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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 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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The Future of Public Companies: The Rise of Shareholder Activism
December 6, 2013
Confidential – For Discussion & General Information Purposes Only
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
Hedge fund activism is a growing phenomenon
Hostile Strategic AcquirorsActivist Investors
Hostile Strategic Acquiror vs. Activist Investor
Hostile Strategic AcquirerActivist Investor
Long term strategic acquisition
Longer
100% ownership
No
Lower
Generally higher
Higher; many constituencies (management, Board, shareholders)
Higher
Cash profits
Shorter
Significant influence / leverage other shareholders
Yes; Often seek third-party support and join forces to form “wolf pack”
Higher
Depends on the Activist
Lower; can be creative and nimble
High
End Game
Investment Time Horizon
Control Aspirations
Willing to Partner with
Others
Tolerance for Negative Publicity
Credibility with Investors /
Public
Predictable Behavior
Ability to Pressure Target
Board / Management
4
More Hedge Funds = More Activism
Key Individuals
William AckmanSardar BiglariRon BurkleMario J. GabelliCarl Icahn
Eddie LampertPeter LangermanWarren G.
LichtensteinDaniel S. LoebKeith Meister
Nelson PeltzTom SandellPaul SingerBruce ShermanRalph Whitworth
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($20)
$0
$20
$40
$60
$80
$100
2003 '04 '05 '06 '07 '08 '09 '10 '11 '12 YTD'13
AUM Net Asset Flow
Source: HFR, AIMI, and Wall Street Journal
($ in Billions)
An estimated $84 billion of AUM is managed by high profile activists
0
2,500
5,000
7,500
10,000
12,500
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Num
ber o
f Funds
Ass
ets
Under
Managem
ent
AUM Number of Funds
Hedge Funds Managed by Activist Investors
($ in Billions)
Evolution of Hedge Funds Activist Funds
Adage Capital Management
Altai Capital
Appaloosa Management
Barington Capital
Becker Drapkin Management
Biglari Holdings
Blue Mountain Capital
Casablanca Capital
California Public Employees Retirement System
California State Teachers Retirement System
Cannell Capital
Carlson Capital
Citadel Advisors
ClearBridge Investments
Clinton Group
Coppersmith Capital
Corvex Management
Crescendo Advisors
Discovery Group
Elliott Management Corporation
ESL Partners
Franklin Mutual Advisors
GAMCO Investors
Greenlight Capital
HBK Investments
Heartland Advisors
Highfields Capital
Highland Capital Management
Icahn Associates Corp.
InterTech Group
Jana Partners
Land and Buildings
Lane Five Capital Management
Lawndale Capital Management
Mason Capital Management
Marcato Capital Management
Millennium Management
OZ Management
Paulson & Co.
Pershing Square Capital Management
Potomac Capital
Private 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
Third Point Mgmt. Co.
Tracinda Corp.
Trian Fund Management
ValueAct Capital Management
Yucaipa
Over 100 First Time Activists in 2012 and 2013 Are Finding Success with Various Campaigns
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Selected First Time Activists in 2012 and 2013
Aim Cap
Alpine Investment Management
Baker Bros. Advisors
Barron Partners
BeaconLight Capital
Birch Run Capital
Caerus Global Investors
Castine Capital Management
Chesapeake Capital Management
Clear Harbor Asset Management
Cordoba Asset
Cove Street Capital
Cray Group
Crest Financial Limited
Enclave Asset Management
First Pacific Advisors
Fort Ashford Holdings
Galbraith Capital
Helios Advisors
Highside Capital Management
Hirzel Capital Management
Huber Capital Management
Hudson Bay Partners
Iroquois Capital
Khrom Capital Management
KIT Capital
Littlejohn & Co.
Longkloof Limited
M4 Capital
Maglan Capital
Maguire Asset Management
Board Representation
56%Maximize Shareholder
Value23%
Review Strategic
Alternatives11%
Return Cash to Shareholders
5%
Other5%
Successful63%
Unsuccessful25%
On-Going12%
Campaign Success Rate
Source: FactSet
Master Global Assets Limited
MFP Investors
MHR Fund Management
MIT Capital Inc.
Nantahala Capital Management
Nokomis Capital
Oskie Capital Management
OTK Associates
Park City Capital
PEEK Investments
Sabby Capital
SAF Capital Management
Sagard Capital Partners
Sandler O'Neill Asset Management
Scoggin Capital Management
Scout Capital Management LLC
SEACOR Holdings
Silver Point Capital
Snowy August Management
Somerset Capital Advisers
Stonepine Capital Management
Stratford Capital
Templar Alliance Fund
The Albury Investment Partnership
The Catalyst Capital Group
Trigran Investments
Vortex Capital
Westham Capital Partners
Yacktman Asset Management
Z Capital Partners
Zuckerman Investment Group
Types of Campaigns Successfully Waged
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Alliances Among Activists / Hedge Funds – “The Wolf Pack”
Source: FactSet and press releases
Perry Corp
Sarissa Capital Management
Soros Fund Management
Glenview Capital Management
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
What are Activists Trying to Achieve?
9
Desired Goal Select Examples
Portfolio Realignment / Asset Sales
Return of Capital
Strategic Alternatives / Force a Sale
Change Strategic Direction
Influence Merger
Change of Management / Governance
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2013 U.S. Proxy Contests – Very Large or Very Small
2013 Dissident Success By Target Size
Historical Proxy Contests By Size
Market Cap of Target
Under $100M - OverDissident… $100M $1B $1B TotalWon Seats 7 2 5 14Settled 1 1 4 6Lost 5 1 3 9
13 4 12 2945% 14% 41% 100%
Dissident "Win Rate"2013 YTD 62% 75% 75% 69%Prior Year 38% 67% 40% 43%
8%
38%
23%
10%
21%
0%
52%
10%14%
24%21%
57%
7% 7% 7%
17%21%
4%
17%
42%41%
14% 12%
3%
30%
>$1,000 $1,000-$100 $100-$50 $50-$25 <$25
2009 (39 Contests) 2010 (21 Contests) 2011 (14 Contests) 2012 (24 Contests) 2013 (29 Contests)Source: Institutional Shareholder ServicesNote: 2013 data through September
($ in Millions)
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The Activist Playbook
Stock Accumulation
Public Communications
Shareholder Proposals
Contested Proxy Solicitation
Least Aggressive
“Acti
vism
on
th
e C
heap
”
Activist seeks to prey on company disunity and disorganization
Private Communication
– “The Ask”
Most Aggressive
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 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 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)
Overarching tactical goal is to create and exploit divisions between management / Board / institutional shareholders
Anticipate Potential Threats
Look at the Company the Way an Activist Would
Pay Attention to Your Shareholder
Base
Cultivate a Team of Advisors to
Assist in Preparation
Review with the Board basic strategy and the portfolio of businesses in light of possible 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
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)
Maintain up-to-date plans for contacts with media, regulatory agencies and political bodies
Retain preferred proxy soliciting firm and PR firm to ensure advisors aren’t conflicted in a public campaign
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
Continually review the Company’s business portfolio and strategy and its governance and 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
Advance Preparation is Crucial – “Best Practices”
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What Can Companies Do Now?
13
Continuously Review Strategic, Financial and Tactical Preparations with the Board
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 Financial
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)
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
Appendix
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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 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.
Stavros TsibiridisWells Fargo Securities
Managing Director
Contact Information375 Park Ave, 9th Floor
New York, NY 10152Phone: (212) 214-5273Mobile: (646) 256-1242
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