Activist strategies and tactics
Hello everyone, during these period where activist Hedge Funds seems to drive banks activity (except restructuring) I find SHAREHOLDERS DEFENSE/ADVISORY a very interesting topic.
I would like to learn some insight from people that are working / or worked on it, about the way Activist Investor operates: What strategies and tactics they usulally uses; how companies can defend themselve from it; when the activist intervention is good or bad for other shareholdes (i.e. which structural charasteristics a company has to have in order to benefit from an activist shareholder); and so on
If you have books or links to suggest about the topic it would be very appreciated.
I assume you're asking this question due to the increase in poison pill adoption as a result of the COVID-19. It's a really cool topic to talk about.
>What strategies and tactics they usually* uses
For context, understand that the typical "friendly" method of acquiring a company is to approach the CEO and management privately. That being said, I'll break down the major hostile takeover in order of increasing aggressiveness:
- **Teddy bear hug**. In this approach, the acquirer send a private letter directly to the board of directors, forcing them to consider the bid, however the board has no duty to disclose this offer.. This approach is likely to require the target to engage their advisors
- **Accumulation of shares on the open market**. If a company is pursuing this tactic they are most likely using it as a setup to benefit in a proxy fight. This is very public and the major drawback is that there are several disclosure thresholds such as whenever a company acquires 5% or more of another (this is the Schedule 13D filing required by the SEC) or when the amount they're acquiring is in excess of $94mm (Hart-Scott-Rodino Threshold set by the FTC)
- **Bear Hug**. This is the more aggressive version of the aforementioned "teddy bear hug". In this strategy, the acquirer makes a public offer to the board of directors, forcing them to publicly consider the offer. Importantly, in a bear hug, the offer made by the acquiring company is typically at a very, very large premium to the company's current stock price. This is an attempt to evoke the company's Revlon duties (In essence, a company is legally obligated to act in the best interest of their shareholders) by presenting them with an offer so high that management and the board of directors would need an air-tight reason to decline it or else they would face legal action.
- Up next is the **proxy fight**. Here the acquirer, using the large amounts of stock that it has previously accumulated, attempts to remove one or more of the current board of directors with the intention of replacing them with their own people. Once their people are on the board, they vote in favor of the acquirer's takeover plans.
- Finally, the most aggressive strategy that a potential acquirer can pursue is the **unsolicited tender offer**. Here, the acquirer simply makes an offer directly to the shareholders of the company, asking them to tender their shares to whatever they are offering. Typically they offer an amount of cash equal to the company's stock price plus a premium. This action also forces board consideration of the bid and is a very quick way of taking over a company.
This is all very brief but should hopefully provide a good springboard for you to be able to research these topics yourself.
Write-up on defense strategies coming soon.
>how companies can defend *themselves from it
Defensive strategies that a company can take to stave off takeover attempts can be split into two categories:
1. Pre-takeover offer (shark repellents)
2. Post-takeover offer
It's important to note that courts have historically been very helpful when it comes to litigation regarding pre-offer defenses but heavily scrutinize the post-offer defenses due to the fact that the target usually assumes the burden of proof in showing that the defense isn't simply so that they can keep their jobs.
Pre-offer defenses:
- **Shareholder Rights Plan** aka the famous "poison pill". In this method of takeover defense, the company assumes a plan which gives each current shareholder of the company 1 "right" per share of common stock that they own. Each right typically has two provisions:
1. You can exchange each right for an amount equal to 1/X000 of 1 share of the issuing company by paying an exercise price of typically 4x the stock price of the company at the time the poison pill is issued. No one does this.
2. Whenever any entity purchases acquires a certain percentage of the issuing company's outstanding stock (typically 15%), you can exercise the right and receive an amount of common stock of the issuing company equal to twice the exercise price of the right. Remember that the exercise price is 4x the price of company's stock price. This means that if you will receive an extremely large amount of shares of the company's stock price for each right that you own. The trick is that this option to exercise is available to everyone *except the entity which has acquired more than the triggering threshold of the poison pill*. The intention is to dilute the ownership of the acquirer so much that it becomes extremely expensive for them to continue to take the company over. in mid-2019, Francesca's actually adopted a poison pill to ward off an attempted takeover: https://www.bamsec.com/filing/114420419037323?cik=1399935
Let's use them as an example. If I remember correctly, FRAN's stock price was about $4.50 at the time they adopted this plan.
The exercise price for each right was $18.
If you had one share, you received one right.
Upon the poison pill being triggered, you would be able to pay $18 and receive $36 worth of FRAN shares, which in this case would be 8 shares. So for every right that you own, you would get 8 shares of FRAN and only be paying for 4 shares worth, effectively a 2-for-1 deal. That is, unless you're the entity that caused the poison pill to be triggered in which case you watch your ownership be diluted down severely. Poison pills were so effective that they were rarely ever triggered. Carl icahn was famously pushed off of a takeover attempt of Netflix once they adopted a poison pill.
Here is a cool article about a company that actually had it's poison pill triggered and the madness that ensued: https://www.lw.com/upload/pubContent/_pdf/pub2563_1.pdf
- **Reincorporation in a state with restrictive takeover laws**. Some states have adopted laws specifically to thwart unfriendly takeover attempts. Ohio, Pennsylvania, and Delaware are historically "target friendly" states.
- **Staggered board of directors**. Another way to make hostile takeover attempts more difficult is to switch up the terms for the board of directors so that only a few of them are up for reelection at a time instead of the entire board at once. This way it would take a hostile party multiple years to acquire a large amount of board seats.
- **Supermajority voting provisions**. A company can change theri charter or bylaws and make it so that a higher percentage approval of shareholders is required for a merger than normally is required, ie 80% approval instead of 51%
- **Fair price amendments**. This is one I assume we will be seeing more of (along with the poison pill) with these market conditions. A fair price amendment is a change to the corporate charter that disallows mergers for which the offer is below some threshold. A company could make it so that the acquirer has to pay at least as much as the highest price the target has ever traded at at over a specified period. This is to protect companies that have experienced recent substantial decline in their stock prices from being scooped up cheaply by opportunistic acquirers.
Post-offer defense mechanisms coming soon.
Post-offer defenses:
- **Litigation**, The target can file a lawsuit claiming that the merger would violate securities or antitrust law. How,ever, these lawsuits typically will not result in any action from the court unless there is serious antitrust violation. The primary goal of filing a lawsuit is to buy the target more time to defend against the takeover.
- **Greenmail**. This is honestly more of a trick used by an acquirer to make a profit than a true defense mechanism but it does get the job of stopping a takeover done. In a greenmail scheme, an acquirer will buy up a large amount of stock and then offer to sell it back to the target at a large premium. There is also typically an agreement that the acquirer will not pursue any further takeover action for a specified period of time. Greenmail isn't too common any more because the internal revenue code was amended in 1986 an added a 50% tax on all profits gained via greenmail.
- The target might choose to **sell off a major asset/division/subsidiary** which robs the acquirer of their motive to engage in the takeover in the first place. More often than not, if this is attempted after the takeover intentions have been made public, the courts will say this is illegal.
- **Pac-Man Defense**. The name of this was coined by investment banking/M&A GOAT, Bruce Wasserstein. Simply put, this defense requires the target company to make a bid to acquirer the acquiring company! This is typically very difficult to pull off as it usually means a company has to make an effort to acquire a company that is larger than itself. Furthermore, if the target attempts this strategy, they can no longer go to court claiming antitrust or securities violation.
- **White knight defense**. The target company seeks a third party to buy it instead of the hostile bidder. Typically, the target seeks out a company with which it has strategic fit and is thus able to justify a higher purchase price than that of the hostile bidder. This might also prompt the hostile bidder to fire back with an even higher bid and start a full-scale bidding war.
- **White squire**. Similar to a white knight, however, instead of making a full-fledged bid, the white squire will purchase a substantial minority stake large enough to block the hostile transaction.
Hope this was helpful
This is really great thank you, do you mind me asking if you work/have worked on activism defence advisory? If so I was wondering if you might provide some colour on it - such as: how it was day to day vs. M&A and the sort of outputs and models produced
One thing I'd like to see a lot more of is chewable poison pills. These are standard in Canada and small handful of US companies have them. Sometimes also called a "qualified offer" pill.
It does what a poison pill does in terms of preventing accumulation, but allows shareholders an out: if someone makes an offer for the company, and a majority of shareholders want to take the offer, they can vote to do so and the company is sold.
A traditional poison pill (99% of US companies either have one enacted or have one on the shelf) does not allow for this and can entrench management until the shareholders organize board change. No bueno.
This is really helpful, thanks.
Wouldn't the share price of the company fall in the event the poison pill is triggered to reflect the fact that there are so many more shares outstanding? Would shareholders still want to exercise the right knowing the price may fall?
Lazard's shareholder advisory group (publicly) publishes an annual review of shareholder activism. It is a useful read for anyone looking to learn more about the sector or some of the key campaigns. the 2019 version is below:
https://www.lazard.com/media/451141/lazards-2019-review-of-shareholder-…</a">https://www.lazard.com/media/451141/lazards-2019-review-of-shareholder-…
Laborum ut nihil excepturi sit quasi ad. Corporis quaerat ipsa voluptas quos. Suscipit sequi qui fuga maiores.
Corrupti maiores est quos vero qui vel ut. Eveniet reiciendis non eos veritatis.
Et itaque quidem qui earum saepe nihil ut. Nisi dicta deleniti impedit quas alias. Cumque in dolorem ut. Velit ea rerum dolor. Sequi illo perferendis minima quas nesciunt. Sapiente et id molestiae quod. Neque vel modi reprehenderit inventore sit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...