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Hedge Fund Activism April 7, 2006 Stephen Fraidin
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Title: Hedge Fund Activism April 7, 2006 Stephen Fraidin
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Hedge Fund ActivismApril 7, 2006Stephen
Fraidin
KIRKLAND ELLIS LLP
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Increased Hostile Activity
- Surge in Hostile Activity
- Hostile / Unsolicited Activity as of Total MA
Volume
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A. Selected Factors
- Hedge Funds - Over 1 Trillion
- Increased Availability of Other Equity Capital
- Private equity
- Cheap Financing
- Debt financing still relatively cheap based on
historic standards - Deleveraging
- Companies have accumulated cash and paid down
debt - Buyers can use targets assets to finance
deal - Increased Disfavor of Takeover Defenses
- Increased corporate governance initiatives have
discouraged adoption
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A. Selected Factors (cont.)
- Reluctance of Boards to Reject Deals
- Boards less likely to reject publicly-made
premium value bids - Sarbanes-Oxley Twist
- One effect is decreased risk of undisclosed
accounting irregularities of Target even without
due diligence - Outward Focus of Companies
- After years of completing internal reviews,
cleaning up balance sheet and achieving internal
efficiencies, companies are more acquisitive and
are looking for outward growth
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B. Hedge Fund Activity
- Funds Committed to Hedge Funds (billions,
approx.)
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B. Hedge Fund Activity (cont.)
- Number of Hedge Funds (approx.)
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B. Hedge Fund Activity (cont.)
- Traders Mentality
- Less focused on long-term value appreciation
- More unspoken cross-firm communication
(conscious parallellism) - Eye for Value and Arbitrage Opportunities
- Increased Metrics-Based Analysis
- Mastery of Derivative/Hedging Strategies
- Flexing Muscles with MA and Activism
Opportunities - Willing to employ hostile bidding techniques (vs.
many private equity firms that are expressly
prohibited from hostile activity and vs. mutual
funds that typically do not engage in this
activity) - Competing for attention as define/distinguish
themselves
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C. Common Form Hedge Fund Tactics
- Purchase Toehold Position in Target
- Purchase quickly (usually following period of
poor stock performance) - Use of derivatives to decrease actual exposure
- Make filings announcing position (potential
influential role) - Pressure Management for Near-Term Value Enhancing
Changes - Force sales of Target or under-performing
businesses - Force monetization of assets
- Force distribution of excess cash to
shareholders/stock buybacks - Block pending transactions
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C. Common Form Hedge Fund Tactics (cont.)
- Other Hedge Funds Accumulate Shares - Conscious
Parallel Activity - Force Change of Un-Cooperative Management/Board
- Request removal of takeover defenses to
facilitate - Shareholder proposals
- Threaten proxy fight to remove directors
- Use of Press to Sway Other Shareholders to Adopt
Hedge Funds Strategy - Note Additional press also helps attract
publicity/distinguish fund for raising of next
fund - General Trend Escalation of Tactics Until
Achieve Goal
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D. Examples of Recent Activist Activity
- Blockbuster/Carl Icahn
- Icahn (largest shareholder) objects to management
of Blockbuster - Critical of failure to acquire rival Hollywood
Video - Critical of CEO Antiocos pay package and other
uses of funds - Demands that greater dividends be paid to
shareholders - Demands that offers for the company be duly
considered - Icahn commences proxy fight
- Dissident slate of directors elected
- Classified board, but can take control of Board
next year
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D. Examples of Recent Activist Activity (cont.)
- Kerr-McGee/Carl Icahn and Jana Partners
- Icahn and Jana (collectively 7.6 shareholders)
want changes at Kerr-McGee - Divest its chemical business and monetize future
production - Use the proceeds to buy back stock
- Icahn and Jana announce proposing slate of
directors - Kerr-McGee agrees to divest chemical business and
commence 4 Billion share repurchase - In exchange for agreement of Icahn and Jana to
withdraw dissident slate of directors
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D. Examples of Recent Activist Activity (cont.)
- Wendys/Pershing Square
- Pershing Square (9.9 shareholder hedge fund)
wants value-enhancing changes at Wendys - Spin-off Tim Hortons (Canadian brand)
- Refranchise several Wendys-owned locations
- Repurchase shares with proceeds of refranchising
- Avoid acquisition of Quick Service
- Pershing Square Escalates Public Attention
- Announces intention to make proposals
- Announces retention of Blackstone to evaluate
strategic transactions for Wendys - Files letter with rationale for proposals and
requests meeting - Ongoing
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E. Observations - Preparedness
- Activism Can Come in Any Context Most
Frequently - Following period of weak stock performance
- When easily monetizable assets or large amounts
of cash - In connection with transaction (either as buyer
or Target) - Annual meetings or proposals to shareholders
- Swarming Effect of Activist Activity When Comes
- Approach companies when at weakest
(undervalued/vulnerable) - Act quickly and together
- Disputes are often made public
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E. Observations Preparedness (cont.)
- Recent Transactions Have Shown Positioning is
Helpful to Confront Activists - Being prepared
- Exposing activist vulnerabilities
- Developing and communicating Board strategy
- Legal challenges to tactics
- Companies Need to Continually Monitor
Vulnerability - Evaluate Corporate Governance Posture
- Identify Key Constituencies/Shareholder Base
- Monitor Market Sentiment
- Examples market reaction to news, press, chat
rooms, etc. - Develop Communications Plan for Strategy
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E. Observations Preparedness (cont.)
- Example Consider some Corporate vulnerabilities
and develop strategy - Corporate Governance Posture has vulnerabilities
to proxy fight - Non-classified board elected by plurality
- Ability of stockholders to call special meeting
- Ability to remove directors and act by written
consent - Poison pills generally prevent stock accumulation
but not proxy fights - Financial position
- Recently depressed stock performance vs. market
- Large pre-acquisition cash position
- FY2003 and FY2004 restructurings
- Large market capitalization companies and
technology sector no longer immune from
shareholder activism/hostile activity/hedge fund
activity
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F. Take-Aways
- Significant influence of hedge funds on todays
MA environment - Continued role of Board in determining Targets
long-term strategy - Need to review vulnerabilities and have
approaches/defenses ready (particularly in
transaction context) - Need to keep eye out for first signs of activity
given common m.o. of escalating tactics
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