For those who haven’t had the pleasure of reading a well-written, vitriol-filled diatribe from an activist fund manager bitterly complaining about foot-dragging and other tactics to convince shareholders, you’re definitely missing out.
Daniel Loeb’s infamous “poison pen” letters to various CEOs are the stuff of legend: “It is time for you to step down from your role as CEO and director so that you can do what you do best – retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites,” Loeb wrote to Irik Sevin, CEO of Star Gas, back in 2009.
Sevin apparently took Loeb’s advice and resigned shortly after.
More recent poisonous overtures from hedge fund honchos that have been in the news, including Nelson Peltz’s not-so-friendly penmanship to Family Dollar Stores and activist hedge fund firm Elliott Management’s emboldened advances for information management company Iron Mountain, have reinvigorated interest in activist investing, and the often bitter, below-the-belt side that emerges when a takeover is rebuffed.
“Elliott remains incredulous that such a sophisticated group of people would react in such an overly dramatic and shareholder unfriendly fashion,” Elliott founder Paul Singer wrote recently.
What the two latest battles highlight is the resurgence of poison pills and their use by companies to plant them, in an almost IED-like fashion, as a way to secure the perimeter from the enemy – and make it very painful and costly to encroach.
Indeed, a recent report by the Conference Board (click here to find the PDF; click here for the press release summary) suggests the poison pill is not only alive and well, but is actually making a comeback. This is thanks in part to a revival in activist activity and also because of recent legal cases that have clarified new ways that poison pills can be deployed against unwanted suitors.
All the rage in the 1980s, the poison pill lost much of its luster over the past five to ten years, in large part thanks to pressure from shareholder activists and other institutional investors to get rid of them. The argument against them: They can entrench management and unfairly deprive shareholders of a way to get more for their money if someone else comes along and wants to shake things up. The chart below shows the number of corporations that have poison pills in their arsenal based on market cap.
But, as the Conference Board notes, several recent U.S. Delaware Court cases have confirmed the continuing legal vitality of pills that are properly structured, adopted and administered – something the report notes will give other corporate boards a template to adopt their own poison pills.
While the report focuses more on company-to-company duels rather than activist manager-to-manager bickering, the end message is basically the same: Companies are embracing new and more subtle ways to fend off the Loeb’s and the Peltz’s of the world by making their boards more difficult to access and engage.
They are also including “derivatives-driven” language – poison pill verbiage that is “either amended or adopted with language intended to capture the panoply of derivative instruments that can confer voting control over, or the economic benefit of, shares to a person without actually placing the shares in the person’s hands,” according to the Conference Board.
Needless to say, it’s not great news for activist hedge funds and other investors on the prowl for a juicy acquisition that can be turned into something that provides more value.
Further, the Conference Board notes that a still large number of companies choose to enhance the effectiveness of their poison pills by setting up staggered boards, which typically provide for three classes of directors, with only one class up for election each year. “To replace a majority of a determined target’s board, the acquirer would need to win two consecutive annual proxy contests—a formidable task,” the report notes. That’s a tough pill to swallow for any acquirer, in particular an activist manager.
To be sure, the report notes that fewer companies actually have staggered boards. Turns out that only 142 of S&P 500 companies currently have them compared to 260 at the end of 2004. (See chart below.)
And although a poison pill may often be quickly adopted by board action in the face of a surprise unsolicited offer, creating a staggered board generally requires a time consuming, often unpredictable shareholder vote.
From the Conference Board’s end, it recommends that corporate boards review their companies’ governance profile and address a number of specific issues, including: drafting shareholder rights plans satisfying standards of acceptability, consider whether their rights plans should be drafted to include derivative positions when computing the level of stock ownership a person holds and think about losing out on tax benefits incurred from net operating losses, which can’t be claimed if the corporation undergoes an “ownership change.”
On our end, we suspect that activist managers and their well-trained minions are already focused on antidotes to the new forms of poison pills and other efforts to block and tackle their advances. Otherwise, our only advice is to read the label and directions before swallowing.
This guest blog was first published on AllAboutAlpha.com.
Tags: activist investors , fund management , hedge funds , poison pills