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Forest Labs Caps Off A Momentous Proxy Season

The Activist Report - Volume 2 Issue 9 - September, 2012

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 activist events.

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%.

2012 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 funds.