February 23, 2017
Activism: Wachtell on Hedge Funds & Other Activists
Wachtell Lipton recently published its annual memo on dealing with hedge funds & other activists. Although assets managed by activist hedge funds declined somewhat in 2016, there are still more than 100 hedge funds currently engaged in frequent activism & over 300 others that have launched activism campaigns in recent years – and they continue to attract interest from major institutions. This excerpt addresses how formidable these activist investors are:
The major activist hedge funds are very experienced and sophisticated with professional analysts, traders, bankers and senior partners that rival the leading investment banks. They produce detailed analyses (“white papers”) of a target’s management, operations, capital structure and strategy designed to show that the changes they propose would result in an increase in share price in the near term. These white papers may also contain aggressive critiques of past decisions made by the target and any of the target’s corporate governance practices that are not considered current “best practices”. Many activist attacks are designed to facilitate a takeover or to force a sale of the target, either immediately or over time.
Prominent institutional investors and strategic acquirors have on occasion worked with activists both behind the scenes and by partnering in sponsoring an activist attack, such as CalSTRS with Relational in attacking Timken, Ontario Teachers’ Pension Fund with Pershing Square in attacking Canadian Pacific and Valeant with Pershing Square in attempting a takeover of Allergan. Major investment banks, law firms, proxy solicitors and public relations advisors have represented activist hedge funds and actively solicited their business. These advisors to activist hedge funds have also aggressively sought to advise mutual funds and other investors on how to run their own activist campaign.
The memo offers a wide range of advice on preparing for & responding to activist attacks. It also points out that credibility with major institutions – and the ability to persuade them to support management’s long-term strategy – are key to fending off an activist attack.
For the latest insights on activist investors, check out our recent “Activist Profiles & Playbooks” webcast.
– John Jenkins