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Elliott’s Stake In Softbank
Japanese financier Yoshitaka Kitao racked up a key victory in his campaign to take over Shinsei Bank (SKLKY). The bank canceled a Thursday shareholder vote on a poison pill defense against a takeover bid from Kitao's SBI Holdings (SBHGF), and assumed a neutral position on the offer. SBI restated that it will not alter the price offered to enlarge its Shinsei stake to 48%. The change comes one day after sources said the Japanese government, Shinsei's biggest shareholder, planned to withhold support for the poison pill. Kitao has publicly taken Shinsei's managers to task, and vowed to oust them once SBI's tender offer is accepted. A takeover fight broke in September when SBI floated a rare unsolicited tender offer to boost its position to a level that would grant it effective control of the lender without going through additional regulatory processes. Shinsei's shares closed up 3.4% in Tokyo on Wednesday. Shinsei had said it would approve the bid if SBI raises its offer and ditches a ceiling on the number of shares it will buy, so that all holders could tender. SBI balked, and the lender proposed the poison pill, calling it the best option for ensuring better terms for existing investors. In doing so, "Shinsei management saves face from what would have been a likely rejection of its poison pill tomorrow," said Morningstar (MORN) analyst Michael Makdad. "More importantly, the government can escape the dilemma of being in the middle of a hostile takeover in which it can't be seen to favor one side or the other, but had no way of staying neutral." In a note issued before Shinsei dropped the poison pill, SMBC Nikko Securities analyst Masahiko Sato said even if the measures were rejected, SBI might not be able to gain enough shares to reach the 48% stake if dissident shareholders and certain passive funds do not tender their shares. Shinsei intends to hold an extraordinary shareholder meeting in February to vote on SBI's proposed director candidates, and the bank said its current managers will resign if shareholders approve.
KKR (KKR) may need to raise its 33 billion euro bid for Telecom Italia (TIAOF) to gain buy-in from investors Vivendi (VIVHY) and Cassa Depositi e Prestiti (CDP), and it can probably up its offer without wearing down CDP with debt. Its 0.505 euros a share offer has so far met no objection from the Italian government or unions, but Vivendi did not respond well. Vivendi owns 24% of Telecom Italia's ordinary stock, and paid on average 1 euro per share. CDP, which owns 10%, likely paid closer to 0.70 euros per share. The implication is that KKR may have to pay more than the 10.8 billion euros currently on offer, but the Italian telecom market and Telecom Italia's debt load, equivalent to about 3.5 times 2021 EBITDA according to Refinitiv, means KKR cannot leverage excessive borrowing to fund the deal. It its favor is the fact that most of Telecom Italia's bonds lack change of control clauses, so they do not need to be refinanced when the deal closes. Should KKR increase its offer to 0.70 euros a share, Telecom Italia's equity will be valued at roughly 15 billion euros and the company, including debt, at just over 37 billion euros. KKR could raise maybe 9 billion euros of extra borrowing, while still keeping gearing at five times 2021 EBITDA, or some 32 billion euros. The private equity group would still need to raise nearly 6 billion euros of equity. Although a hefty sum, it would be less of a depletion if other funds joined in. KKR would also be able to quickly lower the debt by selling Telecom Italia's stake in Inwit (IFSU) and raise at least 1.5 billion euros, or reduce its 67% stake in its Brazilian unit, valued at about 3.6 billion euros. KKR, which is investing through its infrastructure fund, may ultimately choose not to use so much debt.
Advent International and Centerbridge Partners offered to buy Aareal Bank AG (AAALF), the German commercial real estate lender that has been under pressure from activist investors. The private equity firms offered 29 euros per share, valuing the company at 1.74 billion euros ($1.96 billion), Aareal said. The bank’s management and supervisory boards support the offer “on the basis of an investment agreement for a long-term partnership.” Aareal has been criticized by investors including Petrus Advisers and Teleios Capital Partners for high costs and lack of a sustainable strategy, with the investment firms pushing for a potential separation of the bank’s software arm, called Aareon. Aareal complied with some demands but resisted a full divestment of the unit after selling a minority stake to Advent last year. The bidders see themselves as longer-term investors and have no intention to break up Aareal Bank, according to people familiar with the matter. Teleios on Tuesday voiced opposition to the offer by Advent and Centerbridge. “This furtive offer process is yet another attempt by Aareal’s supervisory board to cut corners, to their shareholders’ detriment,” co-founder Adam Epstein said in a written statement to Bloomberg. “Teleios will seek to ensure that the board fulfills its fiduciary duty by staging a professional, structured sale process in the new year,” it added. Petrus declined to comment. Aareal, whose advisors include Perella Weinberg, said investments for growth will be financed via retained profits and that its dividend payment proposal will be withdrawn from the agenda of its shareholder meeting scheduled for next month. The bank said it could increase its lending portfolio to as much as 40 billion euros over the next five years or so by broadening its business in traditional asset classes and property types, as well as by tapping other areas with the support of investors.
Newpark Resources (NR), a provider of drilling fluids systems and composite matting systems used in oilfields, is being pushed by an activist investor to separate its industrials systems and fluids business, according to a letter seen by Reuters. Bradley Radoff, a private investor who previously worked as a portfolio manager at Daniel Loeb's Third Point hedge fund, has approached Newpark's board and is pushing for the separation. He argues that the two segments lack synergies, appeal to different investor bases, and boost excessive corporate costs. "The Company's own disclosures and investor presentations highlight that the Industrial Solutions segment is a high-margin business on a growth trajectory, while the Fluid Systems segment is an unprofitable business operating at the opposite end of the energy transition spectrum," Radoff wrote to the board. Newpark undermines its ability to have "a credible environmental, social and governance story" by keeping the two segments together, Radoff wrote. A majority of the Newpark's board members are oil and gas industry veterans. The company's stock price closed at $2.72 on Monday. Five years ago, the stock was trading at $7.80. Radoff, who sits on independent energy company VAALCO Energy's (EGY) board and has successfully pushed for changes at Tetra Technologies, where the company agreed to add a diverse director and appoint a new chairman, is urging Newpark to split at a time a number of other companies are breaking apart.
Outerbridge Capital Management has issued an investor presentation outlining the case for change at Comtech Telecommunications (CMTL). The New York-based investment adviser owns approximately 4.9% of Comtech. Outerbridge has nominated two director candidates – Wendi Carpenter and Sidney “Sid” Fuchs – for election to the Comtech board at the company's annual meeting on Dec. 17. In the investor presentation, Outerbridge says Comtech has displayed a pattern of dismissive engagement and entrenchment maneuvers. Outerbridge says underperformance and strategic failures are persistent, and the company has a history of poor capital allocation and failed mergers and acquisitions. The investor also says Comtech has a track record of poor corporate governance and has lost credibility. The board nominees are qualified, independent, and represent the best choice for shareholders, according to Outerbridge.
During last week's Pershing Square Holdings (PSHZF) quarterly call, Bill Ackman addressed Pershing Square Tontine Holdings' (PSTH) go-forward strategy. Ackman said Pershing could be filing a prospectus with the SEC for a Pershing Square SPARC soon. The idea is to give each PSTH shareholder money back and a warrant for Pershing Square SPARC. Each warrant holder in PSTH would receive two warrants in Pershing Square SPARC. The strike price of this new warrant would be $10. Ackman suggested the strike would be adjustable. They could use the strike to adjust and raise more or less money depending on the deal at hand. According to Ackman, this innovation makes SPARCs more flexible to meet the needs of opportunities for liquidity. Ackman also said the lawsuit against PSTH is an overhang. However, he doesn't believe the lawsuit will stop a transaction. He summarized PSTH's position by outlining a "best-case scenario" where they announce a deal shortly and get the SPARC sorted out afterward.
Royal Dutch Shell (RDS.A) has begun talks with investors to secure support for its idea to relocate its headquarters from the Netherlands to Britain, sources said. Shell said this month it would scrap its dual Anglo-Dutch share structure and move its head office to London from the Hague due to the Dutch tax system and after a court ruling over its strategy to reduce greenhouse gas emissions. The company also looks to move its tax residence to Britain and drop “Royal Dutch” from its name to become Shell Plc. Shareholders will vote on the changes at a special general meeting on Dec. 10 where the resolution needs to secure more than 75% of votes cast. To secure the high threshold, Shell's management has in recent days set up more than 100 meetings with leading investors, two sources close to the process said. "We believe this is a very shareholder-friendly proposition and we're working hard and engaging with many of our shareholders to explain all of the benefits of this move and encourage them to vote," a Shell spokesperson said. Proxy advisory Glass Lewis recommended shareholders vote in favor, in a note seen by Reuters. The simplified structure would allow "an acceleration in distributions by way of share buybacks, as there will be a larger single pool of ordinary shares that can be bought back," Glass Lewis said. It would also strengthen Shell's ability to manage its energy transition, it added.
When Athenahealth's revenue growth slowed in the second half of the last decade, Paul Singer's Elliott Management pushed for then-CEO Jonathan Bush to step down. Bush did so. Elliott and private equity firm Veritas Capital took Athenahealth private in 2018 for $5.7 billion, which was less than the $6.5 billion it originally offered. Bush called it "a steal." Now, Bain Capital and Hellman & Friedman, both of which kicked the tires back in 2018, have agreed to buy Athenahealth for $17 billion. Elliott and Veritas will retain minority stakes, with a source saying their combined position is expected to be worth just under $1 billion. Athenahealth is now almost as valuable as Cerner Corp. (CERN), one of the two dominant hospital electronic health record vendors alongside Epic Systems. The buyers' basic thesis is that the total addressable market is massive and still growing, particularly for independent docs, which means they can succeed as a top contender. Analysts say Elliott pulled the old private equity playbook of tearing down to build back up. It sold Athenahealth's campus for $525 million and wound down some ancillary efforts to focus on organic growth of its core business. Today, its revenue and headcount are significantly higher than they were in 2018.
Voss Capital, a top-10 investor in Griffon Corp. (GFF) has nominated three directors to the company’s board and is calling on the manufacturer to explore all available alternatives to improve its performance, including a breakup. Voss Capital owns a 2.1% stake in Griffon. It said in a letter to the company’s board Tuesday that it believes the company has very attractive assets but that they are being undervalued because of Griffon’s poor corporate governance, excessive executive compensation and outdated structure. Travis Cocke, Voss’ chief investment officer, said he agrees with the company’s own estimates that its shares could be valued at more than $50 apiece if it were to remove its conglomerate discount. “Now is the optimal time for a committee of truly independent directors to conduct a comprehensive strategic review of all potential paths for unlocking shareholder value and we are highly confident there are several suitors who would be interested in a transaction for each of the three segments,” Cocke said in the letter. Voss’ nominees include Gerry Bollman, H.C. Charles Diao, and Leviathan Winn. Shares in Griffon have gained about 29% year-to-date. Griffon operates three businesses, including a division that builds landscaping and gardening tools, one that produces garage and rolled steel doors, and a defense electronics division that provides intelligence, surveillance, and communications products. Griffon said last week it plans to implement measures to improve its governance, including de-staggering its board over the next three years so that all of its directors stand for re-election annually instead of just a few at a time, among other measures. While Cocke said the review of Telephonics was a step in the right direction, the governance moves are too little and should have been immediately implemented rather than waiting years. He criticized the board for its lack of diversity, arguing it is stacked with Kramer’s allies, who lack the necessary independence and experience. He also called for the immediate removal of current directors Victor Renuart and Robert Harrison, whose military expertise he says will be irrelevant at the business once Telephonics is sold. Cocke also cited the $60 million in compensation that Kramer has been awarded over the past five years, which he said is more than the CEOs of some of the world’s largest and most profitable businesses.
Dollar Tree, Inc. (DLTR) said Tuesday it will raise prices from $1 to $1.25 on the majority of its products by the first quarter of 2022. The change is a sign of the pressures low-cost retailers face holding down prices during a period of rising inflation. Dollar Tree said in a quarterly earnings release that its decision to raise prices to $1.25 permanently, however, was "not a reaction to short-term or transitory market conditions." Selling goods strictly for $1 hampered Dollar Tree, the company said, and forced it stop selling some "customer favorites." Raising prices will give Dollar Tree more flexibility to reintroduce those items, expand its selection, and bring new products and sizes to its stores. Dollar Tree also said that hiking prices will help the company increase its profit margins by "mitigating historically high merchandise cost increases," including freight and distribution costs, as well as wage increases. Dollar Tree had started moving away from only offering goods for $1 in recent years, in part as a response to pressure on Wall Street to raise prices. Dollar Tree has lagged Dollar General and other discount chains. In September, Dollar Tree said it planned to begin selling items at $1.25 and $1.50 at some stores for the first time. It also said it would add $3 and $5 items to more stores, expanding on a prior strategy to offer these prices at select locations. Since that announcement, Mantle Ridge built a stake in Dollar Tree and has tapped a former Dollar General CEO to push for changes at the company. Although Dollar Tree said its decision to permanently raise prices was not a reaction to short-term inflation, one analyst was unconvinced. "The pace of rollout, along with [the] engaged investor, Mantle Ridge, clearly suggests otherwise," Kelly Bania, an analyst at BMO Capital Markets, said in a note to clients Tuesday.
The International Organization of Securities Commissions (IOSCO) on Tuesday set out a global framework to police environment, social, and governance (ESG) investment ratings and help combat greenwashing. "What we are trying to do now is put this foundation in place so we have some possibility to go after greenwashing and not just talking about it," said Erik Thedeen, chair of IOSCO's sustainable task force. IOSCO published 10 recommendations for its members to apply in day-to-day work. It said its recommendations will begin shining a light on how ratings are compiled and conflicts of interest handled.
Shares in Thyssenkrupp AG (TKAMY) fell on Tuesday after Swedish investor Cevian Capital said it had cut its stake in the German industrial conglomerate to 7.9% from 15%. Shares at 1105 GMT were down 7.2% at EUR10.48. Cevian said in a statement that it accompanied Thyssenkrupp through a "strategic, structural and operational transformation" and that the company's recent results and share-price performance reflected the success of the turnaround. Even with Tuesday's share-price dip, the stock has climbed more than 20% in the last month, with fourth-quarter earnings coming in ahead of expectations and the company guiding for a breakeven in cash flow in its fiscal 2022 after years of heavy cash burn. Cevian has previously made no secret of its criticism of Thyssenkrupp's management, having urged it to speed up its strategic restructuring. The company has streamlined the business in recent years, including the blockbuster sale of its elevator unit in 2020 for EUR17.2 billion. Thyssenkrupp said last week it will list its hydrogen unit, Uhde Chlorine Engineers, in spring 2022 and is looking at options for its Steel Europe operations. "Cevian Capital remains among the company's largest investors and continues to fully support the company and its management team in making Thyssenkrupp better and more valuable for all stakeholders," a Cevian spokesman said. This is the first sell-down of Cevian's interest in Thyssenkrupp, which could create some dilution for existing shareholders, analysts at Jefferies said. Thyssenkrupp is set to hold a capital markets day on Dec. 2, when a broad corporate update alongside some guidance around the hydrogen business is expected, Jefferies added.
Government-owned Deposit Insurance Corp. of Japan is planning to vote against Shinsei Bank's (SKLKY) poison pill defense aimed at blocking SBI Holdings Inc.'s (SBHGF) $1.1 billion bid. How the government votes on the defense strategy at a shareholders meeting this week has been in focus as proxy advisory firms have sided with Shinsei, possibly swaying the vote of foreign investors who account for nearly 30% of registered shareholders. The government and SBI each own about 20% of Shinsei. Sources have said a government vote against the poison pill would almost certainly defeat Shinsei's plan, with some hedge fund investors in favor of SBI's bid. City Index Eleventh, a fund backed by activist investor Yoshiaki Murakami that holds about a 4% voting stake, reportedly will not vote in favor of Shinsei's plan. Online financial group SBI announced an offer to take a near-majority stake in the mid-sized Tokyo-based lender in September — an unsolicited bid that met immediate opposition from Shinsei's management. Proxy advisory firms Glass Lewis & Co and Institutional Shareholder Services Inc., meanwhile, have recommended shareholders vote for the lender's plan, with the latter saying SBI's partial offer would leave shareholders unable to tender. The SBI-Shinsei battle comes at a time Japan is witnessing a rise in hostile takeovers. But investors are also watching to see if, under a new prime minister, it will roll back some pro-market policies. Shinsei Bank is due to hold an extraordinary shareholders meeting on Thursday to put the poison pill defense to a vote.
Ericsson (ERIC) has agreed to acquire Vonage Holdings Corp. (VG) in its largest-ever deal, a takeover that also concludes a brief but successful engagement by Jana Partners. Jana Partners, which owns approximately 4% of Vonage, urged the company last summer to hire advisers to weigh strategic alternatives, including a possible sale of all or parts of the telecommunications services company. Ericsson's shares dropped as much as 4.3% in early trading on Nov. 22, with credit analysts at Danske Bank noting that the $6.2 billion all-cash offer Ericsson is paying for Vonage is "quite steep." "I think we're paying the right price," stated CFO Carl Mellander in an interview. "It's a value that we justify, otherwise we wouldn't do it." Ericsson will pay $21 a share for Vonage using existing cash. The offer represents an equity value of $5.3 billion, and a fully diluted value of about $6.2 billion. Vonage's cloud-based communications platform accounts for 80% of its $1.4 billion annual revenues and allows developers to embed services such as messaging or video into their products. That customer base and developer community is seen as an important attraction for Ericsson. Cevian Capital AB said it welcomed the company's push to spark growth within the enterprise segment, enabling a "meaningful re-rating opportunity."
Alden Global Capital has offered to purchase Lee Enterprises Inc. (LEE) for about $142 million in a bid to amass a larger share of the struggling newspaper business. Alden, the hedge fund that owns the Chicago Tribune and New York Daily News, offered $24 a share in cash for the chain, a 30% premium over Lee's closing price on Nov. 19. A letter to Lee's board indicates that an Alden affiliate owns about 6% of Lee. Meanwhile, Cannell Capital has been pressuring Lee to restructure its operations to focus more on digital.
Comtech Telecommunications Corp. (CMTL), a global provider of next-generation 911 emergency systems and secure wireless communication technologies, has mailed a letter to stockholders detailing the deficiencies of Outerbridge Capital Management's nominees and enabling shareholders to get to know Comtech's director candidates. Comtech encourages shareholders to get to know the two members of the board up for election this year—Judy Chambers and Larry Waldman. Comtech believes that Chambers and Waldman are vastly superior board candidates to Outerbridge's nominees.
Telecom Italia (TIAOF) shares increased more than 27% on Monday morning after U.S. private equity giant KKR launched a 10.8 billion euro ($12 billion) buyout bid for Italy’s largest phone company. The non-binding proposal values the former phone monopoly at 0.505 euros per share in cash, indicating a 45.7% premium on Friday’s closing share price, and rises to more than 33 billion euros including debt. Telecom Italia’s reported gross debt exceeds 29 billion euros, and S&P last week downgraded the company’s credit rating further below investment grade level. The buyout offer is reportedly closer to 33 billion euros in total with the debt factored in. Telecom Italia CEO Luigi Gubitosi has been under pressure from top investor Vivendi (VIVHY) after two profit warnings in a single quarter. The French media firm has long been at loggerheads with Elliott Management, a tussle which led to the ousting of Gubitosi’s predecessor, Amos Genish, in November 2018. Prior to the start of trading on Monday, the embattled phone company had seen its share price fall almost 50% over the past five years. The Telecom Italia board, chaired by former Bank of Italy Deputy Governor Salvatore Rossi, met on Sunday to discuss the offer, which was characterized by KKR as “friendly,” according to a statement published Monday. “For the time being, it is conditional — among others — to an estimated four-week confirmatory due diligence, as well as clearance by key government stakeholders,” the statement added.
13D Monitor President Kenneth Squire writes that Mantle Ridge is planning to engage with various stakeholders of discount variety retail store operator Dollar Tree Inc. (DLTR). "In each case, they plan to discuss the company's business, operations, strategies, governance, the composition of the executive suite and board, and possibilities for changes thereto," he notes. This is Mantle Ridge's third investment following CSX (CSX) and Aramark (ARMK). Mantle Ridge founder Paul Hilal is known for generating shareholder value by bringing in a celebrated CEO, and Squire says there is reason to believe he is feting former Dollar General CEO Rick Dreiling to play this role. "In just seven years, Dreiling took the company's value from $4.5 billion to $25 billion, and it is now worth about $52 billion," he points out. Squire adds that the player/coach structure that Dreiling specializes in "is exactly what is needed at DLTR. He suggests shareholder value could be created through two strategies: "first, aggressively implementing a multiple price strategy, which has proven to work elsewhere," and focusing on Family Dollar, "but not to sell it...at least not immediately." Squire argues Dreiling "can do for Family Dollar what he did for Dollar General, and maybe even quicker." If Dollar General is not amenable to a reasonable settlement with Mantle Ridge, then Hilal is not averse to a proxy fight. "It is clear to many shareholders that the company needs fresh eyes at the highest levels of the board," Squire writes, stressing that "the four directors with the most influence...have all been there for at least 13 years." Also in Mantle Ridge's favor is Dollar Tree's chronic underperformance, and stock has risen on heavy volume and the shareholder base has seen much turnover since rumors of Mantle Ridge's involvement broke. "Finally, Mantle Ridge not only has a track record of working well with incumbent boards, but Hilal has skills and characteristics that are generally attractive to boards," Squire contends. He argues further that if Mantle Ridge gains board seats, "we expect that they...will keep an eye on any environmental and social issues or opportunities at the company. For example, the distribution centers have never been completely integrated after DLTR bought Family Dollar. In fact, only one of the 26 serves both brands. This means that Family Dollar trucks are passing DLTR distribution centers to make deliveries and vice versa. Not only would integrating these distribution centers be good for the bottom line, but it would also be beneficial to the environment by greatly reducing the emissions from these trucks as they make their deliveries."
Private-equity firms Bain Capital and Hellman & Friedman LLC are reportedly close to a deal to acquire healthcare-technology firm Athenahealth Inc. for approximately $17 billion including debt. A deal for closely held Athenahealth could be completed in the coming days, according to people familar with the matter. The private-equity pair is poised to prevail in an auction of the company, though there is no guarantee they will clinch a deal. Athenahealth provides cloud-based software to healthcare providers that helps patients communicate with their doctors, streamlines billing and maintains patient records. Demand for healthcare technology, already on the rise, has received a boost in the pandemic as more people attend to their medical needs remotely. The company since 2019 has been owned by Veritas Capital and Evergreen Coast Capital, the private-equity arm of Elliott Management Corp. They agreed to take it private in a roughly $5.5 billion deal in 2018, following a campaign led by Elliott that centered on Athenahealth’s co-founder and former chief executive, Jonathan Bush. Bush stepped down as president and CEO in June 2018 after it surfaced in a 2006 divorce proceeding that he had assaulted his then-wife. Athenahealth’s current owners combined it with Virence Health Technologies, which was already owned by Veritas, and installed Virence’s CEO, Bob Segert, to lead the combined company.
Royal Dutch Shell (RDS.A) shareholders will vote in December on a proposal by the board to drop Royal Dutch from the company's name, transfer its CEO and tax residence to Britain, and terminate a complex dual share structure. Shell Chair Andrew Mackenzie told investors that the proposed changes would make the group "faster," "more agile," and better able to transition to sustainable energy. Shell said the restructuring would have moved forward even without Mackenzie, but investors, former colleagues, and some who work with Mackenzie said he would have backed such a move regardless. In May, a Dutch court ruled that Shell's new strategy did not make a sufficient effort to reduce emissions, and directed it to accelerate. Investors still need persuading, and Third Point last month disclosed a stake in the company and urged a breakup to deliver better value through the transition. Though Mackenzie's co-workers have said he will be looking forward to the challenge, his past experience with shareholders has been difficult. During his stint as CEO of BHP (BHP), Mackenzie faced a challenge from Elliott Advisors which urged the company to sell or spin off its oil business and reorganize its complex corporate structure. One senior fund manager in London recalled that "he was very personally upset with the Elliott stuff because they played him, not the issues." Although investors may approve Shell's proposal, tougher challenges loom. Analysts say a succession plan for CEO Ben van Beurden may be one such task, followed by the need to decarbonize the business quickly enough to meet both the courts and the markets' expectations.
A pension fund filed suit in Delaware against Southwest Gas Holdings Inc. (SWX) and its board, challenging the company's response to a tender offer by Carl Icahn, who is against its planned $2 billion deal for a Dominion Energy Inc. (D) pipeline business. The lawsuit accuses the company's directors of omitting critical information from securities disclosures urging investors not to participate in a $75-per-share tender launched by Icahn Enterprises LP in late October, about a month after the board adopted a poison pill to stave off Icahn's first approach.
Macy's (M) announced it has hired the consulting firm AlixPartners to evaluate whether it makes sense to spin off its ecommerce operations. The move comes amid pressure from an activist investor to separate the fast-growing ecommerce segment from the department chain's brick-and-mortar stores. Macy's CEO Jeff Gennette on Thursday revealed that the company, along with its board and advisers, had previously considered whether it made sense to split the digital business. "What's new now is the market is assigning huge value to ecommerce businesses," Gennette said. "We wanted one more time to pressure test our assumptions and analysis." Gennette stressed that it is too soon to tell what the results of the analysis will be.
Janus Henderson Group Plc (JHG) said CEO Dick Weil will retire at the end of March as the firm comes under greater pressure from Nelson Peltz's Trian Fund Management to boost performance. Weil, who was key to the 2017 merger of Janus Capital Group Inc. and Henderson Group Plc, also will step down as a member of the company's board in March and stay as an adviser through June. The board has begun an internal and external search for a successor. "We don't know who an internal candidate might be at this time, and with a CEO search underway, it could be some time before the company will embark on substantive new initiatives," Keefe, Bruyette & Woods analysts Robert Lee and Margo Rybeck stated in a note to clients following the announcement. Trian, Janus' biggest shareholder, with a 15.4% stake, said in a regulatory filing this week that it's involved in talks with the company's board and management. Trian has proposed a number of strategic and operational changes at Janus, including adding new independent directors, in an effort shore up the firm's performance.
Japan's high court on Nov. 18 dismissed a request to block a plan by Tokyo Kikai Seisakusho Ltd. for a "poison pill" takeover defense, in a closely watched decision that could impact future hostile bids in the nation. The decision, Japan's first on a bid to exclude an investor from a shareholder vote on whether to adopt a poison pill, could make it much simpler for other companies to prevent hostile takeovers using a similar strategy. The decision means Tokyo Kikai can proceed with an issue of new shares that would dilute the 40% stake of leading shareholder Asia Development Capital (ADC), a move already supported by shareholders in a controversial vote that excluded the firm. "This is the final court judgement over (ADC's) injunction request," Tokyo Kikai stated. "We believe this is a totally proper judgement." Asia Development Capital had requested the injunction on the theory that shareholder equality was infringed by the actions taken to exclude it, as an "interested party," from a vote by Tokyo Kikai shareholders on the poison pill strategy. Lower courts found the actions were justified, because the vote was geared to permit other shareholders to judge whether the acquisition would harm their interests. Governance experts are worried about the implications of the court ruling, because it could be interpreted as authorizing a board to refuse to count the votes of some shareholders in certain instances. The ruling could "invite reams of litigation" over which shareholders are allowed to vote," said Stephen Givens, a corporate lawyer based in Tokyo. "Who is an 'interested' shareholder in a vote on a poison pill is a question without obvious answers," he pointed out.
Investor and Pershing Square Capital Management owner William Ackman declared at a conference sponsored by S&P Global Ratings that the U.S. Federal Reserve's loose monetary policy has given rise to a "classic bubble," and it will have to tighten rates rapidly to counter inflation. His comments follow a government announcement that U.S. consumer prices in October gained 6.2% over the last 12 months, topping many economists' predictions. "Every indicator is flashing red," Ackman said, referring to booming prices in real estate, the art market, and the stock market. He said inflation was Pershing Square's biggest risk this year, and he expects the Fed will need to hike rates soon. Ackman also said he sees few benefits in keeping interest rates at their current low levels, adding that easy monetary policy was not luring people back into the workforce. Moreover, he said higher prices are being driven by structural changes and recent surges may not be temporary, as some policymakers, economists, and many corporations suggested. Ackman said ESG initiatives, including a move to cleaner energy and demands for higher wages, are expensive and long-lasting, and will impel higher prices for some time. Last month he tweeted that he had been invited to give a presentation to the Federal Reserve Bank of New York to detail his views on inflation, and that he advised policymakers to "taper immediately and begin raising rates as soon as possible." Ackman reiterated today that he has hedged his portfolio, concerned that higher rates could harm Pershing Square's long-only equity portfolio. His Pershing Square Holdings Fund has yielded 26.1% since January after a 70.2% increase last year.
Pershing Square Tontine Holdings (PSTH) rose 2.2% after Bill Ackman said the firm is actively working to find an alternative transaction. "We are continuing to work on potential, actually one thing in particular, that we think is interesting, but we are still nowhere in a position to have a view of its executability," Ackman said on a quarterly conference call. "The hopeful worst case is we get SPARC approved relatively soon. We are able to return people's capital," Ackman said. He added that the best case scenario is "we get a transaction done and announced in the relative short term hopefully and we thereafter launch SPARC Holdings." Ackman said separately that the Pershing Square hedge fund has been building a new position in an undisclosed name.
Macy’s Inc. (M) said on its Thursday earnings call that it has hired AlixPartners, a management consulting firm, to assess whether or not a spinoff of its e-commerce business makes sense. This move follows a nudge last month by Jana Partners, which proposed a spinoff of Macy’s faster-growing online business, saying the separation could double its market value. The department store is leaning into the dot-com excitement in other ways too. It also announced a plan on Thursday to launch a third-party online marketplace. That, paired with better-than-expected third quarter results, were enough to send the department store’s shares up 20% on Thursday. Its shares are now up about 60% from when Jana went public with its recommendations, and about 232% year-to-date, far exceeding rival Kohl’s Corp.’s (KSS) 49% rise and Nordstrom’s (JWN) 12%. Observers say Macy’s results are encouraging but offer neither clear evidence of a turnaround nor a conclusive case for an online spinoff. The department store is making progress. Its revenue grew 5.2% in the quarter ended Oct. 30 compared with the pre-pandemic quarter, its second quarter of growth compared with 2019. Macy's is starting to see more shoppers buy dressier categories such as dresses and suits, as well as luggage. But that comes as all retailers are seeing a lift. Department stores across the board saw a 13% sales growth over the same period, according to Census Bureau data. Macy’s online business is doing well, but not spectacular. Sales were almost $1.9 billion in the October quarter, up 17% compared with a year earlier, though that was less than the $2 billion analysts expected. Online sales actually declined compared with the second quarter. Just how much more value can be created through a spinoff is hard to say. Jana pointed to the six times forward revenue valuation that Saks.com is targeting through its own spinoff from the luxury department store.
Macy's (M) CEO Jeff Gennette told CNBC's Jim Cramer that the company has not yet made any decisions about spinning out its e-commerce unit into a separate entity, which investor Jana Partners would like. His comments followed Macy's announcement that it had hired consulting firm AlixPartners to evaluate its business structure. "The board, myself, our advisors, we look at this all the time, and we look at how is the company more valuable to the shareholder—as a unified company or as separate companies?" Gennette said. He noted that Macy's "Polaris strategy" had started to yield dividends, and there is space to improve. "But with the value the market is putting on e-commerce, we needed to take another look," Gennette added. According to him, AlixPartners will "pressure test" Macy's ongoing structural analysis. "We don't have any conclusions, but we'll be transparent with the market about where those findings take us," Gennette pledged. CNBC reported in October that Jana Partners had taken a position in Macy's and sent a letter to the board, urging the separation of its e-commerce operations into a standalone firm that could receive a higher market valuation. "At the end of the day, I think what everybody can agree on is the omnichannel behavior of the customer," Gennette said. "That customer is going to be respected at all costs." Macy's reported third-quarter revenue and profits topped Wall Street's estimates, with earnings per share of $1.23 surpassing projections of 31 cents, while sales of $5.4 billion exceeded forecasts of $5.2 billion. Company shares closed Thursday up 21.17% at $37.37 apiece, as investors welcomed the strong quarterly results and Macy's decision to hire AlixPartners.
An investor whose climate resolution garnered 30% votes from Royal Dutch Shell Plc (RDS.A) investors says the energy giant has not fully addressed concerns over emissions. Dutch group Follow This brought a motion at Shell’s general meeting this year urging it to set targets for Scope 1, 2 and 3 emissions. The company put out a regulatory notice on the AGM results, saying that it had already unveiled new targets to halve operational emissions by 2030. “Their silence about Scope 3 speaks volumes about oil majors’ reluctance to engage the fundamental concerns raised by shareholders,” Follow This founder Mark van Baal said in response to Shell’s update. Shell said it would “continue to engage with our shareholders and will be providing further updates” on its energy transition progress at next year’s AGM.
BlackRock Inc.’s (BLK) decision to offer institutional investors the chance to vote directly with companies has been hailed by many as a great step forward for engagement, but the reality might be a little more muted. The initial announcement from BlackRock came in early October, with the firm saying those invested in some 40% of its $4.8trn equity index assets would be able to vote at shareholder meetings, effective January 1, 2022. Demand for voting rights has been particularly strong among clients invested in passive products incorporating ESG and climate metrics, with many concerned about asset managers’ tendencies to vote largely in line with companies’ management. Skeptical on the degree of impact the measures will have, Douglas Chia, founder and president of Soundboard Governance LLC, argues that BlackRock’s decision to expand proxy voting rights makes it appear a good corporate governance actor by furthering shareholder democracy, but also means it can deflect criticism it normally receives for not using its large voting power in more activist ways. Chia concludes the move may not end up having much of an impact on proxy voting outcomes, given many clients will likely take the option of continuing to defer to BlackRock’s discretion during voting processes. “Similar to not having to actively manage investments in individual portfolio companies, part of the attraction of investing in index funds is leaving the decisions and mechanics on hundreds of proxy votes to the asset manager, all at very low cost,” says Chia. “While the largest asset owners have dedicated personnel to analyze and make voting decisions at individual companies, the rest cannot incur that cost. BlackRock may be giving its clients options that most will not use.”
Black Friday may look a little different in 2022—for retailers at least. As department stores prepare for the year’s biggest shopping event, they’re also at a strategic crossroads, with activist investors increasingly calling for a breakup of their brick-and-mortar and online businesses. Macy’s (M), with two activist investors in its stock, said this month that it’s working with an adviser, AlixPartners, to explore a potential spinoff of its e-commerce business. The move would, at least on paper, unlock value in the asset-light, higher growth online business–a basic financial engineering exercise. But many are still skeptical if a deal will happen. “If you spin off online, what do you have left?” said Hoai Ngo, a retail analyst at Bloomberg Intelligence. Macy’s minus its online business, which is the key driver of growth, consists of mostly real estate that is probably not enough to support current valuations, he said. A split could also hurt Macy’s top line, as e-commerce is a big part of its customer acquisition. And doing any kind of spinoff under the watch of public investors adds complexity. Shoppers prefer a hybrid retail experience, where they can shop online and return or pick up their products in store. While that'll still be possible, maintaining that model could create new fixed costs for the businesses, with fees streaming from online to offline. It’s not the first time Macy’s has been in the defensive position. Starboard pushed the retailer to separate its real estate assets in 2015 before exiting its position two years later. Macy’s as a company remained little changed. Even if nothing materializes from Macy's exploration, investors like the idea of action. Macy’s shares have rallied 45% since activists first put out a letter suggesting the split in early October.
After making $2.6 billion on his big Covid-19 short in 2020, this year another macro short of Bill Ackman's is panning out: a $170 million bet on inflation that is now worth $1 billion. “The world is kind of catching up to our view on inflation,” the hedge fund manager told investors in a quarterly call last week. He noted that his firm, Pershing Square Capital, has notched a six-fold increase on the bet, which was placed in all three of its hedge funds. By January, Ackman said he and his team were concerned about a cascade of trends, including the “compounding effects of extremely forward-leaning and aggressive fiscal policy, combined with the most aggressive monetary policy.” At the same time, the economy was feeling the effects of a stimulus from the vaccine as well as the effects of people emerging from lockdown with both savings and a desire “to have fun.” Pershing Square made its bet with options, taking a notional short position principally in shorter-dated maturities of U.S. Treasuries, as well as some longer ten-year dated debt, Ackman said. “We were able to set up a bet like that on an out-of-the-money basis very, very cheaply — very much like credit default swaps; but in this case, not swaps but options,” he explained. “Never before in history have we had a 0% monetary policy with the effects that are taking place now,” he added. “And I think part of that relates to the fact no one was alive for the perspective that one would have in the last pandemic and the impact it has [had] economically.” He suggested that the current environment is akin to the 1920s. Pershing Square Holdings (PSHZF) is up 26.1% this year through November 16.
TSBR released a yearly report on the environmental, social, and governance (ESG) preparedness of the board of directors (BoD) of the world’s largest 100 publicly listed companies. Last year it was found that only 17% of directors on relevant sustainability committees are ESG competent. Overall, there is generally a very low level of hard ESG competence on BoDs. That said, BoDs are increasingly conscious of ESG matters. This is attained primarily through engagement and dialogue with auditors, consultancies, law firms, board assessors, or short webinars and (virtual) roundtables provided by think tanks and knowledge organizations. The results across more than 600 historic data points show that there is a strong and significant correlation between ESG consciousness and gender. Women are on average more conscious of ESG issues. It was also found that the ESG preparedness of BoDs and the ESG consciousness of directors themselves are increasing. Not only are more ESG committees being created, but more directors are becoming ESG conscious too.
Directors see that diversity and inclusion (D&I) efforts are good for both their companies and boardrooms and they recognize the need to build a culture of belonging. With an eye toward better, more sustainable business outcomes, directors increasingly see a link between ESG and the company’s core strategy. The Corporate Directors Survey highlights a number of areas where boards are making progress and operating with a new playbook. But the work of improving governance and board oversight is not done. According to the survey, ESG is the top issue shareholders want to discuss with directors. To help, some boards are forming new committees to focus on the issue. The most critical part of tackling ESG is to embed these long-term concerns into company strategy. For the 36% of directors whose boards are not doing this yet, now is the time. One way to enforce the connection is by tying executive compensation to non-financial metrics. While a growing percentage of directors support the idea, relatively few companies are doing it.
The poison pill, one of the corporate world’s most controversial takeover defenses is winning some unexpected fans. It has long been criticized as a tool to keep bad management teams in place and deny existing shareholders the right to profit from buyouts. But a takeover battle in Japan is now spurring endorsements for the tactic by corporate governance experts and influential proxy advisers, and even making some activist investors consider giving it support. Tokyo-based Shinsei Bank Ltd. (SKLKY) had asked shareholders to approve on Thursday its plan to use a poison pill defense against a proposed stake increase by SBI Holdings Inc. (SBHGF). “Poison pills generally are not terribly good for shareholders,” said Jamie Rosenwald, a co-founder and portfolio manager at Dalton Investments, a $3.4 billion U.S. money manager that owns about 3% of Shinsei for clients. But if the aim is to secure a better deal for investors, that would be a “reasonable reason,” he said. The bank wound up canceling the shareholder vote on a poison pill defense, and assumed a neutral position on the offer. Even so, the case shows how takeover defenses are evolving as companies become more sophisticated about the strategies. Institutional Shareholder Services Inc. said it was backing the defense plan, arguing it was being used to help shareholders. Glass Lewis & Co., the other major proxy adviser, also supported the Shinsei pill, pointing to SBI’s partial offer as its chief reason. “This is not a typical ‘Just say no’ takeover defense situation,” said Nicholas Benes, who heads the Board Director Training Institute of Japan. “This may be one of the only cases in Japan’s history where a poison pill was used for the purpose that poison pills were designed for: to enable the target company to get negotiating power and time so as to get a higher price for all shareholders,” he said. Even activist investors who seek to profit from such bids haven’t ruled out voting for Shinsei’s plan. Oasis Management Co. said the bank’s directors would have to come up with “substantial value-creating actions” to get its support.
Japan is home to many companies "underappreciated by the capital markets," says a partner at U.S. investment firm ValueAct Capital, which has made the Asian economy its second-largest destination after the United States. The California-based investor has allocated more than 400 billion yen ($3.5 billion) in Japan since 2017. The sum accounts for roughly 25% of the company's assets under management, a sizable share that makes ValueAct's position stand out when its North American peers remain bearish about Japan's growth prospects. ValueAct holds a stake of around $1.3 billion in medical imaging device maker Olympus (OCPNY), its first Japanese investment, according to data from FactSet. It is also an investor in materials group JSR (JSCPY), Nintendo (NTDOY), and Seven-Eleven parent Seven & i Holdings (SVNDY). ValueAct's D. Robert Hale sits on the boards of JSR and Olympus. He cites three main factors in ValueAct's decision to expand its investment horizon to Japan. "One, we think there are many world-class businesses in Japan that fit our criteria. They've got strong business models, strong value propositions, global growth opportunities. And they have the opportunity to transform. Number two: Japanese society understands the need for corporations to generate higher returns for shareholders and other stakeholders. And number three: The corporate community, the leadership — and by that I mean executives, outside directors, academics, policymakers in government and even the media — I think they have all been supporting corporate governance change in an effort to realize society's aim for higher-performing corporations. Hale adds that after four years of investing in Japan, "it's still early, I think, in the context of ValueAct history. But so far we have been pleased with our progress in terms of investments, investment outcomes and in terms of corporate transformation and, really importantly, in terms of our relationships and our network that we're building in Japan. That gives us a lot of confidence to continue to invest in Japan. That's what we're focused on, and I think our clients support us."
Healthcare software company Athenahealth announced on Monday that investment firms Hellman & Friedman and Bain Capital (BCSF) would buy it for $17 billion, making it one of the largest leveraged buyouts this year. The sale is the latest instance of private equity firms leveraging favorable conditions, such as low interest rates that let them borrow money cheaply, to strike major deals. Athenahealth founder Jonathan Bush stepped down in June 2018 after allegations of domestic abuse and inappropriate workplace behavior were exposed during a takeover challenge with Elliott Management in 2017. Elliott had acquired a stake and pushed for cost cuts and other changes, prompting Athenahealth to announce layoffs and the eventual appointment of former General Electric (GE) CEO Jeffrey R. Immelt as chairman. Elliott wound up co-owning the company, which Veritas Capital and Evergreen Coast Capital bought for $5.5 billion and later merged with Virence Health Technologies. "Elliott is proud to have worked with Veritas to help transform Athenahealth, and we welcome Hellman & Friedman and Bain Capital as new stewards of this unique and important healthcare leader," declared Elliott managing partner Jesse Cohn. Athenahealth's Chairman and CEO Bob Segert, who will continue to run the company after the deal closes, said the transaction "marks a significant milestone for Athenahealth."
The author of this opinion piece suggests the U.S. Securities and Exchange Commission's (SEC's) approval of the "universal proxy," which will permit corporate shareholders to pick and choose board candidates rather than choose between one slate or another, could give extreme elements an opening to gain influence. "To put forth a shareholder proposal at an AGM [annual general meeting], for example, an investor has to have held a minimum percentage of shares for a period of time," the author states. "There will be no such requirements to propose any director candidates. To ensure challengers are serious, the SEC requires them to actively solicit at least 67% of the voting power of shares entitled to vote. But even that requirement can be satisfied merely by putting the proxy materials on a website. SEC calculations suggest a proxy contest could cost as little as $10,000 whereas previously it could run into millions of dollars, one law firm has noted." The author acknowledges that the universal proxy, scheduled for enactment in late 2022, makes challenging management less of a cost burden. "But that comes at the risk of forcing companies to entertain the whims of gadflies," the author warns. "Whether the measure ultimately proves a nuisance or a healthy check on incumbents, there are certain to be some beneficiaries. Expect those operating the machinery of AGMs—lawyers, vote counters, PR firms—to be the biggest winners."
Glass Lewis has expanded its policy on board gender diversity, and beginning next year, it generally will recommend voting against the chair of the nominating committee of a board with fewer than two gender diverse directors, or the entire nominating committee of a board with no gender diverse directors, at companies within the Russell 3000 index. The company also revised its discussion on disclosure of director diversity and skills in company proxy statements, and starting in 2022 for companies in the S&P 500 index with particularly poor disclosure, it may recommend voting against the chair of the nominating and/or governance committee. Beginning in 2023, when companies in the S&P 500 index have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information, Glass Lewis generally will recommend voting against the chair of the governance committee. Also in 2022, Glass Lewis will note as a concern when boards of companies in the Russell 1000 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Among other things, Glass Lewis will recommend voting against the chair of the governance committee at companies with a multi-class share structure and unequal voting rights when the company does not provide for a reasonable sunset of the multi-class share structure (generally seven years or less).
BlackRock (BLK) announced last month that it plans to give certain institutional index equity clients the ability to instruct BlackRock about how those clients would like their votes to be cast at shareholder meetings of companies in the asset manager's index funds. However, which clients choose to take back discretion on their votes or how those clients cast those votes will remain unknown, even when BlackRock submits its Form N-PX filings. The information will become public only if BlackRock or its clients voluntarily disclose it. Even if the U.S. Securities and Exchange Commission adopts proposed rules to require asset owners to file Form N-PX reports, they will be required to disclose only their "say on pay" votes. Observers believe most BlackRock clients will not give the asset manager consent to disclose how they instructed BlackRock to vote or even whether they continued to rely on BlackRock's voting discretion, making it harder for companies and their proxy solicitors to accurately predict how large blocks of shares held by BlackRock will be voted. However, the move may not have much of an impact on proxy voting outcomes, as many clients likely will continue to defer to BlackRock's discretion on proxy votes.
A memorandum from Capital Group's Jessica Ground indicates that global investors strongly favor active environmental, social, and governance (ESG) strategies, with 75% using active ESG funds, or twice the percentage of passive ESG fund and tracker users. Ground says shareholders prefer asset managers to identify and handle ESG risks and opportunities through bottom-up security choices and fundamental analysis. Moreover, close to 50% cite exercising voting rights and having regular meetings with senior executives at companies as primary engagement tools. A holistic ESG strategy that encompasses all stages of the investment process appears to be strongly desired. The value ascribed to qualitative analysis highlights a need for better ESG data and information, and shareholders list a lack of robust data as a key obstacle to greater ESG adoption. Data quality and consistency issues are especially hindering throughout the investment process, and investors call the uncertainty around the reliability of ESG scores the biggest barrier when incorporating ESG data, ratings, and research. In addition, 20% name inconsistency among different rating provider scores the leading implementation challenge. Ground attests that active management that emphasizes proprietary research can address these issues, while data can also open up more opportunities for ESG-focused investing. Asset managers can be critical contributors in this regard, as nearly half of investors say increased transparency in ESG fund reporting frameworks and data availability would encourage them to focus on ESG more. Shareholders attribute the most value of fund sustainability reporting to clear explanations of the role ESG plays in the investment process. The No. 2 item of importance for them is data on specific E, S, and G factors, with nearly half of investors' attention committed to environmental issues. More transparent fund reporting is viewed as an effective tool in solving the problem of greenwashing. About one in two shareholders say setting minimum regulatory standards for investment products and services would help address this challenge, yet global investors want a common set of global rules and standards to replace the current regulatory scheme. Forty-five percent of investors believe harmonizing global standards, taxonomies, and metrics should be the No. 1 ESG priority for national regulatory frameworks.
Corporate breakups are regaining momentum, with significant implications for investors. General Electric (GE) announced a split into three publicly listed companies focusing on aviation, healthcare, and energy. Morningstar's Joshua Aguilar thinks this could finally "help close the persistent price/value gap for the stock." He continues, "Investors will now have the opportunity to own either or both exceptional franchises in aviation and healthcare without having to hold on to GE's more challenged businesses." Meanwhile, Third Point is lobbying for Royal Dutch Shell (RDS.A) to split into two companies: one will oversee "legacy" assets like oil and gas, while the other will manage renewable energy. Although immediate support for this plan may not be forthcoming, Morningstar's Allen Good believes it could become more favorable if more investors support it. "The idea does have appeal, given Shell's poor past performance and the lukewarm response to its current strategy, so if [Third Point] can attract more supporters, pressure on management will grow," he says. Although Elliott Advisers would like SSE (SSE) to spin off its renewables branch, the company has decided that remaining intact is the best option, while also boosting investments in renewables. Large investors like Royal London are supporting the company. Elliott Advisors has also campaigned for change at GlaxoSmithKline (GSK), which is dividing into a pharmaceutical and a consumer health business next year. Morningstar analysts see this as beneficial, as consumer health companies are often valued higher by investors than pharmaceutical firms. GSK has a fair value estimate of £17.30 while its current price is about £15. Investors want to raise the share price by refreshing GSK's board. Other companies planning breakups include Toshiba (TOSYY), which is splitting into three entities amid shareholder pressure following corporate scandals. Johnson & Johnson (JNJ), meanwhile, surprised analysts and the market with a plan to spin off its consumer healthcare unit. Morningstar's Damien Conover says this move "doesn't have a major impact on our fair value estimate, but the strategic move is likely to create two powerful new companies in 2023. After many decades of operating as a diversified healthcare conglomerate focused on drugs, devices, and consumer healthcare, the firm's timing is surprising, as we don't see any major catalyst for the move." Conover is skeptical that the split will unlock as much value for existing investors as GSK's break-up. "With J&J trading at a higher valuation multiple versus Glaxo, we see less potential for it to create value with its consumer healthcare divestment, even with the strong comparable valuations of stand-alone consumer health companies," he notes.
Today's activist shareholders tend to engage larger companies via a rising number of new campaigns each year. Most activists seek longer-term structural changes that benefit the environment, ensure the care and well-being of employees at the companies they invest in, and such rights as equal pay, shared parental leave, and political ethics. Peter Elwin, head of the Food & Land Use program and director of fixed income at financial think tank Planet Tracker, says there have been notable instances of activists making positive changes. He says, "Shareholders achieved a significant change in the board at Exxon Mobil (XOM) and rejected the excessive pay award proposed for the CEO of Norwegian Cruise Line (NCLH)." However, most efforts do not result in change. Elwin points out: "The Diligent Institute report noted that only 20% were successful in 2020—picking the right battles and gathering support are both important for success." Max Muller, associate professor of accounting at ESMT Berlin, observes: "At Chevron (CVX), shareholders voted for a resolution from 'Follow This,' a campaign group that uses activist investment to substantially reduce indirect emissions arising from the products it produces. Overall, ESG-related campaigns by shareholders are on the rise and increasingly successful." Individuals and institutional investors should be mindful about activism because a growing body of evidence indicates that activists can make companies more profitable and productive. Companies with robust ESG also tend to be better equipped for volatile times, says Jessica Robinson, author of Financial Feminism: A Woman's Guide to Investing for a Sustainable Future.
The Securities and Exchange Commission has approved rules that require the use of universal proxy cards that include the names of all director nominees in contested board elections. The change of rules gives shareholders the ability to vote by proxy for a combination of board candidates from company management and candidates from activist investors. Now that proxy voters will have the ability to support a variety of directors put forth by management and activists, corporate board members will have to consider how that could affect their individual status as a director. The new rule also will increase engagement between shareholders and management. More engagement can potentially lead to greater exchanges of ideas, which may work to improve the standoffish relationship many boards have with shareholders. Finally, universal proxy voting will likely mean each director will be judged more by his or her own individual voting record.
It could take 140 years for Hong Kong’s top listed companies to reach gender parity on their boards of directors, according to a study by investor-backed corporate governance body and non-profit Asian Corporate Governance Association. The study found that last year women constituted only 12.7% of the boards of directors of the top 100 companies by market value tracked by MSCI. Their numbers had risen from 10.3% in 2012 and 5% in 1999, but progress was slow. About a third of all Hong Kong-listed companies will need to appoint at least one woman director by 2025 or face a penalty, under a stock exchange proposal that could be implemented. The proposal, which aims for the city to catch up with gender diversity efforts elsewhere, also seeks for all new listing candidates to have at least one woman on their boards at the time of going public. Of the top 100 companies in Hong Kong, 17 had men-only boards as of last month. Across the city’s stock market as a whole, the figure was 37% last year, not much improved compared to the 40% recorded in 2012 based on MSCI data.
The announcement by Toshiba Corp. (TOSYY), one of Japan’s oldest conglomerates, that it intends to split into three companies raises the prospect that the nation's corporate environment may be ready for reform. Toshiba's announcement is a big deal because the company's travails represent a relatively new phenomenon in Japan. Thousands of other American companies every day have to answer to investors demanding managerial competence in pursuit of higher returns. A diverse ecosystem of asset managers, activist investors, short sellers, law firms, accountants, consultancies, regulators, and the like work to enforce accountability on management—not always immediately or wisely, but inevitably and ruthlessly. Until very recently this was not the case in Japan, where the business ecosystem served primarily to protect management. The most obvious manifestation was the keiretsu system by which banks would organize around themselves a constellation of client-companies who all integrated each other into their supply chains and even owned one another's shares. But there were other factors, such as the government's internal resistance to any sort of regulatory shake-up, or law firms' discomfort with advising activist investors for fear of alienating corporate clients. This has started to fall apart over the past 20 years or so. The main event has been the slow unraveling of the keiretsu system. It began in the 1990s with new restrictions on cross-shareholding. Measuring by value, some 50% of large-company listed shares were tied up in cross shareholdings in 1989, according to veteran Japan investor and adviser Jesper Koll; by 2019 that had fallen to 4%. This has cleared a path for foreign investors to buy into Japan, with foreign ownership expanding to 31% of market value from 4% over the same span. Japan Inc.'s new ownership has driven the government to belated regulatory action to match market reality. A new corporate-governance code introduced in 2015 sought to impose more accountability on corporate managers. More important, a so-called stewardship code implemented in 2014 created new fiduciary responsibility for domestic institutional shareholders.
A total of 48 Japanese companies received shareholder proposals in the June 2021 general meetings (162 proposals in total). This represents a slight decline from 55 companies a year ago, the most on record. Activist shareholders submitted proposals at 18 listed companies this year, according to the Asahi Shimbun, a slight decline from 23 a year ago. Out of the 15 companies that received proposals from activist shareholders (33 proposals in total) in the current year ending in the traditional June AGM season, 13 received approval from more than 20% of shareholders and four received the support of more than 30% of shareholders. A year ago, 30 proposals obtained the support of more than 20% of shareholders and 14 proposals received the support of more than 30% of shareholders. Environmental, social, and governance proposals attracted attention this year. Around two-thirds (108) of the shareholder proposals sought to amend a company's articles of incorporation. Only 17 sought to return profits to shareholders by distributing surplus capital.
Insurance organization AIG (AIG) in September became the latest major corporation to bestow the title of chairman on its existing CEO, Peter Zaffino. Companies like Microsoft (MSFT) and ExxonMobil (XOM) also have merged the chair and CEO roles. However, dividing these jobs is widely regarded as a best practice by corporate governance experts. Having a CEO also serve as a chair can make a company a target for activists. More than half of governance proposals submitted by shareholders this year, and nearly half last year, were requests for an independent chair, according to Sullivan & Cromwell's recent Proxy Season Review. The Securities and Exchange Commission has required some companies to make the change in recent years, such as in 2019 when Elon Musk had to relinquish his role as chair of Tesla's (TSLA) board as part of a settlement with securities regulators. The University of Delaware's Charles Elson, who serves as executive editor-at-large for Directors & Boards, says, "In order to monitor effectively, the board should control its own agenda and its own meetings." Only 33 companies in the S&P 500 index have combined CEO and chair positions over the last five years, compared with 100 that have split the posts, according to Institutional Shareholder Services. Nearly 60% of all S&P companies today have divided the roles of chair and CEO, compared with just 37% a decade ago. In addition to reducing potential conflict, splitting the roles frees up the CEO's time to focus on executive responsibilities instead of having to address board issues, says Harvard Business School's John Dionne. He also believes that having a separate chairperson can provide a valuable outsider perspective on business hurdles as well as be helpful in the event of a crisis. Elson notes that boards often wait until a CEO leaves the company before they separate the roles for the successor.