaits us all in our careers. And Chris Young strokes his hand and says there there friend, don't cry, we can save your career, your career will live to a ripe old age.

Anyway the point is that if you are a banker and conceive of your job as "save the careers of corporate managers" rather than "do what is best for the corporation," that's a little weird.

If that's your conception then you might go and do terrible coercive stuff to keep managers in power and prevent shareholders from doing anything to embarrass them or vote them out. And, lo, that sort of happens. We talked the other day about the new anti-activist poison pills that are sweeping the nation, designed not to prevent coercive takeovers but just to make it really difficult for activists to accumulate shares, communicate with each other, or otherwise mount a challenge to entrenched managers. Those pills, y'know, come from somewhere. They come from banks and law firms who are in the business of helping managers defend themselves from activists. Those pills provide some career life support.

But for the most part this story isn't that story: The main advice the banks are offering seems to be less "how to prevent activists from getting what they want" and more "how to do what activists want before they ask." Young himself comes to Credit Suisse from Institutional Shareholder Services, the governance watchdog-ish thing, where he "advised investors on contested takeovers and activist campaigns." Deutsche Bank's activism group is having "frank conversations with our clients about things activists care about," including stock price and governance. Barclays is giving advice "on value-boosting transactions -- such as spinoffs, splitoffs and carveouts -- to help deter activists," and working with companies "to pinpoint the factors driving poor performance, such as the company's balance sheet, operating performance, or corporate structure."

Are activists good for companies? Ooh gosh, let's debate that somewhere else. But if you subscribe to the simple activist-shareholder model, in which activists (1) identify underperforming companies, (2) buy up those companies' (cheap) stock, (3) push the companies to improve, and then (4) reap (a portion of) the rewards of that improvement, what do you think about this development? It seems good, no? If banks are telling companies to make the governance and shareholder-value improvements that activists would have recommended, in order to fend off activists, then that seems like another positive result of shareholder activism. If your view of Carl Icahn or Bill Ackman or whomever is that they are primarily in the business of making capitalism more efficient and companies more responsive to shareholders, then you can count these efforts as a win for Icahn and Ackman.

Of course they're not getting paid for it. And it seems a little churlish for the banks to interfere with the activists' livelihood like this. The activists have been so nice to the banks! For one thing, a lot of go-to suggestions in the activist playbook ("sell yourself," "do a big levered share repurchase," "split up the company," etc.) tend to be the sorts of projects that require well-paid investment banking help. For another, the mere threat of activists seems to be enough to win the banks (also presumably paid) anti-activist assignments. The least the banks could do would be to leave some poorly governed shareholder-unfriendly companies for activist hedge funds to play with. Though I guess the risk of running out of those isn't too great.

  1. Second-cheapest. The cheapest is that JPMorgan's head of activism defense is named David Hunker and I am giggling about the branding possibilities there ("Activists threatening? Hunker down with Hunker!"). But that is pretty cheap.

  2. I should say, though, that I was maybe a bit hasty in thinking that Hertz's poison pill was hard to justify because the rumored activists in the stock -- Corvex and Third Point -- seemed unlikely to mount a hostile takeover. In fact the pill seems to have been put in place to thwart Carl Icahn, who really is exactly the sort of guy who would run a coercive two-step tender offer to put pressure on shareholders so he can take control of a company. Still the Hertz pill, with its 10 percent threshold and other anti-activist features, goes well beyond preventing that sort of tender offer.

  3. Wait no, I didn't mean here. I meant somewhere far away. A lot of academic researchers say yes; here are Lucian Bebchuk et al., and here is a 2013 paper finding "that efficient capital redeployment is an important channel via which activists create value." The main leaders of the no camp are, I guess, at Wachtell Lipton; here are two Wachtell memos on the topic. There's also Lynn Stout, though that's sort of a different flavor.

  4. I use those two names because they're both prominent activists and they're so fond of each other. I hope they'll fight over who gets credit for governance improvements at companies where neither of them is involved.

  5. And sometimes the one becomes the other, as when CVR Energy hired Goldman to fend off Carl Icahn and then ended up paying Goldman a fee for selling CVR to Icahn. Well, owing Goldman a fee anyway; it's being (delightfully) litigated.

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Matthew S Levine at