The 2012 proxy season was not outstanding in terms of number of proxy fights. But
what it lacked in quantity, it more than made up for in quality. There were a number
of noteworthy proxy campaigns at companies with extremely large market capitalizations
and at many iconic and Icahnic companies. Moreover, there was a great deal of intriguing
non-board related shareholder activism as well as activists doing their part to
jump start the M&A markets. Below is a recap of some of this year’s more interesting
What a Difference a Year Makes. At the Forest Labs Annual Meeting
on August 15, 2012, shareholders elected one of four Icahn nominees to the Board
and nine incumbent directors. However, the backroom negotiations leading up to the
meeting was where all of the intrigue was. Prior to the meeting, some of the Company’s
largest stockholders approached Alex Denner (former Icahn health care portfolio
manager) and asked him to take a seat on the Forest board as a compromise to Icahn’s
slate. Alex, who is in the process of starting up his own activist fund focused
on the health care sector, politely declined. The amazing thing about this is that
Alex used to work for Carl Icahn and was part of Icahn’s slate just a year earlier.
However, the same shareholders (other than Icahn) only voted 8.5% of their shares
for him in 2011. Now they are soliciting him to join the board! This shows how dysfunctional
the FRX shareholder base is and how torn they were between supporting Icahn and
the incumbent board without change. Maybe next year when Icahn runs a slate again,
the shareholders will approach Eric Ende to take a seat on the Board as a compromise
to Icahn’s 2013 slate. While Forest Labs’ all-star team of advisors including Wachtell
Lipton and Mackenzie Partners were certainly integral to the outcome, it was not
necessary for Wachtell Lipton to take a victory lap in the form of an August 17
widely distributed memo, particularly since the Company’s stock declined by 2.3%
during the proxy fight while the S&P500 increased by 8.2% over the same time period.
Starboard’s Pyrrhic Loss. You have heard of a pyrrhic victory,
when the victor is more of a loser because the victory was so costly. Well, at AOL,
Starboard had a pyrrhic loss – as a proxy fight loser, it seemed like they were
more of a winner because the loss was so profitable. Although they lost their proxy
fight (one of their first losses ever), their investment returned 81.5% during a
period that the S&P was down 1.5%, largely due to their efforts. The crazy part
of this proxy fight was that the Company’s largest shareholder and key to this fight,
Dodge & Cox, displayed some very curious behavior, including; (i) stringing along
both sides until the very end, (ii) not recalling approximately one-third of its
shares that were out on loan for payment to Dodge & Cox, and (iii) sending a highly
confidential letter to the Company and Starboard after the fight that reportedly
informed the Company that while they voted for management, they supported a lot
of what Starboard had advocated.
I’ve Been Working on the Railroad. Pershing Square’s proxy fight
with Canadian Pacific was monumental on many levels. First, it was the first time
that an activist was able to successfully attack such a large Canadian company with
a board comprised of so many respected Canadian executives. Second, it was the first
time that an activist opposing a large cap company received a recommendation from
ISS for all of its candidates. And to punctuate the recommendation, ISS also recommended
that shareholders withhold votes from Chairman Cleghorn and CEO Green. Third, both
sides used a universal ballot. The reason this was possible is because, unlike the
US, Canadian incumbent directors do not have to consent to their names being used
on a dissident’s ballot. So with Pershing Square giving shareholders the option
to mix and match all 21 nominees, the Company decided to offer the same option,
giving shareholders the largest selection of candidates to choose from to elect
the best board possible. Fourth, in the hopes of getting railway industry veteran
Hunter Harrison to run Canadian Pacific, Pershing Square offered to personally indemnify
Harrison against claims from his former employer, Canadian National Railway, agreeing
to bear the entire liability of a lawsuit for the benefit of all shareholders. You
would never see a traditional mutual fund stockholder do that.
Welcome Back Dan. After a three year hiatus, Dan Loeb and Third Point dove back
into activist waters with a proxy fight at Yahoo. Despite the Company’s questionable
contentions that Third Point was a short term investor (diametrically contrary to
asking for a board seat) and that shareholders are conflicted from being directors.
Third Point ultimately settled for three Board seats after uncovering the CEO’s
padded resume, something the entire Board and management missed. After joining the
Board, Third Point was instrumental in closing a deal to sell half of the Company’s
Alibaba stake and bringing on a new CEO to turn around the Company’s core business.
Easy Does It. Despite the fact that Carl Icahn could not call a special meeting,
act by written consent or commence a proxy fight in the near term, he was quickly
granted a board seat by Chesapeake. He was able to accomplish this because (i) management’s
actions were so egregious that Icahn could credibly threaten more than just taking
their seats, but potential personal liability and (ii) he had the support of Southeastern
Asset Management, the Company’s largest shareholder, who also received board representation
in the settlement.
A New Standard in Standstill Agreements? Elliott commenced a proxy fight at BMC
Software to put pressure on the Board to sell the Company and settled for two Board
seats. But what is unprecedented is the terms of Elliott’s standstill agreement.
Normally activists can terminate the standstill by resigning from the Board, freeing
them up to commence a proxy fight if they choose. However, Elliott’s standstill
agreement allows Elliott to terminate it simply by having their directors resign
from their committees and stay on the Board. This effectively allows Elliott to
commence a proxy fight while retaining its two seats prior to the Board meeting.
The Dog that Caught the Car. Icahn not only put his money where
his mouth was by acquiring approximately 80% of CVR Energy for $2 billion, he did
it without a financing contingency or a due diligence contingency. So, he committed
to a $2 billion acquisition based solely on public information. Moreover, he gave
tendering shareholders a contingent value right for the upside on any sale of the
Company by Icahn within 15 months after they tendered. This can be done only by
someone like Icahn, who does not have to worry about investor redemptions.
Turnaround is Fair Play? Carl Icahn dropped his $1.7 billion bid
to buy Commercial Metals Co. after the company rejected his $15-a-share offer as
“bargain basement,” backed up by the opinion of bankers at Goldman Sachs.
One week later, Goldman’s research arm got Icahn again when it
issued a report on CMC with a six-month price target of $10 share, causing a steep
drop in the stock. However, Icahn may have an opportunity to exact his revenge.
Goldman was hired by CVR Energy when Icahn made his tender offer. After the Company
was sold to Icahn, Goldman submitted an $18.5 million invoice, based on the size
of the transaction. Icahn, who now controls the Company, has refused to pay the
invoice arguing: “These guys were hired to keep me from buying the company at $30
and they failed. But they are now demanding $18 million for having done nothing.”
M&A(ctivism). In an anemic M&A market, activists are certainly
trying to do their share. Of course Carl Icahn will be an M&A magnet in any market
(i.e., Amylin, CVI, CMC attempt) and activists like Elliot Management continue to
advocate for the sale of portfolio companies, such as BMC. But this year we had
activists like Relational Investors calling for the sale of two of its portfolio
companies and successfully getting Par Pharmaceuticals sold at a big premium, and
ValueAct Capital calling for the sale of Gardner Denver. Neither ValueAct nor Relational
have any track record of employing this kind of strategy prior to this year. Pershing
Square, who also rarely pushes for a sale of a portfolio company, is employing such
a strategy at General Growth, much to the chagrin of Brookfield Asset Management,
the Company’s largest shareholder, who likes its status quo pseudo-control position.
Moreover, activists are not only advocating for the sale of portfolio companies,
but doing their share as board members to acquire companies. Hain Celestial (Icahn)
recently announced an agreement to acquire Premier Foods plc’s portfolio of market-leading
packaged grocery brands, and Valeant Pharmaceuticals (ValueAct) announced that it
will acquire Medicis Pharmaceutical for a 39% premium. Clearly having an activist
on the Board not only facilitated such acquisitions, but the detailed financial
modeling and analysis done by activists assure that such acquisitions are accretive
and in the best interest of shareholders. Accordingly, Hain’s stock rose 19% on
the news and Valeant’s stock rose 15% on the news. Alternatively, prior to Starboard
joining the IDTI board, IDTI announced that they will acquire PLX Technology, Inc.
in a deal valued at $330 million. Upon the news, IDTI’s stock dropped by 9.6%.
was certainly a banner year for activism and I certainly do not see any signs of
a slowdown. New activist funds Corvex Management, founded by former Icahn lieutenant
Keith Meister, and Marcato Capital Management, founded by former Bill Ackman lieutenant
Mick McGuire, have hit the ground running. Moreover, their success has paved the
way for new activist funds in 2013 where we will see Alex Denner, formerly of Icahn
Capital, and Scott Ferguson, formerly of Pershing Square, start their own activist