activism league tables page maker
TRANSCRIPT
MAKERQ2 // 2018
Quarterly
Activism League Tables PAGE 4
The
Focusing onACTIVISM
&
Why
Must Pick Its
POISON
Where Beijing Is and Isn’t Pulling Back
Ending Either Incentive Plans Or MLPs Is A Necessary Evil
China’s SyndromeM&A
Board Chairs Who Pull Their CEOs’ Strings
The Deal // 32 // The Deal
CONTENTSTABLE of
04ACTIVISM
Activism League Tables
07 Another Season of Discontentby Greg Morcroft
10 Who’s Helping WhomCompiled by Ronald Orol
34M&A
Melrose’s Matchmakerby David Marcus
37 China’s M&A Syndromeby Paul Whitfield
40 Cannabis PIPEs: Smokin Hot, Eh?by Paul Springer
21PRIVATE EQUITY
Mitel: Both a Bidder and a Target Beby Chris Nolter
25 Off the Exit Rampby Armie Margaret Lee
26 Coupling Horses in the Race for Oil Reservesby Tom Terrarosa
32 Oil Patch Discipline Equals Buyers Delightby Tom Terrarosa
W elcome to the second issue of The Deal’s quarterly magazine, Q2 Dealmaker, where we offer an extensive sample of long-form coverage of Wall Street deal activity unavailable anywhere else. This issue
highlights our activist coverage, with Anders Keitz producing our cover story, “The Puppet Masters,” a dive informed by our relationship mapping affiliate, BoardEx, into the relationship between CEOs whose predecessors serve as executive chairmen of their companies’ boards and thus may continue to pull the strings. (See the Table of Contents on the following page for page numbers for that story and the others mentioned here.) Also in the activism package is Ron Orol’s look at how activists seem to have an inordinate propensity for targeting female CEOs and what’s up with that particular tic (at least it’s clearly not a #MeToo problem). And Greg Morcroft chips in with a review so far of what’s shaping up to be a particularly eventful proxy season. The package also features our Who’s Who and League Table of activist advisers, a first-of-its-kind list of attorneys and bankers who either advance or deter activism at public corporations or in some cases do both (though not of course in the same situations).
You’ll also find in Q2 Dealmakers a mix of columns and features in our other three key coverage areas, with Tom Terrarosa and Kirk O’Neil each contributing three in Restructuring and Private Equity, as radio joins the energy and retail industries as particularly active arenas for one if not both types of dealmaking. We call particular attention to Tom’s look at the restructuring of energy MLPs, “Why Oil & Gas Must Pick Its Poison,” as it breaks new ground in analyzing the assorted quirks and arcana unique to the oil business. Not to be undone, Chris Nolter weighs in with a column on the latest tech itch that PE is scratching, communications software, and Armie Margaret Lee revives a longstanding Deal feature by rounding up returns on PE exits for the quarter.
In M&A, our featured coverage area for our inaugural issue, Q1 Dealmaker, David Marcus looks at Elliott Management’s role in tipping GKN to Melrose, Paul Whitfield assesses what the hiatus in Chinese M&A does and doesn’t mean, and Paul Springer examines the action in private investments in the public equities of cannabis companies, and why that PIPEs segment is even hotter in Canada than in the U.S.
All in all, we think you’ll find in these pages another issue of Dealmaker chock full of insight and analysis unique to The Deal. Please let us know what you think.
Ronald Fink, Deputy Managing Editor
LETTER from the EDITOR
18 Sextivism: When Male Activists Target Female CEOsby Ronald Orol
43RESTRUCTURING
Fringe Retailers on the Edgeby Kirk O’Neil
45 Retail and Energy Haven’t Seen Anything Yetby Kirk O’Neil
47 Radio Dazeby Kirk O’Neil
49 Why Oil & Gas Must Pick Its Poisonby Tom Terrarosa
China’s SyndromeM&A
37pg
‘The U.S. is acting like a bully. They are citing the reason of national security, but their motivation is protectionism.’
COLUMNS
52 China, Cannabis, Crypto and PE Lending Drive People Movesby Baz Hiralal
54 Last Word: Activism Reconsideredby Ronald Fink
05 Control Freaksby Ronald Orol
14 The Puppet Mastersby Anders Keitz
4 // The Deal
League Tables
RANK
1
2
3
4
5
LAW FIRM
Vinson & Elkins LLP
Wachtell, Lipton Rosen & Katz *
Morgan Lewis & Bockius LLP
Kirkland & Ellis LLP
Latham & Watkins LLP
Law Firms Advising Companies Targeted by ActivistsRanked by Number of Campaigns Advised
5
6
6
7
Skadden, Arps, Slate Meagher & Flom
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Wilson Sonsini Goodrich & Rosati
Goodwin Procter LLP
24
21
13
11
10
10
9
9
5
TOTAL
Source: The Deal
4 // The Deal
*Based on FactSet data
Last August, the S&P 500 index handed the powers behind Snap Inc. (SNAP) a huge defeat by prohibiting the company behind the Snapchat app from participating in the firm’s indices.For institutional investors, Snap had challenged the fundamental concept of shareholder democracy by entering the public market with only non-voting shares. The issuance was an escalation of an already growing trend of companies, particularly technology firms, conducting initial public offerings with dual-class share structures giving founders and insiders control of the majority of votes even though they own a much smaller equity stake. Facebook Inc. co-founder Mark Zuckerberg, for example, controls 60% of the votes at the social media giant but only 16% of the equity.
Entertainment and news companies have long set up the structures, based on the idea that they could raise capital and remain independent, protected against hostile bidders, with a goal of preserving editorial comments and views. However, a large contingent of technology companies in recent years, led by Google’s 2004 dual-class IPO, have gone the route lately, hoping to avoid the wrath of activist investors bent on nominating director candidates and pressing for a sale of the company or a value-enhancing division spinoff.
While it is true that we haven’t seen any more Snap non-voting share IPOs following the move by S&P and other index providers, it is also true that there has continued to be a march of insider controlled corporations giving founders control of the vote.
CONTROL FREAKS
ACTIVISM
By // Ronald Orol
Snap is gone, but index funds,
regulators and legislators aren’t
doing anything to stop the flow
of dual-class share corporate IPOs, ensuring insider control.
That’s bad news for activists.
The Deal // 5
ACTIVISM
RANK
1
2
3
4
4
LAW FIRM
Vinson & Elkins LLP
Wachtell, Lipton Rosen & Katz
Kirkland & Ellis LLP
Goodwin Procter LLP
Morgan Lewis & Bockius LLP
5
5
5
6
Latham & Watkins LLP
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Skadden, Arps, Slate Meagher & Flom
Wilson Sonsini Goodrich & Rosati *
13
9
8
5
5
4
4
4
2
TOTAL
2017 Jan-Apr, 2018
RANK
1
2
3
4
5
LAW FIRM
Olshan Frome Wolosky LLP
Schulte Roth & Zabel LLP
Foley & Lardner LLP
Cadwalader, Wickersham & Taft LLP
Akin Gump Strauss Hauer & Feld
Law Firms Advising Activists Targeting CompaniesRanked by Number of Campaigns Advised
6 Wilson Sonsini Goodrich & Rosati
81
58
16
8
4
3
TOTAL RANK
1
2
3
4
5
LAW FIRM
Olshan Frome Wolosky LLP
Schulte Roth & Zabel LLP
Foley & Lardner LLP
Akin Gump Strauss Hauer & Feld
Cadwalader, Wickersham & Taft LLP
5 Wilson Sonsini Goodrich & Rosati *
47
15
8
4
1
1
TOTAL
2017 Jan-Apr, 2018
NOTE: The campaigns included only involve publicly-disclosed efforts. Law firms often advise companies and activists in private insurgencies that are never disclosed.
6 // The Deal
According to the Council of Institutional Investors, there were 15 dual-class IPOs between August, 2017—when S&P issued its rule—and April 2018, a situation that raised the ire of large shareholders.
Snap’s structure prohibits shareholders from a “say on pay” and investors aren’t permitted to submit nonbinding proposals on governance, environmental or social issues. However, other aspects of Snap’s structure, which was installed to protect co-founders Evan Spiegel and Robert Murphy. mirror the systems set up by other dual-class share companies by giving insiders or founders control of the votes even though they own far fewer shares.
This is a fundamental problem for activists and big institutional investors, who argue that these corporations and their boards are unaccountable to shareholders. Yet, regulators and legislators aren’t doing anything to stop the flow of dual-class IPOs.
Robert J. Jackson Jr., a member of the Securities and Exchange Commission, recently sought to make a case against perpetual dual-class share structures, arguing that they created “corporate royalty.” However, Jackson, a Democrat, is a minority on the commission. SEC Chairman Jay Clayton, who controls the agency’s agenda, told The Deal that he agreed with Jackson on a lot of things “but not everything.” Translation: The SEC has no plan to do away with dual-class share structures any time soon.
Also consider the major U.S. stock exchanges. They would only take action if pressed to do so by the SEC. Instead, they are caught in a vicious global battle for IPOs and the revenue that comes with them. The situation was made worse when Hong Kong approved changes to its IPO rules in April to allow technology firms with different voting rights, giving insiders control, to go public on the Hong Kong Exchange. The change comes after Hong Kong lost the massive 2014 Alibaba Group Holding Ltd. (BABA) IPO, which listed on the New York Stock Exchange after it accommodated the e-commerce giant’s request to give founders control of the board. (Clayton, an attorney at Sullivan & Cromwell then, was a principal adviser on the Alibaba IPO).
Not much appears to be happening on the state level either.
Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, has been urging the extremely important state and its courts to step in and litigate the issue of dual-class share companies. He recently asked a Delaware Supreme Court Justice whether the courts have abrogated their function as an investor protector if they stay out of the dual-class share structure question. “There was always the possibility [for shareholders] to throw out people [directors, executives] who made bad decisions,” Elson said. “But if you get non-voting stock, then the check isn’t there anymore. Sooner or later we’re going to have to litigate.”
However, there doesn’t appear to be any interest in Delaware to change state statutes governing dual-class share structures. P. Clarkson Collins Jr., a partner at Morris James LLP and member of the Delaware Corporation Law Council, which reviews and proposes amendments to the state’s business entity statutes, suggested recently that dual-class share companies can “serve a useful business purpose.” On the question of what to do, Collins added: “There isn’t a good answer to that except to say you can vote with your feet if you don’t like the management or the entity.”
That may be true for investors, but index funds? Not so much. There is a possible compromise approach that both sides might be warming up to—a so called sunset provision that allows for an eventual collapse of the dual-class share
structure to a one-vote, one-share system, after some years. According to CII, there were six companies in 2017 that set up dual-class share structures with sunsets and two in 2018 as of April 16.
The hike in sunsets may represent promising news for institutional investors hoping to maintain the vote. However, big investors will still need to keep the pressure on to ensure the sunsets keep coming, as regulators, exchanges and legislators don’t appear to have any interest in backing the effort.
Ronald Orol is a Senior Editor of The Deal
Activist investors tore through the market in the first quarter and the second looks to continue the trend as it draws to a close.
While bare-knuckle brawls like the recently concluded Carl Icahn vs. Xerox Corp. (XRX) and several campaigns by Elliott Management, support for the election of directors remains high, according to a recent report from D.F. King, an investor services firm. The report said that “of over 13,000 instances of a director being up for election this proxy season, we have discovered only 20 instances where a director received less than majority shareholder support.”
That number doesn’t imply that there haven’t been fights, but it does reflect that some of the highest profile fights got settled ahead of a vote.
On May 13 the document technology company agreed to cancel a merger agreed to in January with Fujifilm as part of a settlement with Icahn. In the deal, a change-of-control slate of six Icahn-backed directors joined Xerox’s board while five incumbent directors stepped down. Also, Xerox CEO Jeff Jacobson agreed to resign and be replaced by John Visentin, a consultant to Icahn.
“We will continue our fight to rescue and revitalize Xerox, as so many of our fellow shareholders have been encouraging us to do,” said Icahn said in a joint statement with Darwin Deason, the third largest Xerox shareholder.
Activist investors tore through the market in the
first quarter and the second looks to continue the trend.
By // Greg Morcroft
ANOTHER SEASON OF The Deal // 7 ACTIVISM ACTIVISM
You can vote with your feet if you don’t like the management or the entity.
“
If you get non-voting stock, then the check isn’t there anymore. Sooner or later we’re going to have to litigate.
“
The Deal // 98 // The Deal
The veteran raider also battled SandRidge Energy Inc. (SD) and Icahn on Tuesday, June 19 appeared to take control of its board in a heated proxy contest that went the distance. Shareholders elected at least four of his seven dissident director candidates, according to a representative for the insurgent investor.
Icahn’s side said dissident directors John Lipinski, Randolph Read, Bob Alexander and Jonathan Christodoro all won seats. Management-backed incumbent directors Sylvia Barnes and William Griffin were also elected. A seventh candidate for the board has not yet been chosen, he added, as the votes are still too close.
A SandRidge spokesperson did not return a request for comment.
Shareholder proposals on environmental and social issues showed up in growing numbers in 2018, as D.F. King reports that they made up.
“Top themes involve political and lobbying disclosure, workplace diversity/parity and climate change/sustainability reporting. As we also saw in 2017, support levels in certain instances tend to be relatively high for these types of proposals,” the research showed.
Its preliminary analysis on climate change/ sustainability proposals shows that average support remains a tepid 30% for such proposals the firm noted “at least” six instances in its 40-proposals cited, received majority support and another have dozen missed a majority vote by mere points.
Many investors aren’t happy with the way Facebook Inc. (FB) has handled things in the wake of its Cambridge Analytica data scandal either.
A group of more than 75 investors, human rights groups, and religious organizations in early May urged Facebook’s most significant shareholders to pressure the company for real change following the disclosure of at least 87 million users’ data.
“We share a deep concern that Facebook Inc. is failing to both assess and address longstanding—yet urgent—human rights problems, including critical concerns regarding civil, political and privacy rights,” the letter states. “Facebook has consistently gambled with the rights and well-being of its more than 2 billion users—as well as the company’s future—without adequate consideration of the risks involved,” the group wrote.
The letter’s signatories include the activist investor Arjuna
Capital, NorthStar Asset Management, Inc., and the Socially Responsible Investment Coalition. They called on the nation’s largest investors and Facebook’s biggest holders, to put more pressure on the company to adopt new policies on transparency and employment of women and people of color as well as privacy issues.
Other groups have made similar requests.
Also at issue is a trend in recent years of California technology companies entering the public markets giving their founders control of the votes, even if they owned far fewer shares. Facebook’s Mark Zuckerberg, for example, controls 60% of the votes at the social media giant but only 16% of the stock. That power assured that the proposals listed above failed.
Investors showed their displeasure with the company during the meeting, including plane flown overhead the May meeting with a message accusing Facebook of “breaking democracy,” and another investor decrying what he called a budding,” “corporate dictatorship.”
Many corporations like the insider-controlled structure because activist managers can’t get dissident director candidates elected to their corporate boards—the system permanently protects companies from insurgents and their M&A and share-price improvement focus. However, activists and prominent institutions are opposed to the structure, arguing that these corporations and their boards are unaccountable to their owners.
Paul Singer-helmed Elliott Management Corp., as usual, has a full plate this quarter.
On May 4 the group won control of the board of Telecom Italia SpA (TI) after a bitter battle with the company’s largest shareholder Vivendi SA (VIV).
Shareholders chose Elliott’s slate of 10 new directors, led by Fulvio Conti, over the rival slate put up by the French media conglomerate and left Vivendi with just five directors on the 15-member board.
“Today’s win for the independent slate sends a powerful signal to Italy and beyond that engaged investors will not accept substandard corporate governance, paving the way for maximizing value creation for all TIM’s stakeholders,” Elliott said in a statement.
Elliott, which controls a 5.75% stake in Telecom Italia,
including a 2.5% direct holding, claims that Vivendi’s influence over Telecom Italia has led to “profound and persistent” share price underperformance due to strategic failures, conflicts of interest and corporate governance failings.
Both Vivendi and Elliott back Telecom Italia’s plan to spin off the network operation, though the activist fund wants Telecom Italia to go further by selling a stake in the service and some or all of its undersea cable division. Cash from those sales could be used to cut debt and reinstate Telecom Italia’s dividend, according to Elliott.
And just as proxy seasons reflects changing business realities, this year politics has taken up much more space on corporate agenda. “New types of proposals that we’ve recorded have been filed subsequent to recent events that have taken the national spotlight,” according to D.F. King.
The mass shootings that over the last year have produced several proposals targeting gun manufacturers and retailers to disclose what they are doing to prevent such crimes and improve gun safety. Resolutions regarding disclosures about racial and gender diversity, climate change, and pay parity for women also gained traction, but not many victories this quarter.
Greg Morcroft is an Assistant Managing Editor for The Deal. Ron Orol contributed to this story.
ACTIVISM ACTIVISM
‘Today’s win for the independent slate sends a powerful signal to Italy and beyond that engaged investors will not accept substandard corporate governance’
“ We share a deep concern that Facebook Inc. is failing to both assess and address longstanding—yet urgent—human rights problems, including critical concerns regarding civil, political and privacy rights.
The Deal // 1110 // The Deal ACTIVISM ACTIVISM
Wachtell, Lipton, Rosen & Katz partners Daniel A. Neff, Sabastian V. Niles and Trevor S. Norwitz advised Whole Foods Market in response to activism by Neuberger Berman and JANA Partners and in Whole Foods Market’s $14 billion acquisition by Amazon.com
Wachtell, Lipton, Rosen & Katz partners Steven A. Rosenblum and Sabastian V. Niles advised General Motors in its response to Greenlight Capital/David Einhorn’s campaign and proxy fight to create a dual-class capital structure and replace three GM directors
Wachtell, Lipton, Rosen & Katz partners Adam O. Emmerich and Sabastian V. Niles advised Taubman Centers REIT in its response to a proxy fight by Land & Buildings/Jonathan Litt
Wachtell, Lipton, Rosen & Katz partners Daniel A. Neff and Sabastian V. Niles advised Alexion Pharmaceuticals in its engagement with Elliott Management
Vinson & Elkins LLP’s team led by former partner Kai Liekefett and partner Lawrence Elbaum (Counsel), with assistance from an associate team including Jessica Wood, Katherine Chen, Kathy Wang and Taj Tucker advised Fiesta Restaurants Group in its proxy contest against JCP Investment Management LLC.
Vinson & Elkins LLP’s team led by former partner Kai Liekefett as well as Shaun Mathew and Lawrence Elbaum (both Counsel), with assistance from an associate team including Leonard Wood, Katherine Chen, Kathy Wang and Taj Tucker advised Fred’s Pharmacy in its activism defense against Alden Global.
Vinson & Elkins LLP’s team was led by former partner Kai Liekefett and Steve Gill (Partners) as well as Shaun Mathew (Counsel), with assistance from an associate team including Patrick Gadson, Justin Hunter, Katherine Chen, and Kathy Wang advised SandRidge Energy in its proxy contest against Carl Icahn.
Morgan Lewis & Bockius partners Keith Gottfried and Sean Donahue advised, and are continuing to advise, Alaska Communications Systems Group, Inc. on an activist campaign threatened by Karen Singer.
Morgan Lewis & Bockius partners Keith Gottfried and Sean Donahue advised RAIT Financial Trust on a proxy contest threatened by Highland Capital Management, L.P. that resulted in a settlement agreement being executed.
Morgan Lewis & Bockius partners Keith Gottfried and Sean Donahue advised The Meet Group, Inc. on its activism settlement agreement with Harvest Capital Strategies, LLC.
Wilson Sonsini Goodrich & Rosati partners Brad Finkelstein and Doug Schnell represented Deckers Outdoor in the UGG bootsmaker’s defeat of Marcato Capital’s Mick McGuire and his total-board takeover effort.
Wilson Sonsini Goodrich & Rosati partners Brad Finkelstein and Doug Schnell represented Gigamon in its response to activist Elliott Management, which later agreed to acquire the network security and monitoring outfit in a $1.6 billion deal.
Wilson Sonsini Goodrich & Rosati partners Brad Finkelstein and Doug Schnell represented private equity firm Vintage Capital in its effort at Babcock & Wilcox Enterprises Inc. (BW), which resulted in a settlement in January.
Latham & Watkins LLP partner Thomas Christopher and Senior Attorney Tiffany Campion, with assistance from associate Kristin Mendoza, advised NRG Energy, Inc. in connection with its cooperation agreements with Elliott Management Corporation and Bluescape Energy Partners LLC in January 2017.
Latham & Watkins LLP partner Thomas Christopher and counsel Colin Bumby advised PHH Corp. in connection with the investment by EJF Capital LLC in June 2017.
Latham & Watkins LLP partners Steven Stokdyk and Paul Tosetti advised Motorcar Parts of America, Inc. in its engagement with activist fund Engine Capital LLC in March 2017.
Kirkland & Ellis partners Daniel Wolf and David Fox advised Bristol-Myers Squibb in connection with discussions regarding board composition with activist shareholder Jana Partners
Kirkland & Ellis partners Daniel Wolf and Michael Brueck advised Vitamin Shoppe in connection with shareholder activism matters and agreements with investor Carlson Capital regarding board composition
Kirkland & Ellis partners Daniel Wolf, David Fox and Michael Brueck advised Avis Budget Group in its implementation
of a poison pill and subsequent entry into a cooperation agreement with SRS Investment addressing board composition and termination of the rights plan
Skadden, Arps, Slate, Meagher & Flom LLP partner Joseph Coco advised Brookdale Senior Living Inc. in a settlement agreement with Land & Buildings Investment Management, LLC to appoint a new independent director to Brookdale’s board of directors.
Skadden partners Richard Grossman and Julie Gao advised SINA Corporation, an online media company serving China and the global Chinese communities, in connection with its response to proposals by activist shareholder Aristeia Capital LLC, together with certain of its affiliates and managed entities, and its proxy fight to elect two individuals to the SINA Board of Directors.
Skadden partners Jeremy London and Richard Grossman advised The Advisory Board Company in its US$2.6 billion sale of its health care business to OptumInsight, Inc. and its education business to affiliates of Vista Equity Partners LLC in response to Elliott Management Corporation’s activist campaign.
Goodwin Procter partners Joseph L. Johnson III, Stuart M. Cable, Todd R. Cronan and Andrew H. Goodman, advised Cognizant in the negotiation of its announced cooperation agreement with activist hedge fund, Elliot Management. (February 8, 2017)
Goodwin Procter partners Joseph L. Johnson III, Andrew H. Goodman and Stuart M. Cable advised PAREXEL in its defense of activist campaigns led by activist hedge funds, Corvex and Starboard Value. (June 19, 2017)
Goodwin Procter partners Joseph L. Johnson III, John T. Haggerty, Andrew H. Goodman and Scott C. Chase, advised TIER REIT in its successful defense of a campaign launched by activist hedge fund, Engine Capital. Designed strategy which resulted in Engine Capital withdrawing its director nominees for the 2017 Annual Meeting.
Top Advisers to Companies Targeted By Activists
Compiled By // Ronald Orol
HELPING ’
12 // The Deal
Schulte Roth & Zabel LLP partners Marc Weingarten and Aneliya S. Crawford, with assistance from associates Brandon S. Gold, Daniel A. Goldstein and Reuben Zaramian, advised Trian Fund Management in the election of Nelson Peltz to the Board of Directors at Procter & Gamble Co.
Schulte Roth & Zabel LLP partners Marc Weingarten and Ele Klein, with assistance from associates Brandon S. Gold and Daniel A. Goldstein, advised Greenlight Capital Inc. in its campaign at General Motors.
Schulte Roth & Zabel LLP partners Ele Klein and Marc Weingarten, with assistance from associates Brandon S. Gold and Daniel A. Goldstein, advised Jana Partners in its campaign at Whole Foods Market.
Olshan Frome Wolosky LLP partners Steve Wolosky and Andrew Freedman with assistance from counsel Kenneth Mantel and associate Dorothy Sluszka, advised Elliott Management on its successful proxy campaign and ultimate settlement with Arconic Inc. in May 2017.
Olshan Frome Wolosky LLP partners Steve Wolosky and Andrew Freedman with assistance from associate Meagan Reda advised Starboard Value LP on its settlement with Perrigo Company plc in February 2017.
Olshan Frome Wolosky LLP partner Steve Wolosky with assistance from associate Ryan Nebel advised Engaged Capital on its successful proxy contest at Rent-A-Center in June 2017.
Cadwalader, Wickersham & Taft LLP partner Richard Brand, with assistance from Corporate partner Gregory Patti, Antitrust partner Amy Ray and Litigation partner Jason Halper, advised Pershing Square Capital Management in its acquisition of an 8% stake in Automatic Data Processing, Inc. (ADP) and proxy contest seeking to elect three directors to the board of ADP.
Cadwalader, Wickersham & Taft LLP partner Richard Brand, with assistance from corporate partner Joshua Apfelroth, antitrust partner Amy Ray, financial services partner Ray
Shirazi and litigation partners Nathan Bull and Jason Halper, advised Marcato Capital Management in its acquisition of a 9.9% stake in Buffalo Wild Wings Inc. and successful effort to elect three directors to the board of Buffalo Wild Wings in a proxy contest.
Cadwalader, Wickersham & Taft LLP partner Richard Brand, with assistance from corporate partners Braden McCurrach and William Mills, litigation partner Jason Halper and tax partners Linda Swartz and Edward Wei, advised Mantle Ridge in its investment in CSX Corporation and successful effort to install Hunter Harrison as CSX’s CEO, and to add five new directors, including Mantle Ridge CEO Paul Hilal and Harrison, to the board of CSX.
Foley & Lardner partners Phillip Goldberg and Peter Fetzer advised activist PL Capital on its settlement with Banc of California for a board seat.
Foley & Lardner partners Phillip Goldberg, Peter Fetzer and Dean Jeske advised Rockwell Medical in its proxy campaign against an activist investor.
Foley & Lardner partners Phillip Goldberg and Peter Fetzer advised Roaring Blue Lion Capital in its campaign to secure board seats at HomeStreet, Inc.
Akin Gump corporate partner Jeffrey Kochian, with assistance from associate Jason Sison, advised Engaged Capital with respect to its investment and eventual settlement with Hain Celestial in September 2017.
Akin Gump corporate partners Jeffrey Kochian and Gerald Brant, with assistance from associates Brittany Harrison and Jason Sison along with litigation partner David Zensky, counsel Lucy Malcolm and associate Kaitlyn Tongalson advised Corvex Management on its investment in Energen.
Akin Gump corporate partner Gerald Brant and litigation partner Douglas Rappaport, with assistance from senior practice attorney William Wetmore, advised First Pacific Advisors with respect to its investment in and board representation at Nexeo
Top Advisers to Activists Targeting Companies
Lawrence Elbaum is co-leader of V&E’s Shareholder Activism practice based in New York City. In this role, he draws upon over a decade of experience as a securities litigator and business advisor to counsel senior management and boards of public companies with respect to proxy contests and other shareholder activism campaigns, such as merger contests, shareholder proposals, consent solicitations, withhold the vote/vote “no” campaigns and short attacks. Lawrence also advises these clients concerning complex corporate governance matters, strategic investor relations and related litigation and investigations in the U.S. and abroad.
Jeff Floyd is co-leader of the Shareholder Activism practice based in Houston. He is a member of the firm’s Management Committee and a senior partner in the Mergers & Acquisitions practice. Jeff has more than two decades of experience representing clients in proxy contests, corporate control transactions and complex corporate governance matters. In recent years, he has defended a number of public companies in a broad spectrum of activism defense engagements, including Miller Energy Resources, Endeavour International Corporation, Conn’s and Oil States International. He also recently handled the sale of Omega Protein, an activist defense client of V&E.
Patrick Gadson currently serves as the New York chair of V&E’s Shareholder Activism practice. He counsels the boards and management teams of public companies on complex matters with respect to proxy solicitations, corporate governance, mergers and acquisitions and strategic investor relations. Over the past few years, Patrick has played a leading role in many of V&E’s defense assignments, including Matrix Services Company, Ecology & Environment, Sito Mobile and Senomyx, Inc. Throughout his career, he has been a lead advisor in over 75 activism campaigns, including proxy fights, consent solicitations, withhold the vote/vote “no” campaigns and merger contests.
Steve Gill concentrates his Houston-based practice on mergers and acquisitions for public and private companies and private equity firms, including a focus on takeovers and takeover/activism defense. He has led some of V&E’s most significant corporate control transactions in recent years, including Rice Energy’s sale to EQT, which was contested by Jana Partners and MDA’s acquisition of DigitalGlobe, which was contested by Edenbrook Capital. Steve is currently serving as lead counsel to SandRidge Energy in the defense of the proxy contest brought by Carl Icahn. He also represented SandRidge in its response to the unsolicited bid from Midstates Petroleum.
S P O N S O R E D C O N T E N T
V&E’s Shareholder Activism practice, which includes approximately 30 attorneys, leverages the experience of the firm’s top-tier corporate and securities litigation practices, representing companies facing the growing tide of shareholder activism. Over the past several proxy seasons, V&E’s team has defended scores of public companies across a wide array of industries, including energy, manufacturing, EPC, retail/wholesale, hospitality, restaurant, pharmaceutical and real estate/REITs, spanning market capitalizations from the $100M range to $10B.
V&E is currently ranked No. 1 among all law firms for company defense against activist shareholders by FactSet SharkRepellent in 2018 (as of June 13, 2018). In 2016 and 2017, V&E ranked No. 1 among all law firms for company defense by FactSet SharkRepellent, Thomson Reuters and Activism Insight Magazine.
ACTIVISM
The Deal // 15
s the proxy season wraps up, corporate governance experts are increasingly
concerned about companies whose executive chairman is its former chief executive, amid signs that such a
leadership structure can limit the new CEO’s independence and ability to execute strategy.
“It’s very hard to run a company if the person who ran the company is still over you,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “I think [the new CEO] is more like a chief operating officer.”
The former CEO who shifted into the chair position effectively retains leadership of the organization, Elson said.
“It’s a change in title as opposed to a change in authority,” he said in a recent interview with The Deal.
Because it’s too easy to switch the nameplates around, former CEOs should be off the board entirely, said Nell Minow, vice chair of ValueEdge Advisors, a consulting firm that counsels investors on corporate governance.
“It’s very important that the new CEO has a clear path forward and not have to worry about compromising or meddling by the former CEO,” Minow told The Deal.
Despite opposition to this CEO-chair composition by governance experts, there are 79 companies in the S&P 500 that have a chair who was the former CEO, according to a June dataset compiled by BoardEx, a relationship mapping service of The Deal’s parent company TheStreet Inc. That includes Chipotle Mexican Grill Inc. (CMG), Coca-Cola Co. (KO), Hanesbrands Inc. (HBI) and Oracle Corp. (ORCL).
Though tension or power struggles between chief executives and executive chairpersons hardly ever reach public attention, that doesn’t mean companies can’t suffer from muddled decision-making at the highest level.
William George, former CEO of Medtronic plc (MDT)
and a veteran of 10 corporate boards, described a situation in which an executive chairman and former CEO at an unnamed company tried to sabotage the search for a new CEO.
“He proposed to the board that he would develop some much younger candidates who not only were several years away from being viable successors but also, in some cases, seemed unlikely ever to make effective CEOs,” George wrote in a 2013 article for management consultant McKinsey & Co.
At that point, George said he resigned from the board, rather than remain part of what he viewed as a charade. Meanwhile, the former CEO stayed with the company for years and even continued to occupy his CEO office after he stepped down. His eventual successor found that managers routinely took problems and opportunities to the old CEO, undermining the new CEO’s authority, George said.
The roles of CEO and chair of the board of directors are the pinnacle positions in corporate America, and each role carries separate, but critically important responsibilities. The CEO is responsible for day-to-day management decisions and the execution of the company’s long-term strategy while also serving as the direct liaison between management and the board. The chair, meanwhile, controls the board’s agenda, sets committee positions and assignments and oversees management.
Boards have been examining leadership structure and overall board composition more closely in recent years as some investors put forth proposals seeking not only a separation of the CEO and chair roles but specifically an independent chair.
At publicly-traded companies there are a handful of leadership structures; at some organizations, one person will serve as chair and CEO, some companies will have two different people serve as a
ACTIVISM ACTIVISM
The
Nearly 10% of S&P 500 companies have a former CEO serving as chair of the board of directors. That makes it hard for current CEOs to run them.
By // Anders Keitz
14 // The Deal
It’s very important that the new CEO has a clear path forward and not
have to worry about compromising or meddling by the former CEO.
“
The Deal // 1716 // The Deal
“However, once again none of these proposals passed, confirming that shareholders are generally satisfied that a sufficiently empowered lead independent director can offset having a combined CEO and chair role,” the firm said in its report.
Minow said she is not enthusiastic about splitting the role of Chairman and CEO “as a fix for anything unless it is meaningful.”
Influential proxy adviser Glass, Lewis & Co. LLC believes the installation of an independent chair “is almost always a positive step from a corporate governance perspective and promotes the best interests of the shareholders.”
“Further, the presence of an independent chair fosters the creation of a thoughtful and dynamic board, not dominated by the views of senior management,” Glass Lewis said in its 2018 proxy voting guidelines.
Institutional Shareholder Services Inc., on the other hand, looks at the separation of the roles on a case-by-case situation, taking into account various factors, such as the company’s current leadership and governance structure as well as company performance.
Splitting the roles allows a CEO to focus on executing the company’s strategy while a chair sets the agenda, creating clear benefits in terms of time management for both the CEO and the chair, said Brian Stafford, CEO of Diligent Corp., which offers secure communications software for boards.
When Diligent was a public company prior to 2016, 30% to 40% of Stafford’s time as CEO was spent meeting with the board, analysts and investors, he said.
“Separation [of the CEO-chair roles] broadcasts that there is better governance,” said Nili. “But when a board places someone who was the ex-CEO as the chair, it is somewhat of an illusionary process where you don’t have the separation that shareholders are asking the company to do.”
Anders Keitz is a Reporter for The Deal
non-executive chair and a CEO, and others have a dual-role CEO-chairperson and a lead independent director.
Typically, a board will classify a former CEO who shifts into chair role as an executive chair, a director who doesn’t have a current position in the C-Suite but has ties to management. After a couple of years, however, a board may name a former CEO as a non-executive director or an independent director.
Gilead Sciences Inc.’s (GILD) executive director, John Martin, who served as CEO between 2008 and 2016, transitioned in March of this year to a non-executive chair role. The board named Martin as executive chairman on March 10, 2016, when he was succeeded by CEO John Milligan, according to the company’s proxy statement. Director John Cogan, a public policy professor at Stanford University and a senior fellow at the Hoover Institution, serves as the lead independent director at Gilead, creating a unique leadership structure at the biopharmaceutical company.
“As we can tell, the new CEO John Milligan’s independence was expected to grow when John Martin transitioned from the role of executive chairman to a non-executive role as chairman,” said Jian Zhou, professor of accounting, the Shidler College of Business at the University of Hawaii at Mānoa.
Gilead declined to respond to The Deal’s request for comment.
Zhou surmises that Milligan’s independence will expand as Martin shifts to a non-executive role because, generally, a CEO’s power is the smallest and independence is lowest when a company has a CEO and an executive char served by two different people, he said.
“A new CEO is not truly independent of an executive chair, especially if the chair was a former CEO,” Zhou told The Deal via email.
The independence of the new CEO lies on a spectrum of
complete independence and complete dependence on the executive chair. The new CEO’s level of independence depends on a variety of things, Zhou said, such as whether the CEO is hired from the outside or promoted from the inside, whether the executive chair is a temporary position, and how much share ownership the executive chair has.
An internal CEO candidate being groomed for the role is going to have ties to the chair who was the company’s former CEO, said Yaron Nili, an assistant professor of law at the University of Wisconsin Law School. A new CEO from outside an organization “could lead to more independence because they are less bound to the ex-CEO,” Nili said.
‘A new CEO is not truly independent of an executive chair, especially if the chair was a former CEO.’
ACTIVISM ACTIVISM
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John F. Milligan
The biopharmaceutical company has a unique leadership structure: executive director John Martin, who served as CEO between 2008 and 2016, transitioned in March of this year to a non-executive chair role. Martin was named executive chairman on March 10, 2016, when he was succeeded as CEO by John Milligan. John Cogan, a public policy academic, serves as the lead independent director.
John C. Martin
John Francis Cogan
C-Suite SynopsisGILEAD SCIENCES
Employment Timespan: 1990 to Present
CURRENT: President/CEO & Principal Executive Officer March 2016 - Present
PAST (various): Chairman (Executive) 1990 - March 2018
CURRENT: Chairman (Non-Executive) March 2018 - Present
PAST: Independent Director July 2005 - May 2013
CURRENT: Lead Independent Director May 2013 - Present
Source: BoardEx
PAST (various): President/COO1990 - March 2016
28.3 yearsExperience at Gilead Sciences Inc.
Powered by
2.2 yearsCurrent positions
27.6 yearsExperience at Gilead Sciences Inc.
2 monthsCurrent position
12.8 yearsExperience at Gilead Sciences Inc.
5 yearsCurrent position
Sometimes a greater sense of independence is exactly what a new company could be seeking, particularly after dealing with a scandal. Chipotle, for instance, was dealing with food-safety scares and was losing customers when founder and now-former CEO Steven Ells shifted into the executive chair position in March. Current CEO Brian Niccol was hired away from rival Taco Bell, a Yum! Brands Inc. (YUM) fast-food restaurant chain, to deal with that situation.
“In Brian Niccol’s case, he is largely viewed as more independent given that Chipotle was in crisis mode and he was hired for his expertise and experience,” said Zhou.
That said, Elson told The Deal in November when Ells announced he was stepping down as CEO that the now-former CEO is “still effectively in charge.”
“Brian [Niccol] has complete autonomy to create and execute the strategy at Chipotle,” Laurie Schalow, Chipotle’s chief communications officer, said in an email to The Deal.
Niccol, himself, expressed thanks to Ells for his ingenuity and leadership and said the company is fortunate to be able to leverage his creativity and expertise as a culinarian and visionary.
“I thank Steve for the invaluable time he spent bringing me up to speed over the past several weeks,” Niccol said during the first-quarter conference call this year. “I deeply appreciate him fully handing over the reins to me and giving me the autonomy to lead, innovate and create the new strategy that will ensure our growth for the future.”
Then, there are the new CEOs who were promoted internally and serve alongside their predecessors in the boardroom.
“If you look at Hanesbrands and Gilead, the two new CEOs were promoted from inside. These new CEOs were promoted due to their skill, expertise, and also because they both share similar strategy and execution duties in regard to the executive chair (former CEO),” Zhou said.
As boards debate over the ideal leadership structure for a company, it’s clear there is no one-size-fits-all kind of strategy when it comes to board composition, and while shareholder proposals seeking to change a board’s composition are still common, most have been futile thus far.
Shareholders proposals for the board to have an independent chair generally received support from shareholders, somewhere in the range of 25% to 40%, according to a July 2017 report by law firm Sullivan & Cromwell LLP.
When a board places someone who was the ex-CEO
as the chair, it is somewhat of an illusionary process.
“
I
The Deal // 19 ACTIVISM
In 2016, Starboard Value’s Jeff Smith launched a campaign against Yahoo! Inc., (YHOO) helmed at the time by CEO Marissa Mayer. Smith’s fund engaged in a multi-pronged campaign and director-election contest that eventually pushed the embattled internet company to sell itself to Verizon Communications Inc. Yahoo! had been experiencing years of decline, and Smith made the case that Yahoo!’s market value at the time, not including a 15% stake in Alibaba Group Holding Ltd. (BABA), had collapsed and was trading at near zero. By June last year, Mayer was out.
Smith’s campaign to have Mayer
resign, and replaced, is just one example of a trend of activist investors targeting women CEOs for removal. There are many other examples: In the spring of 2016, Barington Capital’s Jim Mitarotonda began pushing publicly for Avon Products Inc. (AVP) CEO Sheri McCoy to resign, at one point arguing that she had overseen a “tremendous” destruction of shareholder value—a valid point with shares dropping from as much as $20 to about $2.80 a share during her five-plus year tenure. It took some time, but with Avon’s share price moving in the wrong direction, by August 2017, she was out, eventually
replaced by Unilever veteran Jan Zijderveld, a victory for the activists at the gate. In a settlement in 2016, however, Barington reached a settlement with the beauty product company to install a women director, Cathy Ross, to its board.
Most situations have not ended well for women C-Suite targets. Case in point: In June, Buffalo Wild Wings (BWLD) CEO Sally Smith announced she was resigning from the wing and beer restaurant company, a move she made the same day that activist Marcato Capital’s Mick McGuire succeeded at installing three of four dissident director candidates
to the company’s board. By November, buyout shop Roark Capital Group acquired the chain in a $2.9 billion deal.
Carl Icahn battled Xerox’s (XRX) Ursula Burns, who stepped down from her chairman and CEO role at the document technology company in 2016-2017 following her agreement to break the business into two.
And activist Glenn Welling won a director battle and obtained two seats on the board of Benchmark Electronics in 2016, (BHE) - soon after that the technology company’s CEO, Gayla Delly, resigned to pursue “other interests.” Other notable campaigns
involve Nelson Peltz’s ultimately successful campaign against DuPont and its CEO, Ellen Kullman and, much more recently, Elliott Management’s ongoing effort to push U.K. Whitbread Plc CEO Alison Brittain into splitting off the company’s Costa Coffee business in an expedited manner.
In some cases, male activists recommend women for CEO roles, as Barington’s Mitarotonda did at Omnova Solutions Inc. (OMN). As a member of the chemical company’s board, Mitarotonda strongly advocated for the installment of Anne Noonan to become CEO of the company in November 2016, after the prior chief executive, Kevin McMullen, stepped down.
In the rare women CEO defeats the activist at her gate category we have General Motors (GM) CEO Mary Barra, who defeated David Einhorn of Greenlight Capital. The insurgent fund manager’s arguably ill-conceived proxy campaign to convince the mega-automobile manufacturer to split its shares into two classes was overwhelmingly defeated.
Beyond anecdotal - and often high-profile - examples of the trend, statistics appear also to support the idea that male activist are targeting female CEOs in large numbers. Vishal Gupta, associate professor in management at the University of Alabama and two other academics,
earlier this year released a study finding that male CEOs were targeted by an activist 6% of the time during the study period, between 1996 and 2013, compared to 9.4% of the time when the CEO was female. The study, which examined 3,026 large U.S. firms, found that activist wolf packs - where two or more insurgent managers are pushing for change –targeted male CEOs 1% and women CEOs 1.6% of the time.
In addition, corporate boards at big targeted companies with female CEOs appear to also face a drop off in women directors after the campaigns are completed. That’s according to relationship mapping service BoardEx, a service of The
Deal parent, TheStreet – and the drop off in some situations went beyond the CEO leaving her board role. BoardEx studied five large female led corporations targeted by activists, taking a look at the number of women directors they had at the time the campaign was launched and how many were there when the dissident effort was completed. Overall, all of them faced a drop off in women directors after the insurgency campaign was completed. BoardEx reported that the boards had 16% fewer female directors, though one board experienced a 30% drop.
If one accepts the idea that activist hedge fund managers are targeting
SEXTIVISM:WHEN MALE ACTIVISTS TARGET WOMEN CEOS
18 // The Deal ACTIVISM
I think women are looked at as the weaker sex and women
will not take on the fight.“
There’s a growing trend of insurgent managers seeking to oust women CEOs and the results haven’t been pretty for female C-Suite executives. We examine what may be causing it.By // Ronald Orol
20 // The Deal
women CEOs, the next question is why? Academics, corporate executives and others offered up a variety of different explanations.
Gupta argues that activists may be targeting women CEOs at underperforming companies because they perceive them to be weak and more likely to settle or give in to an activist’s demands to have companies split up or sell themselves.
“It may be that these women are perceived as weak and that they will not fight. That is what we think is happening. A lot these things may happen behind the scenes. We can only see part of the iceberg,” Gupta said. “”We controlled for firm performance and found that the performance of firms with female CEOs is weak and that is what is pulling in the activist.”
Patriarch Partners founder Lynn Tilton, who has had a storied career on Wall Street and in business, said she also believes that male activists are targeting women CEOs because they see females as weaker and more likely to back down in a fight, and whose boards will give up on them if the media focusing on the issue gets too ugly.
“I think women are looked at as the
weaker sex and women will not take on the fight,” Tilton said. “I don’t necessarily disagree that women won’t take on a fight. I certainly do not see them as the weaker sex, but I think women often do not like the ugliness. I know I don’t like the ugliness.”
She urged female executives not to back down when faced with a fight. “Until they [women] stop backing off, until women have the support when people come after them, either by boards or by media, then we will proliferate that weaker sex impression and we will allow it to continue to happen,” Tilton said.
University of Iowa Professor of Law Gregory Shill agrees that it is a serious possibility that male activist hedge funds are targeting a small subset of Fortune 500 women CEOs because they perceive them to be weak. “Activist hedge funds are run by men, and they often have a kind of macho personality,” Shill said. “We can’t rule that out.”
However, a variety of other factors could be at play as well. Shill points to a 2005 study produced by Michelle Ryan and Alexander Haslam, “The Glass Cliff: Exploring the Dynamics Surrounding the Appointment of
Women to Precarious Leadership Positions,” as an example of a possible factor. The study, he notes, suggests that companies in trouble tend to disproportionately be helmed by women CEOs.
Activist hedge funds frequently target underperforming companies, many of which are in the midst of a turnaround or have other troubles. If it is true that women are more frequently in charge of troubled companies then there is a greater likelihood that an activist will target that business, irregardless of whether the female CEO is perceived as weak.
“If you look only at the gender of the activist investor and the gender of the targeted CEO you are omitting the process that determined who would become the CEO of a given company,” Shill said.
Women, Shill noted, may be more likely to agree to become chief executives of embattled public corporations simply because they have fewer opportunities available to them than their male CEO counterparts. “A well-qualified male CEO candidate for a given company would also be a strong candidate for another company and they are likely to have more opportunities while female CEOs are still tiny minority of
public company CEOs, so they jump at the opportunity,” Shill said.
Critics often point to Mayer’s tenure at the helm of Yahoo! before the embattled internet giant was targeted for M&A by Starboard Value’s Jeff Smith as an example of a situation that might play into the Ryan-Haslam thesis. “Yahoo was experiencing multiple years of decline before Mayer was brought on,” said one academic following the situation.
However, University of Delaware Professor Charles Elson said he strenuously disagrees with any notion that male activist hedge fund managers target women CEOs for removal. “Hedge fund people look for low stock prices,” he said. “Gender doesn’t matter. It’s happenstance that some companies have women CEOs.”
Elson also said he doesn’t agree with the notion that companies that are in trouble are more likely to install women CEOs. “Boards look for the best candidate, the best talent and people don’t apply for these jobs, they are recruited,” he said. “To suggest that you pick a female CEO because you know the company is going down the drain is strange.”
Even so, expect more male activists to target women CEOs and the corporations they oversee in the month and years to come.
Ronald Orol is a Senior Editor of The Deal.
Brian Sozzi, Executive Editor of The
Deal’s sister site, TheStreet,
contributed to this report.
ACTIVISM
‘Activist hedge funds are run by men, and they often have a kind of macho personality.’
‘Gender doesn’t matter. It’s happenstance that some companies have women CEOs.’
MITEL:BOTH A BIDDER
and aTARGET BEThe communications technology provider lost a bidding war against Siris Capital in 2016, and sold to Searchlight Capital Partners this spring.By // Chris Nolter
Mitel Networks Corp. (MITL) has witnessed private equity’s growing interest in communications technology from two perspectives—as a rival bidder and a target.
The Ottawa, Ontario, company lost a bidding war against Siris Capital Group LLC for rival provider Polycom Inc in 2016, and announced a sale to Searchlight Capital Partners LP in April.
Mitel’s experience reflects private equity’s comfort in buying tech companies, which has played out in sectors such as IT and cyber security. Sponsors often see an opportunity to acquire a startup that
PRIVATE EQUITY The Deal // 21
needs to acquire scale, or a more mature company that is struggling to make a transition to the cloud or a new business model.
Mitel pursued Polycom Inc. in 2016 at the suggestion of Paul Singer’s Elliott Asset Management.
The activist firm, which had stakes in both companies, argued that Mitel and its management team were good candidates to roll up communications tech outfits that provide a bundle that includes digital voice, messaging, video conferencing and other services. With the scale and other benefits of a merger, Elliott stated in a press release, Polycom could be part of an “accretive M&A machine.”
Elliott even floated the idea that the companies could go private, pointing to examples of Blue Coat Systems Inc., BMC Software Inc., CompuWare Corp., Tibco Software Inc. and others that arranged sales to private equity.
The companies agreed to a nearly $2 billion cash-and-stock deal. The valuation fell when Mitel’s stock dropped, however, leaving the deal vulnerable.
Siris swooped in with a $2 billion bid. The New York private equity firm had already gotten comfortable with unified communications, having purchased Premiere Global Services, Inc. for $1 billion in 2015.
The second chapter of Mitel’s PE story came in April, when announced a $2 billion sale to Searchlight. Elliott, which tried to push Mitel and Polycom together, holds a nearly 7% stake, according to FactSet.
Mitel Chairman Dr. Terence Matthews co-founded the company in 1972, long before recurring revenue models and the cloud were in vogue.
Management has acknowledged facing headwinds in the transformation, which may be why it is going private. “Searchlight’s bid reflects the struggles Mitel has had in shifting its on-premises communications systems to the cloud, and specifically the quickly growing communications [platform as a service] PaaS market,” 451 Research noted in a post about the transaction.
Mitel wants to grow recurring revenue to half of its sales in 2019 and two-thirds of its sales by 2022. At the same time, the company wants cloud recurring revenues to account for half of the top line by 2022.
Searchlight is familiar with telecommunications. The firm backs Communications Sales & Leasing Inc. (CSAL), a REIT that owns telecom network infrastructure. Searchlight sold fiber optic networker Electric Lightwave LLC to Zayo Group Holdings Inc. (ZAYO) for $1.42 billion in March and a controlling position in Alaska telecom General Communication Inc. to Liberty Interactive Corp. for $1.12 billion in April 2017.
The market for communications tech companies has been active. Siris Capital announced a deal to sell Polycom to headset maker Plantronics Inc. (PLT) for $2 billion in March. Cisco Systems Inc. (CSCO) acquired unified communications provider BroadSoft Inc. for $1.9 billion in February.
If Searchlight can push Mitel towards its revenue goals, the firm will have an easier time convincing a rival to pay up for the company.
Chris Nolter is a Senior Writer for The Deal
22 // The Deal PRIVATE EQUITY
Over the past several years, the growth of Representations & Warranties (R&W) insurance in middle market mergers and acquisitions deals has been staggering. Aon, for example, placed over 400 R&W insurance policies last year in North America, compared to less than 80 only five years ago. The use of these policies has become entrenched across a wide spectrum of deal sizes and industries. While many know of the benefits of R&W insurance – increased proceeds to sellers at closing, more efficient negotiation of contentious deal points, buyer recourse against a credit-worthy insurer, and so on – it’s hard not to feel a key value proposition has been overlooked. The overwhelming majority of R&W policies have been placed on acquisitions of private companies, yet the product offers significant benefits for public company deals, too. Buyer-side R&W Insurance policies serve either to
bolster a limited indemnity given by a seller or replace that indemnity entirely, in which case the buyer’s sole recourse would be to the policy. This latter structure is commonly referred to as a “public-style deal,” because the purchase and sale agreement typically will be analogous to a public company deal. James C. Freund’s seminal M&A book Anatomy of a Merger outlines
the difference between post-closing protection in private M&A deals and public M&A deals:
When Anatomy of a Merger was written in 1975, this was very much the case. Shareholders were then, as they are now, loath to stand behind the representations and warranties of a company they owned in only the most passive sense. However, in the same way private company acquirers routinely capitalize on R&W insurance to receive protections they had historically sought from a seller, public company acquirers can now avail themselves of these same protections.
Aon has observed financial sponsor clients using this approach more and more in the context of “take-private” transactions. But despite the obvious logic of this approach, too many strategic and financial buyers still
T H O U G H T L E A D E R S H I P
Generally speaking, there is no indemnification section in acquisition agreements between two public companies, inasmuch as the agreement usually states that the respective representations and warranties terminate upon the closing.
Over the past several years, the growth of Representations & Warranties insurance in middle market M&A deals has been staggering.
Are public deals next?
By Eric Ziff
“ Searchlight’s bid reflects the struggles Mitel has
had in shifting its on-premises communications
systems to the cloud
Returns generated by KKR, Apax Partners and others from recently announced or completed exits.
By // Armie Margaret Lee
represented in Germany by Düsseldorf affiliate Lindsay Goldberg Vogel GmbH, said the deal follows three years of investment and restructuring at VDM following its acquisition from ThyssenKrupp AG for an undisclosed price in 2015. A Lindsay Goldberg spokesman declined to comment on the private equity firm’s return on its investment, but the firm is expected to make about 3 times its money on VDM Group, including the proceeds from a recapitalization. —Jonathan Braude
Nordic Capital on March 14 agreed to acquire control of Swedish online payments provider Trustly Group AB in a deal valuing the company at €700 million ($865 million). Trustly’s management and founders as well as investment company Alfvén & Didrikson will remain significant shareholders. However, Bridgepoint Development Capital Fund II, the fintech company’s largest shareholder, will sell its entire equity holding. No financial information was disclosed, although people familiar with the situation said BDC, the growth investment arm of U.K. private equity house Bridgepoint Capital Ltd., will make 8.8 times its
money for an internal rate of return of 103%. It invested €23 million for a minority stake in the business in March 2015. —J.B.
Palomon Capital Partners LP said March 13 it has agreed to sell German ophthalmology business OberScharrer Gruppe GmbH to Nordic Capital. Neither side was prepared to discuss financial terms of the deal or give any kind of information on OberScharrer Group’s financial performance. However, Palamon did say that the sale will generate investment returns of 3.6 times its money. Palomon acquired a majority stake in OberScharrer from its two founders in 2011. —J.B.
After an ownership of about 3-1/2 years, Apax Partners Inc. has sold a majority stake in medical cost containment and disability management company Genex Services LLC to its previous owner, Stone Point Capital LLC. Apax generated a 3 times multiple of invested capital from the transaction, according to a source familiar with the situation. The deal, first announced on Feb. 9, was completed a month later. Stone Point acquired
Genex in 2007 and sold it to Apax in June 2014. In a separate deal announced in June 2014, Genex sold its specialty network businesses to One Call Care Management. —A.M.L.
KKR & Co. LP (KKR) was purring contentedly on Jan. 30 after receiving the final £108 million ($152.8 million) payout from its 2010 investment in U.K. companion animal accessories supplier Pets at Home Group plc. KKR sold just over 62 million shares at 174 pence per share on Jan. 25, in a placing of its remaining 12.4% stake in the company managed by Bank of America Merrill Lynch and Numis Securities Ltd. It received the cash on Jan. 29. In the previous placing on Oct. 10, KKR sold 61 million shares and garnered £119 million. KKR, which made a return of nearly twice its money investment on Pets at Home, first acquired Pets at Home from London mid-market firm Bridgepoint Capital Ltd. for £955 million, after a dual track process. In March 2014, KKR brought Pets at Home to IPO at 245 pence per share. —J.B.
Armie Margaret Lee is a Reporter for The Deal
Palladium Equity Partners LLC has exited its seven-year investment in Jordan Health
Services through a sale of the home care company to Kelso & Co. and Blue Wolf Capital Partners LLC in a deal announced in April and completed in May. Terms of the transaction were not disclosed but a source familiar with the situation said the transaction had an enterprise value of about $700 million, including about $270 million of debt. New York-based Palladium, which had a majority stake in Jordan, generated a return of more than 4.5 times its investment, taking account sale proceeds and a dividend it had received, the source said. In tandem with the deal, Jordan will be combined with Great Lakes Caring Home Health and Hospice and National Home Health Care Corp., both of which are backed by Blue Wolf.—A.M.L.
Goldberg Lindsay & Co. LLC is selling its German nickel and nickel alloys producer VDM Metals Holding GmbH to Luxembourg steel-maker Aperam SA for an enterprise value of €596 million ($737.9 million), according to an April 11 announcement. The New York private equity firm, which does business as Lindsay Goldberg and is
The Deal // 25 PRIVATE EQUITY
OFF THE EXIT RAMP
subscribe to the traditional paradigm that no protection in public deals is available. Contrary to the a popular view that public deals are less risky than their private counterparts, one salient example shows that public deals can still pose similar threats to acquirers.
In October 2011, Hewlett-Packard (HP) acquired Autonomy for $11.7 billion. After the transaction closed, HP discovered accounting irregularities and believed Autonomy had defrauded them, resulting in a write-down of 85% of the acquisition value, a loss of approximately $8.8 billion. Following the announcement of the write-down, HP was subjected to numerous shareholder derivative suits, some of which alleged that HP had been negligent in its due diligence.
This example, though extreme, illustrates that an acquisition is not inherently de-risked because the target company is publicly traded, large in size and subjected to seemingly robust audits. HP suffered tremendous setbacks, both in terms of the diminution in value of their investment and payouts on derivative suits, not to mention the devaluation of HP’s stock and reputation. These are exactly the types of situations that indemnities have historically been used to remedy, and why buyers have purchased R&W insurance on private company transactions.
This same approach can and should be used to provide cover on public company acquisitions. And while most transactions will turn out not to have the challenges that Autonomy posed for HP, R&W insurance can (and does) respond to items far less material that can still represent meaningful financial damages for a buyer. R&W Insurance is there to protect against inadequate
disclosure and to safeguard buyers from items that are not spotted in a robust diligence process. The issues discovered by HP at Autonomy are no different than those that have been the basis for many claims under R&W policies.
It was not long ago that members of Aon’s Transaction Liability team would walk into rooms full of lawyers and other deal professionals and be met with little to no interest in R&W insurance. Those days have long since passed, and the deal efficiencies that have been realized through the use of R&W insurance have forever changed the way private M&A deals are done.
It is only a matter of time before such realizations permeate the public M&A market. Shareholders of public acquirers should expect their fiduciaries to procure reasonable protection against a deal going awry, if such coverage is obtainable.
A few years ago, a private equity attorney remarked that the failure to bring up the availability of this insurance to private M&A clients was borderline malpractice. While we have not reached that point on public M&A transactions, it seems like a conversation worth having. Nobody goes into a transaction expecting to buy the next Autonomy. But nobody can predict the future, either; that’s why people buy insurance.
T H O U G H T L E A D E R S H I P
Eric Ziff is a managing director in Aon’s Transaction Solutions Group
The Deal // 2726 // The Deal
With commitments getting larger, and deals more difficult to come by, firms are betting on more than one management team in the same basin.
By // Tom Terrarosa
When the founders of Double Eagle Energy Permian LLC were tapped by the same private equity behemoth that funded their second company with a rarefied $1 billion commitment to launch their third company, Double Eagle Energy Holdings III LLC, it sent a buzz through Houston just as thousands of oil and gas investors and executives gathered in February for the annual NAPE Conference.
In all of 2017, private equity firms committed $12.4 billion to 73 new upstream U.S. oil and gas companies, or less than $170 million each on average, according to oil and gas research provider 1Derrick. Meaning in the second month of 2018, Apollo Global Management LLC (APO) committed to one company a sum equivalent to 8% of what 73 different companies were promised last year.
Based on reactions observed from smaller private equity-backed management teams at the conference, it would seem Double Eagle had made it to the big show.
With Apollo’s help, John Sellers and Cody Campbell, the co-founders and co-CEOs of Double Eagle III and its predecessor companies, had collected 73,000 net acres in the Midland Basin, a subformation of the prolific Permian Basin, and sold the acreage to Parsley Energy Inc. (PE) for $2.8 billion after rumors of a $3 billion initial public offering had previously circulated. Now they had gotten Apollo to buy back in so they could try to recreate the magic.
The company in early June announced a deal that likely marks one of the first major stages of that mission. Double Eagle III will merge with fellow PE-backed operator FourPoint Energy LLC, adding acreage the companies already own to acreage recently acquired from undisclosed sellers to form a new joint venture called DoublePoint Energy LLC. FourPoint received a $450 million commitment from Quantum Energy Partners LP in December.
OIL RESERVESCoupling Horses in the Race for DoublePoint Energy will be a pure-play Midland Basin
company boasting more than 70,000 acres in west Texas’ Midland, Glasscock, Martin, Howard, Upton and Reagan counties.
Terms of the recent asset sales were undisclosed, but two industry sources familiar with matter told The Deal the transaction between Double Eagle III and FourPoint included acreage purchases from JM Cox Resources LP, a family-owned oil business run by Kelly Cox, and affiliates. One of these sources placed a value on the overall transaction around $3 billion.
This time around it could be harder to flip that acreage, however, given the uptick in valuations in the Permian and a persisting sentiment among industry watchers that most of the core Permian acreage is just about consolidated among publicly traded operators.
Still, quite a few observers were willing to say Double Eagle might have as good a chance as any to make things happen again.
The reason is that Sellers and Campbell have already proven twice over they can go out and find value where others could not or would not. They’ve proven their worth beyond the hype, which is a big deal since reputation plays such a critical role in securing funds for buying land and drilling.
But it’s the hype around Sellers’ and Campbell’s third go-around and these types of big ticket transactions that gave the atmosphere at NAPE in 2018 such a different feel from the past three years, as those in search of oil deals came together with renewed excitement for the business.
One of those excited oil execs at the conference was Aaron Davis, the co-founder and CEO of Fortuna Resources LLC. Davis’ company is lucky enough to be the recipient of a second round of funding from the same private equity firm, having bought properties with funds provided by Och-Ziff Capital Management Group LLC.
Less then a year later, Fortuna sold much of that land to PDC Energy Inc. (PDCE) in January 2017 for $118 million. The company then sold the rest of that property to an undisclosed buyer for an undisclosed sum in September 2017, but before even closing that deal, Davis launched his second company, TNM Resources LLC, with a second equity commitment from Och-Ziff that topped the first $75 million promised to the oil and gas explorer in 2016.
In an interview with The Deal, Davis could not disclose the
total return on invested capital for his first company, but said it was within the 2.5 times to 3.5 times typically hoped for by private equity shops in the middle market.
Fortuna, while in search of much smaller fish than Double Eagle, is a testament to the challenges that face entrepreneurs seeking to swim in the oil pond, as well as the rapid changes that can come about when you’ve experienced some success.
After you secure a solid return for your investors, one might think at least some of pressure comes off when heading into conversations about fund raising. Not so, said Davis.
“When it’s your first time, you’re an unknown commodity,” he told The Deal in an early May interview. “You’re negotiating position is different, you may be willing to accept terms with less push back.
“The second time around you would think it would be an easier process, but it actually may be a little more difficult than the first time.”
Because you’re riding the high that comes after making a profitable exit to your first business. After Fortuna made its first deal with PDC Energy, Davis and his team’s confidence was through the roof, and the former Occidental Petroleum Corp. (OXY) employee said it went even higher when four or five other private equity firms began blowing up his phone lines looking to sit down for lunch.
“It was really eye-opening,” he said. “I thought the decisions would be pretty easy after that, but in some ways, I would say it was more stressful. Because you become friends with these guys, you don’t want to push too hard. But you also don’t want to leave anything on the table.”
Davis will be the first to tell you comparing his firm to Double Eagle is nowhere near apples-to-apples, but he also thinks more and more companies will gain access to the level of funds Double Eagle has in the coming years out of necessity.
“I think private equity in the industry is starting to bifurcate
‘People are realizing if you want to build the same
company you would have built even two years ago, it’s going to take more money.’
PRIVATE EQUITY PRIVATE EQUITY
The Deal // 2928 // The Deal
a little bit,” he explained. “People are realizing if you want to build the same company you would have built even two years ago, it’s going to take more money. The result is a lot more companies getting bigger commitments and a lot more companies getting smaller commitments.”
The changing tides presents some challenges, though: If Delaware Basin acreage is trading at $20,000 to $25,000 per acre, those teams raking in bigger commitments are hoping to secure a deal between $35,000 and $45,000 an acre in a few years. Davis said those deals may still happen, but in the meantime, companies are going to be drilling a lot more wells than private equity would have traditionally drilled.
For its part, Double Eagle said earlier this month it already has one rig running, and as field and drilling operations are transitioned to DoublePoint Energy, the new JV plans to ramp up drilling and development activity over its footprint, which largely has been undeveloped.
Still, private equity’s willingness to up the ante is a good sign for the industry. Up until now, the opportunity for an oil and gas driller to secure that level of private equity capital may have been akin to hitting the lottery: There are far more management teams that are promised far less money and never see all of it, and fewer still that receive a second, larger commitment from the same firm.
Some teams receive a commitment and never find a deal. Others find a deal, but then can’t flip the properties,
often leading the financial sponsor or sponsors to seek a recapitalization or a deal to roll up the holdings of multiple teams in one basin into one company, which may later be sold or go public.
In fact, Apollo formed Double Eagle Permian by combining Double Eagle Lone Star LLC with Veritas Energy LLC, a portfolio company of another private equity firm, Post Oak Energy Capital LP. Double Eagle Lone Star was originally a unit of Apollo’s Double Eagle Energy Holdings II LLC, which it formed in 2014 after it sold its predecessor’s assets in Oklahoma’s Anadarko and Ardmore Basins to American Energy Partners LP, then backed by Energy & Minerals Group. Post Oak invested in Veritas in 2015.
Apollo first backed the Double Eagle team in early 2013 without disclosing terms, and Double Eagle Permian also received $450 million of equity and delayed draw unsecured debt capital from Magnetar Capital LLC just four months before the deal with Parsley. Magnetar seemingly secured a stake in Double Eagle III through that sale, with the company calling the firm a current backer in its June 5 release.
But the one-in-a-million chance of hitting that big time jackpot up comes only after you’ve proven you’re the best in the business at finding deals, and it may be all the hope and incentive an entrepreneur needs to get into the business of pumping oil.
To be sure, there are plenty of such prospectors. According
to the Texas Railroad Commission, beyond the 500 corporations with active drilling permits in the state of Texas, there are more than 500 limited limited liability companies, some 50 sole proprietorships, plus a handful of private partnerships all actively drilling or seeking to drill wells today.
1Derrick tracks 375 private equity-backed oil and gas producers, 150 of which are focused on the Permian, it reported in January.
It may be this abundance of supply of talent that leads firms like Apollo to target this strategy of backing management teams with independent experience so often over other strategies. Various private equity firms have tried different approaches.
Denham Capital Management LP, Kimmeridge Energy Management Co. and EnerVest Ltd. are among a swath of PE shops that charge their own portfolio managers who have direct industry experience to go out and find assets worth owning and developing directly by the firm.
In 2016, that strategy paid off well for Kimmeridge, which sold two of its asset holding companies, Arris Petroleum Corp. and 299 Resources LLC, to PDC Energy Inc. (PDCE) for $1.5 billion.
But the resounding majority of private equity firms who play in the oil patch do so at an arms length, investing alongside veteran management teams for a stake in the business. This strategy has proven so successful, and
veteran management teams have become such a bountiful resource, that sponsors can now afford to take a buckshot approach to exploring various U.S. resource plays.
In other words, Apollo and other energy-focused sponsors, such as EnCap Investments LP, Riverstone Holdings LLC and Quantum Energy, can provide capital to multiple management teams within the same basin, which sometimes develop property within the very same county.
According to several investment banking sources, many times two or more companies backed by the same private equity firm have even found themselves participating in the final stages of the same competitive auction process.
This is not some random phenomenon, however; this is portfolio theory at the fund level, one of these sources said. Fund managers are coupling horses in the race for oil and gas reserves.
As private equity firms raise record amounts of money, it has to go somewhere. Apollo last year raised $24.6 billion in the largest private equity fund ever. This year, Blackstone Group LP (BX) is reportedly targeting more than $30 billion to top that for an unparalleled energy and infrastructure fund.
So sponsors spread this record amount of cash around in a way that they have exposure to as many opportunities as possible.
Another of Apollo’s upstream energy companies, Chisholm Oil & Gas LLC, is led by the management team of a company the firm previously backed, Zenergy Inc. As The Deal has previously reported, with Apollo’s backing, the Zenergy team picked up prized assets in Oklahoma from EnCap Investments-backed Staghorn Petroleum LLC for around $620 million in January.
EnCap has some 50 upstream oil and gas companies listed as current investments on its website. Of those more than 10 list the Permian Basin of west Texas as among their primary regions of exploration.
Analysts hope the next wave of M&A in the Permian is one of corporate consolidation, but these latest moves from EnCap, Apollo and others indicate private equity firms are hoping they can squeeze one last selling spree out of the hypersaturated Permian.
Tom Terrarosa is a Reporter for The Deal
“The second time around you would think it would be an easier process, but it actually may be a little more difficult than the first time.
PRIVATE EQUITY PRIVATE EQUITY
The Deal // 31S P O N S O R E D C O N T E N T
THE INTRALINKS DEAL FLOW PREDICTOR IS A UNIQUE AND HIGHLY ACCURATE SIX-MONTH FORECAST OF GLOBAL M&A ACTIVITY.
The Intralinks Deal Flow Predictor forecasts the number of future M&A announcements by tracking early-stage M&A activity–M&A transactions across the world that are in preparation or have begun their due diligence stage. These early-stage deals are, on average, six months away from their public announcement. As the world’s #1 provider of virtual data rooms for M&A deals, Intralinks’ involvement in the early stages of a significant percentage of the world’s M&A transactions gives us unique insight into the expected volume of future announced M&A deals.
The Deal sat down with Philip Whitchelo, Intralinks’ Vice President of Strategic Business & Corporate Development, to discuss the Intralinks Deal Flow Predictor and how dealmakers can make use of it:
The Deal: What are your predictions fOr M&A activity in 2018 and how does North America compare to the rest of the world?
Philip Whitchelo, Intralinks: Global M&A activity is hitting new highs in 2018. Based on the levels of early-stage M&A activity which Intralinks has seen in the past six months, our predictive model is forecasting that, over the next two quarters, year-on-year (YOY) growth in the worldwide number of announced deals will accelerate to 8%. We are predicting that over 41,000 M&A deals will be announced in the first nine months of 2018, a new record. We are expecting the strongest growth in worldwide M&A deal announcements over the next six months to come from the Industrials, TMT (Technology, Media and Telecoms) and Real Estate sectors. Growth in M&A activity is not evenly spread, however, with the Asia-
Pacific (APAC) region dominating our growth forecast: 73% of our forecast increase in announced deal count over the next two quarters is expected to come from APAC. In North America, we are forecasting announced deal count growth of just 2% YOY over the next six months, due mainly to an exceptionally strong prior year comparison period. The North American M&A market exploded after the election of Donald Trump in Q4 2016, with double-digit increases in announced deal count for four consecutive quarters. That had to slow down eventually.
Is there anything new about the Intralinks Deal Flow Predictor for 2018?
Yes! A few weeks ago we launched a new interactive website where your readers can explore our Intralinks Deal Flow Predictor data in more detail and drill down into the forecast numbers based on which sectors and regions they are most interested in. This can be found at: https://www.intralinks.com/resources/publications/deal-flow-predictor-2018q3
How accurate are your predictions and have you had any external validation for your forecasting model?
Our predictions are extremely accurate, because they are based on a proprietary statistical model sampling a very large volume of actual deals in preparation and due diligence, not just an extrapolation of past deal trends into the future. Our data, the model and its predictive accuracy have been tested and verified by two independent firms of econometric statisticians. They concluded that our prediction model has a very high level of statistical significance, with a more than 99.9 percent probability that the Intralinks Deal Flow Predictor is a statistically significant six-month predictor of future announced deal volumes. The historical six-month forecast accuracy of the Intralinks Deal Flow Predictor is ±2%. More details about our forecast model and its statistical validity can be found here.
Who is the target audience for the Intralinks Deal Flow Predictor and how can they use it?
The target audience is anybody involved in M&A. Intralinks serves the global dealmaking, capital markets and banking communities. Intralinks’ customers comprise dealmaking professionals working in investment banks, professional services firms, law firms, corporate development, private equity and family offices. Over 185,000 M&A professionals worldwide receive the Intralinks Deal Flow Predictor every quarter. They value it for its unique insights and because they want to know the future of global M&A six months ahead of everybody else.
Apart from your predictions for global M&A activity, is there anything else in the Intralinks Deal Flow Predictor?
Absolutely. Every edition of the Intralinks Deal Flow Predictor has several in-depth features which cover topical issues of interest to M&A dealmakers. For example, the current edition has a spotlight feature on the upsurge in private equity dealmaking, an interview with a data privacy expert discussing the European Union’s new data privacy regulation, the GDPR, and how this will affect M&A dealmaking, and regional data on due diligence metrics.
How long do you think the current M&A bull market can continue?
Current levels of M&A activity are being underpinned by the strongest global economic growth since 2011, low inflation, low interest rates, ready availability of acquisition financing and record amounts of private equity capital competing with deal-hungry corporate acquirers looking to juice up their top-line growth. Conditions are near perfect. Despite such positive underpinnings, we believe that the near-term risks of an M&A market correction are increasing: the M&A market is in the fifth year of its current up-cycle; interest rates and inflation are starting to tick higher; valuations are at record highs and 23% above their 25-year average; global equity markets are down 7% since their January 2018 peak; there is a growing backlash against cross-border (especially Chinese and Asian) acquirers in countries such as the US, Germany, the UK and Australia; and global trade is under threat from economic nationalism, protectionism and the unwinding of cross-border
economic integration (e.g., US, EU and China trade tariff barriers, Brexit and the NAFTA renegotiation). Nothing lasts forever and we would not be surprised if the M&A market began to soften in 2019. Whatever happens, with our six-month look-ahead into the future, you’ll read about it first in the Intralinks Deal Flow Predictor.
A B O U T I N T R A L I N K S
Intralinks is a leading financial technology provider for the global banking, deal making and capital markets communities. As pioneers of the virtual data room, Intralinks enables and secures the flow of information facilitating strategic initiatives such as mergers and acquisitions, capital raising and investor reporting. In its 21-year history Intralinks has earned the trust and business of more than 99 percent of the Fortune 1000 and has executed over US$34.7 trillion worth of financial transactions on its platform. For more information, visit www.intralinks.com.
“Intralinks” and the Intralinks stylized logo are the registered trademarks of Intralinks, Inc. © 2018 Intralinks, Inc.
T H O U G H T L E A D E R S H I P
32 // The Deal
By // Tom Terrarosa
DISCIPLINE EQUALS BUYER’S DELIGHT
Strategics are focused on one thing in 2018: cash flow. Meaning private
equity should for the most part be the only buyers on the street.
Despite U.S. tax reform that has freed up swaths of cash for corporations across America, relaxing regulations that have opened up federal waters and lands for drilling, and a greater than 50% increase in oil prices in the past year, the name of the game for strategic U.S. oil and gas producers in 2018 has so far been, and will continue to be, capital discipline.
“Expect little change to messaging or 2018 plans as operators continue to view the rally in crude as a boon to cash flow rather than an opportunity to accelerate growth,” Tudor, Pickering, Holt & Co. analysts said in a late-April research note previewing first quarter earnings. The messaging from many public oil producers was relatively in line with that prediction.
On its first-quarter earnings call, Anadarko Petroleum Corp. (APC) reiterated its focus on capital discipline and noted it has no plans to increase operated activity this year despite the increase in oil prices. Noble Energy Inc. (NBL) said management remains focused on capital discipline and returning cash to shareholders. EOG Resources Inc. (EOG) has set a goal to reduce debt by $3 billion over the next four years while increasing the dividend growth rate above its historical 19% compound annual growth rate. The list goes on.
According to several investment bankers, M&A attorneys and oil company executives interviewed by The Deal in recent weeks, though, that mantra by strategics is expected to lead to a big year for private equity dealmaking in the oil patch.
“The only buyers on the street are private equity,” TNM Resources LLC CEO Aaron Davis told The Deal in early May. “Public companies are being forced to stay within cash flow. They’re really not going to buy anything unless it’s extremely compelling.”
Meanwhile more than $100 billion has been committed toward buying assets in the natural resource space, according to Tudor Pickering analysts. And of the 73 companies that received $12.4 billion in equity commitments from sponsors in 2017, only 23 had made significant acquisitions by the end of January, according to oil and gas research firm 1Derrick.
Potential upstream deals, including those that will attract public players such as BHP Billiton plc’s massive U.S. shale portfolio, totaled about $25 billion to 30 billion in the first few months of the year, according to TPH.
“ Public companiesare being forced to stay
within cash flow.
But with operators such as Chesapeake Energy Corp. (CHK), Continental Resources Inc. (CLR), Devon Energy Corp. (DVN), Oasis Petroleum Corp. (OAS), Pioneer Natural Resources Co. (PXD), Range Resources Corp. (RRC), QEP Resources Corp. (QEP), Southwestern Energy Corp. (SWN) and Whiting Petroleum Corp. (WLL) all expected to pare assets this year, that $100 billion could definitely be put to work soon, the research firm and investment bank implied in a recent research note.
Indeed, Pioneer alone has nearly $1 billion worth of assets on the block, Williams Capital Group LP analyst Gabriele Sorbara noted in early May. That includes a 60,000-net-acre position in the Eagle Ford potentially worth $650 million, according to the analyst, and assets in south Texas and Texas’ western panhandle that could together bring in another $250 million. Those deals, with the possible exception of the Eagle Ford where Pioneer has midstream hoops to jump through, should be announced in the second half of the year.
Concho Resources Inc. (CXO) also will likely entertain the idea of more divestitures later this year after it closes an $8 billion stock deal for smaller competitor RSP Permian Inc. (RSPP) and reviews its newly expanded portfolio. Parsley Energy and Marathon Oil are also among a list of companies bankers see shopping noncore assets, possibly even in the Permian Basin.
And with oil approaching $70 per barrel, plays outside of the Permian, such as the Bakken Shale area in North Dakota, may begin to see heightened deal activity as well. Already this year SM Energy Co. (SM) announced a $292 million sale of its Divide County assets in the Bakken, and QEP has put its assets in the Bakken and greater Williston Basin—the reserve basin in which the
Bakken Shale is located—on the block.
Perhaps most indicative of a solid year for private equity in the oil patch, however, is the renewed interest from strategics in forming alternative partnerships with sponsors to fund drilling. Activist investors explicitly demanded Jones Energy Inc. (JONE) explore drilling joint venture, or drillco, deals to fund its program in Oklahoma.
Also witness Diamondback Energy Inc.’s (FANG) recent decision to search for potential partners for a Delaware Basin-focused drillco. The company hired UBS Securities LLC and is seeking investors to provide up to $600 million of capital to develop 12,800 net acres in Pecos County, Texas.
In the words of TNM Resources’ Davis, whose company received a second equity commitment from Och-Ziff Capital Management Group LLC last year, private equity-backed oil explorers’ job “is to be faster and nimbler than the public guys. We want to identify opportunities, get in there, prove it up to a point where [strategics] want to buy it, and then let the larger companies come in and manufacture mode that asset.”
To be sure, if the next few quarters of earnings turn out any better than the first quarter of 2018 and capital markets open back up, corporate buyers may turn back on the M&A machines.
But for the moment the majority of those strategics are dedicated to “manufacture moding” the assets they paid big bucks for between 2014 and 2017, giving private equity plenty of room to run.
Tom Terrarosa is a Reporter for The Deal
PRIVATE EQUITY PRIVATE EQUITY The Deal // 33
The Deal // 3534 // The Deal
MELROSE’S MATCHMAKER
Melrose Industries plc’s purchase of GKN plc capped one of the most impassioned hostile takeover battles of the last decade in the U.K.
Even though target companies are barred from taking so-called frustrating actions under the City Code on Takeovers and Mergers, and protectionist arguments against a deal have almost never worked in the U.K., Melrose had to contend with GKN’s significant pension liabilities, the possibility of regulatory intervention because of GKN’s aerospace business and a competing offer from a white knight. But another factor tipped the fight to Melrose: the involvement of Elliott Management Corp. and other short-term investors.
Melrose, a publicly traded London turnaround specialist, picked a vulnerable target. Longtime GKN CEO Nigel Stein announced on Sept. 14 that he would step down at the end of the year in favor of Kevin Cummings, the CEO of the aerospace division. But on Nov. 16, GKN announced that Cummings would not take over; instead, non-executive director Anne Stevens, who joined the GKN board in 2016,
How Elliott Management helped Melrose overcome pensions and protectionism to buy GKN.
By // David Marcus
would be the interim CEO until a successor was named.
The bidder pounced on Jan. 12 with an offer of 1.49 shares and 81 pence in cash per GKN share for a nominal value of 405 pence per share or £6.95 billion for the entire company. The bid attracted unusual regulatory scrutiny because of GKN’s defense business. Not only was the Ministry of Defense a customer; the target had been involved in manufacturing Spitfire fighter planes in World War II, which helped stir some Members of Parliament to oppose the deal. More practically, Tom Williams, the COO of Airbus SE’s commercial aircraft division, said that a takeover of GKN might make it impossible for Airbus to rely on GKN as a contractor.
Even though Defense Secretary Gavin Williamson expressed concerns about Melrose’s bid, Business Secretary Greg Clarke didn’t want to challenge it, and Melrose mooted the issue by making a legally binding commitment not to sell GKN Aerospace for five years and maintain British headquarters and a London listing for the same amount of time. And GKN may not have wanted to press the issue too
strongly lest it end up preventing another offer from emerging.
The same hesitancy may have hindered the effectiveness of the pension issue as a defense. GKN had a major pension deficit, and the pension fund’s trustees opposed a deal that might have put the pensions at even greater risk. But on March 19 Melrose promised to inject £1 billion into the fund, up from its previous commitment of £150 million, which appeased the trustees.
The contribution was a response to the most significant threat to Melrose’s bid, which came from Dana Corp. of Toledo, Ohio. On March 9 the industrial company agreed to combine with GKN’s automotive unit in a deal that would have created Dana plc, a U.K. corporation to be traded on the New York Stock Exchange and headquartered in Maumee, a suburb of Toledo. Dana would have issued 133 million shares to GKN shareholders, paid GKN $1.6 billion in cash and assumed $1 billion in pension liabilities, consideration worth a total of $6.1 billion. Dana shareholders would have owned 52.75% of the combined company, GKN shareholders 47.25%. The Dana deal would have left GKN’s aerospace division as a public company in the hands of its current management.
Melrose raised the stock portion of its bid to 1.69 shares from 1.49 and lowered its acceptance threshold from 90% of GKN shares to a bare majority, an extraordinary move given that Melrose risked being unable to buy out the rest of GKN. The risk turned out to be worth taking. On March 29, Melrose said it got tenders from 52.43% of GKN shares. By then, Elliott Management controlled a 3.8% voting stake in GKN, up from about 1.8% on March 2 and 2.8% on March 19, according to regulatory filings. If the increase in Elliott’s stake is any indication, other short-term investors may have raised their positions in GKN after Melrose reduced its offer threshold, which tipped the vote to Melrose.
After Melrose prevailed, it received tenders for a total of about 85% of GKN stock and started delisting the target’s stock on April 19. Clarke said on April 24 that the U.K. wouldn’t challenge the deal on national security grounds. But the narrow margin of Melrose’s victory may push future U.K. targets to be more aggressive in making protectionist arguments, especially if the bidder is a foreign company.
David Marcus is a Senior Writer for The Deal
Not only was the Ministry of Defense a customer; the target had been involved in manufacturing Spitfire fighter planes in World War II,
which helped stir some members of Parliament to oppose the deal.
M&A The Deal // 35
The Deal // 37 M&A
A regulatory squeeze has led to a dip in Chinese acquisitions in the key
markets of the U.S. and Europe, but in Asia
and at home it is a different story.
By // Paul Whitfield
China’s SyndromeM&A
COULD THE DRAGON BE RUNNING OUT OF PUFF?
Overseas mergers and acquisitions by Chinese companies over the first quarter of 2018 fell to $13.7 billion, their lowest mark since 2013, according to Dealogic Ltd., a company that tracks such things. Add that to a precipitous dip in 2017, when Chinese non-financial outbound investment fell 30% to $120 billion, and it appears something of a trend.
The most evident cause of the dip is a squeeze on China’s access to its two major deal-destinations. The Trump administration’s America First policy has coalesced into a potential trade war and increased scrutiny of Chinese bids, notably in the tech sector. Meanwhile, the European Union has also been rumbling with talk of a harder-line on Chinese bidders. Germany France and Italy have teamed to draft new laws to restrict Chinese acquisitions in strategic sectors.
Acquisitions have been blocked. Ant Financial Services Group Ltd.’s $1.2 billion merger with MoneyGram International Inc. (MGI) was shot down in January by the Committee on Foreign Investment in the United States (Cfius) for fear that Beijing could use MoneyGram’s records to track U.S. citizens. In September, President Donald Trump directly intervened to block China-backed PE firm Canyon Bridge Partners LLC’s $1.3 billion acquisition of U.S. chipmaker Lattice Semiconductor Corp.
Germany, in January, put on hold a Chinese acquisition of aircraft parts maker Cotesa GmbH, though reports at the end of April suggested it might yet be approved.
It is safe to assume that other transactions have been put on hold and dropped as Chinese companies balk at launching expensive takeovers into a newly hostile landscape.
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The Deal // 3938 // The Deal
“The U.S. is acting like a bully,” China’s foreign ministry spokeswoman Hua Chunying told reporters in late April in response to reports that the U.S. Treasury Department was considering emergency measures to curb Chinese investment in technology companies. “They are citing the reason of national security, but their motivation is protectionism.”
NOT EVERYONE IS CONVINCED THAT CHINA IS BEING SINGLED OUT.
“We have also seen Cifus rejecting deals initiated by companies from other countries, such as the acquisition of Cree Inc.’s (CREE) subsidiary Wolfspree, by a German company (Infineon Technologies AG),” said Flora Zhu, Fitch Ratings’ Beijing-based associate director corporates. “The U.S. government is preventing its advanced technology from being acquired by other countries, and it doesn’t matter if the acquirer is from China or another country.”
In Europe there remains an expectation that the dip in Chinese acquisitions is a mere hiccup. “We expect Chinese investment to increase, in particular in countries such as Germany, France or the U.K.,” said Linklaters LLP corporate partner Wolfgang Sturm. “These investments increasingly trigger detailed reviews ... however, with good preparation such deals are doable.”
That will be cold comfort for Chinese buyers that have pulled or missed out on deals over the past year as the goal posts for regulatory clearance have shifted. Yet, growing protectionism in the U.S. and E.U. is only
part of the story of China’s M&A dip, and ignores the important role that China itself has played.
The record for Chinese cross-border acquisitions was posted in 2016, when $170 billion of deals were struck, according to figures from China’s Ministry of Commerce. That boom was led by highly-geared, privately-owned conglomerates such as HNA Group Co. Ltd., Dalian Wanda Group Co. Ltd., Anbang Group Holdings Co.
Ltd. and CEFC China Energy. It is hard to overstate their impact on deal flow—
in 2016, HNA alone accounted for an incredible 13% of all Chinese
overseas deals.
Fast forward to 2018 and those same deal makers have not only ceased buying but become sellers in the wake of
a government crackdown on “irresponsible” M&A. Removing
a coterie of the biggest buyers has inevitably calmed deal flow. But
Beijing’s response that 2016 boom has been wider than that.
Spooked by the potential damage to China’s financial markets, and the country’s corporate reputation, China’s National Development and Reform Commission (NDRC), on March 1, implemented a previously-draft directive on acquisitions that will receive support,
and those that will be discouraged. In the former camp are technology assets and consumer brands that support China’s “Go Global” and
“Made in China 2025” policies. In the latter bin are luxury real estate, sports franchises and
other hospitality and entertainment assets.
A parallel crackdown on debt-funding for overseas deals, notably on the provision of bank loans
secured against Chinese assets (known as Nei Bao Wai Dai), has also had a chilling effect on
M&A activity not explicitly endorsed by Beijing.
Such measures may have averted a debt-driven calamity, but they have also had secondary effects on Chinese bidders toeing the government line.
Targets have become increasingly concerned at Chinese corporations’ ability to close deals,
and with good reason. “Of the $13 billion of identified canceled (outbound Chinese) deals in 2017, a significant proportion was reportedly canceled at least in part due to perceived risks relating to Chinese regulatory processes rather than regulatory restrictions of the countries in which the targets were based,” law firm Linklaters wrote in a March report on Chinese deal making.
The upshot of that uncertainty has been sharper deal-transaction terms. Average break fees on Chinese deals rose to 8% in 2017, up from 5% in 2016, according to Fitch. Chinese buyers are increasingly asked to place large U.S. dollar deposits offshore as proof they can close deals, rather than simply presenting commitments from state lenders, as had often been the case in the past.
Not everyone will recognize the narrative of a fall in Chinese deal volumes. While the dip has been notable in the U.S., and to a lesser extent in Europe, there has been a marked uptick in Chinese M&A activity in other regions.
“In 2017, deal value of Chinese M&As in ASEAN (Association of Southeast Asian Nations) surged to $34.1 billion, rising by 268%,” Ernst & Young, an accounting and business services group noted in April.
China’s biggest M&A destination over 2017 was Singapore, according to EY. Malaysia and Indonesia have also
witnessed a significant increase in acquisitions, notably of utility, commodity and infrastructure assets, with many of the deals linked to China’s massive Belt and Road trading-infrastructure initiative.
And there has been one other notable beneficiary of China’s dip in outbound M&A. China’s domestic M&A activity hit an all-time quarterly record of $110.6 billion in the first quarter
of 2018, according to Dealogic.
Domestically, at least, there is no shortage of targets. “In value-added terms, China now has about 50% as many higher-tech manufacturers as the U.S., Japan, Germany and the U.K. do in total - a three-fold increase...from a decade ago.,” Goldman Sachs bankers wrote in April. “In Capex, China
now spends about $450 billion in annual investments in the sectors, matching the amount spent by the same group of advanced countries.”
A period of internal consolidation will create larger, better capitalized business but won’t satiate China’s hunger for the sort of intellectual property that it craves from overseas targets.
Chinese corporates will surely return to the U.S. and Europe in time. Only, when they do they are likely to be bigger, stronger and wiser.
Paul Whitfield is a Paris-based Correspondent to The Deal
M&A M&A
‘The U.S. is acting like a bully. They are citing the reason of national security, but their motivation is protectionism.’
The Deal // 41
he days when you could get ten years in prison for smoking a joint are over, and cannabis and cannabis products continue moving towards universal acceptance, legal and otherwise.
But the industry is moving on in fits and starts, particularly in the regulatory differential between the U.S. and Canada, where cannabis is federally legal for medicinal purposes as it soon will be for recreational use.
The industry is experiencing growing pains, and problems remain with finding banking services, dealing with cross boarder commerce, navigating a legal minefield (in the U.S.) and sourcing capital.
When it comes to capital, the private-investment-in-public-equity market is becoming increasingly popular as a source of capital for cannabis-related public companies.
In the first quarter, cannabis company PIPEs raised almost as much capital and generated almost as many transactions as in the entire year of 2017.
PIPEs are not the only way to finance a cannabis enterprise, so it’s valuable to create some context.
Larger cannabis companies are seeing substantial investments from private equity funds, initial public offerings, strategic investors in the spirits industry and other cannabis companies.
While there have been only a few cannabis IPOs, a trend may be emerging where IPOs serve to raise relatively large amounts of capital while the PIPEs market supports early-stage companies.
In 2018, on average cannabis PIPEs raised $10.76 million per deal, and there were over 40 deals in the first quarter.
Those deals raised about $450 million.
In contrast, the most recent cannabis IPO, Green Organics Dutchmen Ltd., raised over $100 million in one deal.
Green Organics CEO Rob Anderson told The Deal he was enthusiastic about the offering and the potential it creates.
“Having raised $115,011,500 in our Initial Public Offering and subsequently listing directly onto the TSX, the world’s premier exchange for cannabis companies, was a significant achievement for The Green Organic Dutchman,” Anderson said.
“The capital we have received in addition to the continued support from both Aurora Cannabis and retail investors alike further validates the company’s business plan as we strive to become the world’s leading organic cannabis company. Our company traded over 12 million shares and was the third most active stock on the TSX on our listing day.”
The Green Organics deal brings up two forces that are informing the cannabis industry.
Anderson’s mention of Aurora Cannabis underscores strategic cannabis investing in Canada, where companies like Aurora, Canopy Growth Corp. and Aphria Inc. have made substantial investments in other companies and will likely continue to do so.
It’s also notable that Anderson’s company effected its IPO on the CSE/TSX-not that it had a lot of choice-although Cronos Group Inc. (CRON) managed to go public on the Nasdaq. Cronos invests in other companies and is not involved in cultivation.
Nasdaq doesn’t want to see cultivators at its door, and it’s clear that bankers in the U.S. are losing out to Canada.
Small cannabis companies are constantly acquiring each other, but M&A is scaling up in Canada. Examples are
Aurora’s $883 million acquisition of CanniMed and a going public reverse merger play by Los Angeles-based MedMen Enterprises, which was recently valued at $1 billion based on a sale of stock.
Aurora and MedReleaf Corp. are currently in merger talks.
A few U.S. cannabis companies are going public in Canada rather than the U.S., according to Duane Morris LLP partner David Feldman.
Feldman wasn’t sure how advantageous this approach is but it’s indicative of concerns about the schizophrenic legal situation in the U.S., where cannabis is illegal at the federal level but legal in over 20 states.
This regulatory uncertainty continues to benefit Canada at the expense of the U.S.
Feldman was optimistic that the U.S. will iron out its regulatory issues soon, citing President Trump’s pro-cannabis stance and former Speaker of the House John Boehner’s alliance with cannabis cultivator Acreage properties.
He also noted a variety of legislative and political developments, such as President Trump’s cutting a deal with Colorado Senator Cory Gardner (R-Colo.) to hold back on federal enforcement in exchange for lifting a block on federal judicial nominations.
Terra Tech Corp. board chairman and CEO Derek Peterson told The Deal he transitioned from an ancillary investing vehicle to cultivation based on financial considerations rather than legal ones. Peterson worked held positions with Morgan Stanley and Wachovia before deciding that the cannabis industry offered attractive returns.
“It was a risk/reward decision,” Peterson said. “There’s no guarantee that the federal government won’t return to aggressive enforcement policies, but at a certain point cultivation started to make sense as an investment,” according to Peterson.
M&A M&A
:
‘There’s no guarantee that the federal government won’t return
to aggressive enforcement policies, but at a certain point
cultivation started to make sense as an investment.’
SMOKING HOT, EH?
40 // The Deal
The first quarter of 2018 generated more cannabis
PIPE transactions than the entire previous year, but
Canada is dominating the action.
By // Paul Springer
“Everyone in the business has worked in an aggressive environment,” Peterson said.
“The cannabis movement showcased democracy in its purest form, given its evolution from ballot referendums. It’s the epitome of democracy.”
While no active cannabis cultivators are allowed to trade on Nasdaq, Peterson thinks that will change. At some point, Peterson believes, a substantial private cannabis company and its bankers will make a winning case to Nasdaq to allow a listing.
Still, regulatory uncertainty continues to stifle cannabis investing in the U.S, and many people are not so optimistic about a resolution in the near term.
One of them is Sichenzia Ross Ference Kesner LLP partner Gregory Sichenzia.
Sichenzia told The Deal that the U.S. is lagging Canada severely and that he does not see a near-term resolution of U.S. regulatory conflicts, especially in a chaotic political environment where cannabis issues have to take a backseat to larger ones.
Sichenzia also brought up an economic factor that could affect cannabis companies and their investors-cannabis prices are going down. Sichenzia says he’s seen marijuana prices gradually decline from around $2,000 per pound to $1,200.
“But fixed costs remain the same or rise,” Sichenzia said.
Price shifts would likely hit undercapitalized companies hardest, whether they are public or private.
For private companies, especially small ones, the landscape is murky. Nearly any form of financing could come into play, from angel investing to hard money lending.
It’s worth noting that in the U.S., one source of capital for ancillary companies has been the small business loan. However, the Small Business Administration recently changed its regulations to make it impossible to get a loan even for companies that are far removed from the cannabis concerns they provide products and services to. An April 3 SBA policy notice stated that cannabis, indirect cannabis and hemp businesses are all illegal.
In the first quarter of the year, cannabis PIPEs raised $448.2 million, versus $603 million in all of last year.
As noted the average deal size was under $11 million, a number that is somewhat distorted by $112 million in PIPE investments by Liquor Stores NA, which is moving into cannabis distribution, and a $44 million PIPE from cannabis investor Captor Capital Corp.
The median market cap for cannabis issuers was $110 million, with the bottom of the range at around $5 million.
While the cannabis industry is clearly on a tear, PIPE issuers’ liquidity may be an issue. Daily trading volume for these issues averages 507,000 shares, indicating that investor interest may not be in line with the excitement felt within the cannabis industry.
Out of 41 deals in the first quarter, 32 were issued by Canadian companies. That’s a good indication of where the wind is blowing with cannabis investing, at least when it comes to PIPEs.
Paul Springer is a Senior Reporter for The Deal
‘The cannabis movement showcased democracy
in its purest form, given its evolution from ballot
referendums. It’s the epitome of democracy.’
or the past 10 years, most restructuring advisers and attorneys, retail companies and analysts have claimed the chief cause of the impending demise of brick-and-mortar retail is the proliferation of
internet commerce led by online retailers such as Amazon.com Inc. (AMZN).
Internet commerce has been steadily gaining market share, capturing about 9% of U.S. retail sales in the fourth quarter of 2017. Amazon, which commands about 44% of internet retail sales, generates about 4% of all retail sales in the U.S., according to research firm Statista.
Competition from online retailers is certainly a major problem for crumbling brick-and-mortar retailers, and those that do not establish a strong internet retail presence are digging their own graves.
An even faster way to kill off struggling, overextended retailers such as Sears Holdings Corp. (SHLD), Neiman Marcus Group Inc. and others, though, is to raise interest rates, which is exactly what the Federal Open Market Committee plans to do several times through 2020.
Overleveraged retailers that face a tidal wave of debt coming due in the next two years are likely to flood into Chapter 11 and liquidate as appropriate as a result of interest rate hikes,
on theRETAILERS
EDGE
FRINGE
The Deal // 43 M&A
By // Kirk O’Neil
Rising interest rates likely will lead many overleveraged retailers into serious financial distress and eventual Chapter 11 filings.
42 // The Deal
F
RESTRUCTURING
The Deal // 4544 // The Deal
which might not affect them directly but will eventually short-change them at the cash register.
The funded debt of overleveraged retailers isn’t necessarily tied to the federal funds rate – the interest rate financial institutions charge other financial institutions for overnight lending – which the committee has indicated it will continue to increase over the next couple of years.
Consumers who spend their dollars in retail stores, though, will be directly affected, with rising interest rates for mortgages, credit card interest and other loans. In addition, rising interest rates likely would increase the cost of future loans strapped retailers might seek to refinance debt coming due.
The FOMC in March raised its benchmark federal funds rate by 25 basis points to 1.75%. The Fed left the rate unchanged at its May 2 meeting but raised the rate another 25 basis points to 2% in June. The committee indicated that it might raise rates a couple more times this year, as well as several times in 2019 and 2020.
Back in December, analysts at Moody’s Investors Service Inc. were predicting a stable outlook for U.S. retail this year, with operating income and sales to grow 3.5% to 4.5%. The ratings agency also predicted retail defaults would ease and certain department stores, such as Macy’s,
Kohl’s and Nordstrom, would begin to have better performances and shrinking losses.
The jury is still out on those predictions. A Moody’s retail report in March said that pockets of U.S. retail, including some department stores, would show improvement this year, but more defaults were on the
horizon for the sector.
Rising interest rates obviously are not what overleveraged retailers were hoping for on the road to recovery. Higher rates will result in fewer dollars for consumer discretionary spending and less potential revenue for retailers.
The Fed’s attempt to curb inflation by raising rates may actually lead to a wave of Chapter 11 filings, employee layoffs, store closings and liquidations from several major retailers. The Fed, therefore, may want to reconsider a series of rate increases that could have inadvertent consequences.
Kirk O’Neil is an Associate Editor of The Deal
A Moody’s retail report in March said that pockets of U.S. retail,
including some department stores, would show improvement this year,
but more defaults were on the horizon for the sector.
RETAIL ENERGYHAVEN’T SEEN ANYTHING YETRestructuring attorneys and advisers project more companies in the sectors will seek out-of-court restructurings and Chapter 11 bankruptcies in the second half of this year, with a broader default cycle potentially coming in 2020.
By // Kirk O’Neil
and
R estructuring attorneys and advisers expect the retail and energy sectors to be the most active for out-of-court restructurings and Chapter 11 filings through the second half of 2018.
A number of distress factors affecting each of these industries already have
prompted many retail and energy companies to seek out-of-court restructurings of their businesses. Many also have resorted to Chapter 11 to reorganize after unsuccessfully trying to restructure out of court.
“We’re still seeing a lot of retail companies restructuring out of court,” said Michael C. Eisenband, global co-leader of corporate finance and restructuring at FTI Consulting Inc. “I’m proud that we brought more retail industry specialists on board over the last year who are focused on business transformation, advising clients on evolving their organizations, cost structures, supply chains and other operational areas to weather the continued disruption impacting the industry.”
Eisenband said that FTI Consulting also has taken on business from energy and healthcare companies, as well as a variety of other industries. Despite a lot of activity from retail, energy and healthcare companies out of court or in Chapter 11, more than 50% of FTI’s business comes from companies outside those sectors.
Lisa Donahue, global leader of turnaround and restructuring
services at AlixPartners LLP, tabbed the retail sector to remain the most active with out-of-court restructurings and Chapter 11 filings along with the energy industry.
“In the next nine months, we expect the retail, merchant power and offshore oil and gas drilling sectors to be the most active in out-of-court restructurings and Chapter 11 filings,” Donahue said.
Retailers will continue to suffer from an excessive brick-and-mortar presence in regional malls and other shopping centers, as foot traffic decreases from consumers purchasing more products online. Amazon.com Inc.’s (AMZN) increased activity in internet commerce will force many retailers to re-examine their business models and try to drive more online retail traffic, Donahue said.
Low oil and natural gas prices, meanwhile, have affected
‘In the next nine months, we expect the retail, merchant power and offshore oil and
gas drilling sectors to be the most active in out-of-court restructurings and
Chapter 11 filings’
RESTRUCTURING RESTRUCTURING
The Deal // 4746 // The Deal The Deal // 47RESTRUCTURING
Radio station owners face tight competition from digital advertisers that are for the first time projected to capture 50% of U.S. net ad revenue in 2018.By // Kirk O’Neil
The nation’s largest radio broadcast companies, already in bankruptcy court, face a major challenge to hold on to their share of the advertising dollar – and in turn avoid further financial distress – as digital ad sales continue to capture the lion’s share of U.S. advertising revenue.
Digital advertising’s onslaught in the past 10 years has diverted significant revenue from the radio broadcast industry and is considered a major factor in the nation’s two largest radio broadcasters, Cumulus Media Inc. and iHeartMedia Inc., filing for Chapter 11 protection over the past six months or so.
The nation’s largest radio station owner, iHeartMedia, on March 14 submitted a Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of Texas in Houston, blaming competition from the internet and digital advertising industry – search, video, display and social media platforms – and the entry of on-demand streaming services for siphoning off advertising revenue it needed to meet its financial obligations.
offshore oil and gas exploration and development companies and ancillary suppliers, causing financial distress leading to out-of-court restructuring and Chapter 11s, according to Donahue.
The low oil and gas prices also resulted in financial distress for merchant power companies, which don’t have contracts with utility companies and instead sell their power on the open market, Donahue said.
Attorneys and advisers have expected distress in the energy sector to begin to diminish as oil prices rise into the $50 to $60 range and since many distressed companies already have fixed their problems over the past three years either in or out of court.
Improved pricing, however, may not have arrived soon enough, as oil and gas producers have continued filing for Chapter 11 through the first half of the year.
Oil and gas exploration and production companies also have been busy restructuring out of court during the first half of 2018, according to bankruptcy and restructuring attorney Damian S. Schaible of Davis Polk & Wardwell LLP. Schaible expected the restructuring activity to continue through the remainder of the year.
Much of the out-of-court restructuring has involved refinancing debt coming due, Schaible said. Companies are completing amend-and-extend transactions, debt
exchanges and other methods to refinance loans facing an impending debt maturity.
West Texas Intermediate crude oil pricing, about $105 a barrel in June 2014, was $69.28 on June 22. Henry Hub natural gas prices fell from $4.59 per million British thermal units to $2.94 per MMBTU over the same period.
Overall, “Chapter 11 filings remain fairly robust considering the strength of leveraged credit markets and peak corporate earnings in 2017 and 2018,” Eisenband said. “Amid that backdrop, restructuring activity in the U.S. has been relatively healthy.”
Bankruptcy filings rose by about 1% in 2017, compared with 2016, according to a February PricewaterhouseCoopers LLP review of bankruptcies and out-of-court restructurings in 2017. The report predicted a similar year for restructurings in 2018, with few macro headwinds that would drive bankruptcy numbers higher.
A boom time in the restructuring industry could be on the horizon, however.
With interest rates rising, Eisenband anticipated corporate credit markets to tighten by 2019. He said credit markets could then dry up, with a default cycle hitting nine months to a year later in 2020.
Kirk O’Neil is an Associate Editor of The Deal
With interest rates rising, Eisenband anticipated corporate credit markets to tighten by 2019. He said credit markets could then dry up, with a default cycle
hitting nine months to a year later in 2020.
RESTRUCTURING
48 // The Deal RESTRUCTURING
It also cited the 2008 economic downturn, which resulted in a significant decline in advertising and
marketing spending by customers.
Cumulus on Nov. 29 filed for Chapter 11 protection in the Southern District of New York in Manhattan, blaming a decline in revenue on a loss in advertiser and listener demand for radio. The debtor in court papers said the radio industry had lost both content
and advertising to digital streaming and web-based formats, resulting in declines in radio industry
revenue and listenership.
Debtor counsel and financial advisers for iHeart and Cumulus did not return requests for comment.
Smaller radio station companies also are facing financial distress from declining ad revenue, but other factors are contributing to their distress.
MGTF Radio Co. LLC, parent of radio station owner Steel City Media, for example, filed for Chapter 11 protection on March 20 in the Eastern District of Missouri in St. Louis seeking to restructure over $60 million in prepetition debt even though the company was highly profitable, debtor counsel Robert E. Eggman said.
The St. Louis debtor, which owns radio stations in Kansas City and Pittsburgh, filed its petition after secured lender Fifth Third Bank required MGTF to find new lending partners to refinance debt owed to the bank. The debtor almost had closed a deal with a new junior lender when the lender backed out of the financing package three days before closing.
“We saw a trend of traditional commercial banks wanting out of radio,” Eggman said. “When you take away the traditional banks, you’re left with higher-priced insurance companies, hedge funds and private equity. Higher prices mean less profit.”
A need to address debt, not surprisingly, was a common problem for all three debtors, with Cumulus and iHeart having built up unsustainable debt loads through mergers and leveraged buyouts.
The reorganization plan for San Antonio-based iHeart would cut its funded debt from about $16.2 billion to $5.75 billion, plus an asset-based lending credit agreement to provide working capital. The plan also would separate its iHeart radio business from its Clear Channel Outdoor Holdings Inc. (CCO) billboard operations.
Cumulus, meanwhile, is set to cut more than $1 billion in debt under its confirmed plan. The debtor owns and operates 446 radio stations in 90 cities. Its Westwood One network has 8,000 broadcast radio station affiliates and digital channels.
The broadcaster’s long-term debt grew nearly 5 times from $575 million in 2010 to more than $2.8 billion in 2011, when it bought recently bankrupt radio group Citadel Broadcasting Corp. for $2.3 billion in cash and stock.
Both Cumulus and iHeart, though, will need to address competition from digital and Internet advertising if they want to avoid a Chapter 11 rerun in the future.
Digital advertising sales in 2017 grew by 18% to about $85 billion, for a market share of 46% of U.S. net advertising revenue; they are expected to capture 50% of the market this year with an estimated $97 billion in revenue, for projected growth of 14%, according to IPG Mediabrands’ Magna.
Radio net advertising revenue last year declined by 2% to $14 billion. By comparison, national television ad revenue in 2017 declined by 2% to $42 billion, local TV revenue declined by 4% to $19 billion and print advertising fell by 15% to $18 billion.
Moody’s Investors Service Inc. in a recent credit outlook note said broadcast radio and TV station ad revenue is projected to continue declining through the next 12 to 18 months.
IHeart already has taken proactive measures, developing a digital platform and iHeartRadio-branded live events with audio and video streamed and televised nationwide.
“Multimedia has had a rapid change,” said Lisa Donahue, global leader of turnaround and restructuring services at AlixPartners LLP. “I don’t know any millennial person who listens to the radio. They’d rather plug into Spotify or
another streaming platform.”
Kirk O’Neil is an Associate Editor of The Deal
RESTRUCTURINGRESTRUCTURING
Incentive distribution rights were fun while they lasted, but the lesson so many MLP sponsors have learned in the past few years is: There’s no good way to get out of them.
By // Tom Terrarosa
The Deal // 49
Why
Must Pick Its
POISON
‘It’s a business model situation. I don’t know any millennial person
who listens to the radio. They’d rather plug into Spotify or another
streaming platform.’
&
aster limited partnerships, or MLPs, arguably have been one of segments of the oil and gas industry most greatly affected by by the latest commodity downturn. As a result, a majority of these companies have restructured their businesses to make them more friendly to investors, but doing so
has become a pick-your-poison type of exercise.
The latest such effort came last week from Tallgrass Energy Partners LP (TEP), an MLP, and its publicly traded general partner, Tallgrass Energy GP LP (TEGP), which combined to effectively turn two publicly traded partnerships into one.
Last year, Oneok Inc. (OKE) opted to go a different route. The company, structured as a traditional C-Corp, was trading at a premium to its MLP, Oneok Partners LP, giving it the currency to pay a premium to acquire its MLP directly, even though investors of the MLP would have to swallow the pill of a taxable event.
Both methods were ultimately aimed at attracting more investors in a shallow midstream equity market by effectively eliminating costly incentive distribution rights, which are payments paid to the GP by the MLP out of the latter’s cash flow that step up over time to a certain cap, typically between 25% and 50%. As these businesses mature, IDRs are a key reason why the MLP structure becomes less cost-effective, and even before the downturn exacerbated this issue, many MLPs attempted to address it.
The Deal // 5150 // The Deal RESTRUCTURINGRESTRUCTURING
Those temporary fixes included capping IDRs below 50% or even resetting higher IDRs to lower levels, which maintains some level of management incentive but provides a lower cost of capital relative to MLPs with a top distribution of 50%.
Thanks to the downturn, MLPs have been forced to reconsider their options, though. And in recent years, more complex structures have required a different type of finesse.
Witness the broader restructurings undertaken by pipeline behemoths Energy Transfer Equity LP (ETE) and Williams Cos. (WMB) in which the companies’ MLPs bought themselves out of IDRs by issuing more equity to their sponsors.
Not every company can make that happen, however. In many cases, IDRs are trading at multiples as high as 15 to 20 times cash flow, while MLPs on average are trading closer to 8 to 10 times, meaning many MLPs would have to fork over too much. According to industry followers, investors likely let these players get away with it when they are part of broader restructurings.
For example ETE, a family of publicly traded partnerships, also significantly simplified its complex structure by having two of its MLPs, Energy Transfer Partners LP (ETP) and Sunoco Logistics LP, merge into one company.
That may be why the companies that are most expected by investment banking sources and research analysts to follow suit in MLP restructurings are those with higher tier IDRs and a publicly traded GP, including EnLink Midstream Partners LP (ENLK) and its publicly traded general partner,
EnLink Midstream LLC (ENLC), Western Gas Partners LP (WES) and its general partner-interest holder, Western Gas Equity Partners LP (WGP), which is backed by oil producer Anadarko Petroleum Corp. (APC), Antero Midstream Partners LP (AM) and its general partner, Antero Midstream GP LP (AMGP), and EQT Midstream Partners LP (EQT) and its general partner-interest holder, EQT GP Holdings LP (EQGP), which is backed by activist-embattled oil producer EQT Corp. (EQT).
Refining logistics MLPs that may consider simplification transactions, as well, are Phillips 66 Partners LP (PSXP), Shell Energy Partners LP (SHLX), and Valero Energy Partners LP (VLP).
“Each of these companies are deep in the high IDR splits, suffer from rising equity costs related to recent unit price declines, rely on equity markets to fund robust growth plans that include dropdown acquisitions, and trade at high multiples relative to peers,” Seaport Global Securities LLC analysts wrote in a recent note.
Dropdowns are a fundamental component of the MLP structure. MLPs typically acquire assets at the project level from their sponsors. Due to the MLPs lower cost of capital, the often pay more for the assets than a third party might do, and in return they have a guaranteed pipeline of deals from which they can rapidly grow their cash flows. But higher IDRs have made it hard for MLPs to stay on track with these planned dropdown transactions as well.
The growing interest in simplifying and in some cases eliminating the MLP structure since around 2016 comes after a boom in initial public offerings in the space between
2011 and 2014 and can be attributed to two primary pressures: Growing investor distaste and an inability to issue new equity.
MLP investors, or so-called unitholders, are a shrinking class. After commodity prices first tumbled between late 2014 and early 2015, MLPs were forced to cut distributions—a type of dividend payment—and subsequently stall the future growth on those distributions. Ahead of the downturn, MLPs were promising 15% to 20% annual distribution growth to unitholders. Now the average MLP distribution growth is closer to 5% or 6%.
But even as limited partner distributions were being cut, the percentage of an MLP’s free cash flow going to its general partner was increasing thanks to IDRs, terms for which were locked in upon the creation of the MLP.
“Investors are increasingly focused on returns on invested capital,” Seaport wrote. “The dropdown strategy no longer produces enough accretion to drive meaningful growth as acquisition multiples are too high. Investors are only willing to fund capital spending associated with organic growth projects at much lower multiples. IDRs are increasingly unacceptable to the incremental investor.”
So it’s no surprise MLPs have put a sour taste in the mouths
of investors over the past few years. From it’s 10-year high of 539.85 hit on Aug. 25, 2014, the Alerian MLP index has fallen about 56% to 239.70. And even though oil now trades above $65 per barrel, the benchmark MLP index appears set to return to its 5-year low of 215.4, which it hit in early February 2016 when oil traded in the mid-$20s.
But the MLP investor base was already limited long before oil prices went down the tubes. Due to the potential for the investment to be classified as unrelated business taxable income, U.S. tax-exempt investors, such as pension funds, university endowments and IRA operators like Fidelity Investments LLC and Prudential Securities Inc., don’t invest directly in MLPs.
And with the corporate tax rate being reduced from 35% to 21%, the key incentive to form an MLP—not paying corporate taxes—carries less weight when considering all of the other recent issues these mature companies now face. That’s why some industry followers expect the MLP may move from endangerment to extinction fairly quickly.
MLPs are also under pressure on the supply side. The equity markets have seemingly closed up for these players, evidenced by the precipitous decline in MLP IPOs since 2014. If MLPs can’t issue new equity, they have no access to
cheap project financing, and subsequently can’t meet the booming demand that has come as a result of increased efficiency of drillers in prolific U.S. resource plays like west Texas’ Permian Basin.
With issues galore, there’s not much of a case for
why any mature MLP should remain under that structure. Yet there may remain many MLPs that have no publicly traded sponsor or GP. That is, unless these companies opt to follow through with a little explored option: Electing to pay taxes like a C-Corp, rather than an MLP.
According to investment banking sources, that’s not likely. But ultimately, the rapid succession of these restructurings since Kinder Morgan Inc. (KMI) kicked off the cycle in August 2014, may leave many MLPs happy to consider any options for fear of being left for dead by an already thinning investor base.
Tom Terrarosa is a Reporter for The Deal
“ Each of these companies are deep in the high IDR splits, suffer from rising equity costs related to recent unit price declines, rely on equity markets to fund robust growth plans that include dropdown acquisitions, and trade at high multiples relative to peers.
‘The dropdown strategy no longer produces enough accretion to drive meaningful growth as acquisition multiples are too high. Investors are only willing to fund capital spending associated with organic growth projects at much lower multiples. IDRs are increasingly unacceptable to the incremental investor.’
The Deal // 5352 // The Deal
surpass the private equity industry in terms of assets under management.” And that means more recruiting. Take Mayer Brown LLP, which just hired partner Jaime Gatenio for its private credit business, which is now headed globally by Matt O’Meara. O’Meara wrote in that “the record pace of private credit fundraising over the last few years and the increasingly complex legal needs of private credit fund clients are driving lateral hiring in the space.” He continued, “As the private credit asset class continues to grow in the U.S., Europe and Asia, so too will demand for lawyers who focus on private credit fund formation, fund regulatory issues (including business development company experience), fund finance, structured finance and direct lending.”
Movers also checked in with private asset manager Capital Dynamics, which launched a dedicated private credit asset management business in October, hiring Jens Ernberg and Thomas Hall—they co-founded and ran the mid-market direct lending business at Credit Suisse. Ernberg said, “Institutional direct lending has emerged as a legitimate asset class since the global financial crisis, driven by several secular themes, including institutional and retail investor demand for yield, the departure from the market of traditional lenders [see: Jonathan Braude’s ‘Who Needs Banks?’], such as commercial banks, and a regulatory environment that has pushed arrangers to focus on larger, more liquid markets. This has driven
demand from large and small asset managers for talent with underwriting and structuring experience from both the commercial and investment banking industries capable of building and/or supporting institutional private credit platforms.”
People are moving money as well as talent moves from commercial banks. Hall said they raised “unprecedented
amounts of capital to fill the void, resulting in approximately 80% of all middle market loans as of 2017 being held by institutional direct lenders, standing in sharp contrast to 15 years ago when commercial banks held almost 80% of these loans.” Hall opined there remains greater opportunities in the lower end of the middle market created by limited competition. “It results in higher contractual returns; lower leverage levels and more conservative loan to value metrics; and continued structural integrity of loan documents.”
Dealmakers looking to put their associates to work gathering info should home in on a few other trends Movers has snagged. Equities are still trending, which is good news for employees at Deutsche Bank, which is slashing its unit. For example, ex-DB senior trader David Liberatore is now at Cantor Fitzgerald, where ex-Deutsche co-CEO Anshu Jain is
building operations (he also started a power banking practice with Kevin Phillips and Hari Chandra). And Raymond James created a new role, hiring David De Luca in New York from Vesey Street Capital as head of global equities. The biggest related hiring theme is in quantitative trading/multi-asset/beta—see Pimco hiring Wesley Chan; Alistair Lowe moving
to JPMorgan AM; Denise Fiacco to Instinet; Julien Halfon to BNP Paribas AM; Mike Schuster to Two Sigma Investments; Peter Weidner to Wells Fargo AM; John Comerford and Armando Gonzalez to Credit Suisse; Emanuele
Di Stefano to Macquarie Group; and among others, past moves involving Olivia Engel/SSGA and Alexey Poyarkov/TGS.
Finally, though there’s movement in cryptocurrencies and cannabis. It includes Goldman Sachs hiring quant trader Justin Schmidt, 38, as vice president and head of digital asset markets; Coinbase adding LinkedIn Corp.’s dealmaker Emilie Choi; and BlockTower Capital hiring Goldman vice president Michael Bucella. On marijuana’s slow-burn advancement across the country, note former Goldman managing director Thomas Mazarakis joining legalized cannabis-sector investor Salveo Capital; and Canaccord Genuity hiring Shannon Soqui as head of U.S. cannabis investment banking. Canaccord advised Aurora on its acquisition of CanniMed Therapeutics Inc. for $883 million. Expect more rolling up, er, consolidation in the field.
Baz Hiralal is Online Editor of The Deal
Look back at private equity succession planning during the quarter and one now-
obvious appointment is that of Blackstone Group LP’s Tony James handing reins to John Gray, who pulled off deals such as the $36 billion acquisition of Equity Office Properties and the $26 billion acquisition of Hilton Hotels Corp., both profitable ventures. The EOP deal will come full circle with the pending sale of San Francisco’s landmark Ferry Building and two other properties. There are other sales ahead all real estate dealmakers should pay attention to - recall Blackstone’s quenching of the Chinese thirst for property, such as the Waldorf Astoria. With HNA, Anbang Insurance Group and Dalian Wanda Group under government pressure to curb or unwind investments, Blackstone is in an interesting position of possibly buying back assets it sold, such as the 25% of Hilton it flipped to HNA for $6.5
billion. Gray and co-founder Stephen Schwarzman are not the only game in town, so look out for opportunities to buy, or grab advisory fees.
But if cross-border is not your forte, there’s plenty of U.S. business. Take it from A&G Realty Partners’ Peter J. Lynch, who is now targeting healthcare holdings. He says, “Just as
retail landlords can ill afford to keep vacant or under-performing stores on their balance sheets, today’s medical providers are under the gun to maximize the real estate dimension of their hospitals, medical offices, skilled nursing homes and other assets.” Note that an executive on the retail scene, Seas Holdings Corp. real estate president Jeff Stollenwerck, may be looking for a new gig. And
on raising capital for deals, Evercore Partners Inc. made a play in hiring Bill N. Thompson as co-CEO of its private capital advisory practice. He was head of Greenhill & Co.’s capital advisory group from 2010, and was head of the real estate private fund group at Credit Suisse Group.
Carlyle Group hit on a few trends with a recent move, touching special
situations, real estate and private credit. It brought in Taylor Boswell from Apollo for its illiquid opportunistic credit business. BlackRock followed with a big credit opportunities
play, acquiring the 80-plus team of Tennenbaum Capital. Special situations/opportunistic hires have ballooned over the past two quarters. See: Carl M. Stanton to Invesco Ltd.; Ryan Mollett to Angelo, Gordon & Co. LP; Geoffrey Richards to Raymond James Financial Inc.; and Scott Kleinman’s Carlyle elevation.
Carlyle co-founder David Rubenstein says “private credit could one day
With HNA, Anbang Insurance and Dalian Wanda under Chinese government pressure to curb or unwind investments, Blackstone is in an interesting position. But there’s also plenty of U.S. action.
By // Baz Hiralal
Trendspotting‘Movers’
CHINA, CANNABIS, CRYPTO and PE LENDING DRIVE PEOPLE MOVES
‘Today’s medical providers are under the gun to maximize the real estate dimension of their hospitals, medical offices, skilled nursing homes and other assets.’
‘80% of all middle market loans as of 2017 being held by institutional direct lenders, standing in sharp contrast to 15 years ago when commercial banks held almost 80% of these loans.” ’
The Deal // 55
Activism has clearly upset the apple cart in corporate America and on Wall Street the past few years, and as this issue of Q2 Dealmakers makes clear, that cart isn’t likely to sit still any time soon. If anything, the action is getting hotter and heavier, as Elliott Management influences the outcome of Melrose’s hostile bid (page 34) and edges closer into private equity, Carl Icahn aggressively uses the courts to stop or start deals he does or doesn’t want to see happen, and Nelson Peltz or his minions pen treatises or give in-depth interviews on how dinosaurs like GE and P&G can avoid extinction. Then there’s the Just Say No attacks on management that we’re seeing in more and more proxy battles (page 7).
54 // TheDeal
WORD:Last
WHAT’S IT ALL ABOUT?Critics assert that it’s just powerful investors seeking short term gains by creating and exploiting arbitrage opportunities by opposing CEOs who aren’t moving fast enough for activists’ tastes even if the action they seek would hurt the company in the long run. Supporters argue those companies are run by entrenched, lazy and/or incompetent executives who should either do something sooner rather than later to boost shareholders’ returns on investment or return their capital. Who’s right? Both, depending on the particular circumstances.
The larger question is whether activists are operating for the larger good, that is, do they make companies, individually and en masse, more or less sustainable? That is, do they ultimately serve or hinder the global economy? The answer, again, is it depends, but not on the basis of the above argument. Instead, it depends on whether activists eventually embrace a broader perspective, one based on the so-called ESG (for environmental, social and governance) movement.
Yes, ESG has long been considered a goody, too-shoes sort of concern. Think tree hugging gadflies proposing shareholder resolutions for Exxon to save the planet at the immediate conclusion of its annual meeting. But when Norway’s sovereign wealth fund, the world’s largest and an increasingly important source of global capital, decides to avoid investments in oil, as it has, because it doesn’t deny climate change, or a nun named Nora Nash of the Interfatih Center on Corporate Responsibility lands on scandal-plagued Well Fargo’s board in order to help the bank get right with its much-abused customers, activism takes on broader significance.
A concern for sustainability, in other words, is simply another way to look at risk, and any company that doesn’t manage risk effectively, be it short-term financial liabilities or long-term environmental ones, is in need of change, and the sooner it’s made, the better for all concerned, including creditors, customers, employees and taxpayers as well as shareholders. And that’s the case whether you’re defending Icahn et. al. or opposing them.
For activism to be about more than a one-time boost to a company’s stock price, it needs to address the sustainability of a company. By // Ronald Fink
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Innisfree M&A Incorporated 501 Madison Avenue, 20th Floor, New York, NY 10022 212 750 5833 www.innisfreema.com
Proxy Fights I Shareholder Meetings I Stock Surveillance I Tender OffersExecutive Compensation Consulting I Corporate Governance Consulting I Activism Defense
Total Target/ Acquirer/
Deals Seller Bidder
1. Innisfree M&A Incorporated 55 42 13
2. MacKenzie Partners Inc. 43 30 13
3. D.F. King & Co. 38 22 16
4. Georgeson Inc. 30 12 18
5. Okapi Partners LLC 18 4 14
Advisers in deals announced between January 1 and December 31, 2017
with a value of $100 million or more.
*Source: Corporate Control Alert, January/February 2018, Volume 35, No.1
TOP PROXY SOLICITOR/INFORMATION AGENTS*
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