September 20, 2017

Activism: Where Things Stand Today

This Wachtell memo addresses where things stand today in the world of shareholder activism.  New capital continues to flow into activist hedge funds, & attacks on large companies have increased – but efforts to promote a more long-term focus among institutional investors are also gaining traction.

Here are some of the key takeaways on how activist strategies are evolving:

– While an activist attack on a large successful company to force acceptance of a financial engineering strategy has generally failed, e.g., GM’s resounding defeat of Greenlight Capital’s attempt to get shareholder approval of converting common stock into two classes, there has been an increase in attacks to obtain a change in a company’s CEO.

– There has been an increase in attacks designed to force the target into a merger or a private equity deal with the activist.

– There has been a significant increase in “bumpitrage” — buying a block of stock in a merger partner seeking shareholder approval to use the block to defeat approval, unless the merger price were increased.

– Several major funds have converted from classic activism to a form of merchant banker approach of requesting board representation to assist a company to improve operations and strategy for long-term success.

The memo highlights efforts to promote long-termism among investors, and points out that BlackRock, State Street and Vanguard have continued to express support for sustainable long-term investment. These investors have been active in sharing their governance and engagement expectations with public company boards and CEOs. Shareholder engagement is increasingly critical – failure to engage effectively has resulted in the loss of proxy contests, or in “Pyrrhic” victories followed by a change in management.

John Jenkins