Lazard’s 1Q 2019 Activism Review

Jim Rossman is Head of Shareholder Advisory at Lazard. This post is based on their Lazard memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here);  Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

1. Slower Pace than Record 2018, but In Line with Historical Levels

Q1 2019’s campaign activity (57 new campaigns against 53 companies) was down year-over-year relative to 2018’s record pace, but in line with multi-year average levels

  • Capital deployed in Q1 2019 ($11.3bn) was in line with recent quarters, and the top 10 activists had a cumulative $75.5bn deployed in public activist positions (new and existing)1 at the end of the quarter
  • Starboard overtook Elliott as the most prolific activist in Q1 2019, launching seven new campaigns

2. Activism’s Transactional Focus Continued

  • Transaction-focused campaigns were by far the most common in Q1 2019, with an M&A-related objective arising in nearly 50% of all new campaigns
    • Pushes to sell the company (e.g., Caesars, Zayo) or engage in break-up or divestiture transactions (e.g, Dollar Tree, eBay) were the most frequent M&A objectives
    • Attempts to scuttle or sweeten existing deals were relatively less frequent than in prior quarters

3. Numerous Board Seats in Play Heading into Proxy Season

  • Activists won 39 seats in Q1 2019,2 down from a record-breaking 65 in Q1 2018
    • All Board seats won were secured via settlements, as only three campaigns for Board seats (all international) went to a final vote
    • Settlements included notable examples in the K. (Hammerson) and Japan (Olympus)
  • Q1 2019 saw a notable surge in long slate nominations, with 10 long slates nominated, accounting for 77 Board seats sought
  • Heading into the 2019 proxy season, 103 Board seats remain in play

4. Continued Robust Activity Outside the U.S.

  • Campaigns outside the S. continued to account for ~33% of global activity
    • In Europe, activists primarily focused on catalyzing change at their existing campaigns (e.g., Barclays, EDP, Hammerson, Pernod Ricard)
    • ValueAct’s settlement for Board seats at Olympus and the defeat of Elliott’s proposals at Hyundai Motor Company and Hyundai Mobis indicate continued mixed results for S. activists in Asia
    • Heightened capital deployment in Canada (e.g., TransAlta, Methanex), accounting for 10% of the global total

 5. Active Managers Taking Vocal Approach to New Heights

  • Wellington Management switched its 13G filing to a 13D and publicly opposed Bristol-Myers Squibb’s $74bn acquisition of Celgene
    • Starboard separately opposed the deal, but withdrew its campaign after the deal garnered proxy advisor support
  • Neuberger Berman twice intervened in activist campaigns (Ashland Global, SeaChange International) to broker Board refreshment deals and avoid proxy fights

6. Passive Managers Urge Focus on Culture and Purpose

  • State Street and BlackRock released letters refining their ESG principles to include corporate culture and purpose
  • Comments from passive managers come amid continued inflows into low-cost investment strategies and increasing shareholder concentration

Source: FactSet, press reports and public filings as of 3/31/2019.
Note: All data is for campaigns conducted globally by activists at companies with market capitalizations greater than $500 million at time of campaign announcement.

  1. Based on the market value of activist positions initiated since 2013 in which the activist still holds a stake. Excludes derivatives.
  2. Represents Board seats won by activists in the respective year, regardless of the year in which the campaign was initiated.

Source: FactSet, press reports and public filings as of 3/31/2019
Note
: All data is for campaigns conducted globally by activists at companies with market capitalizations greater than $500 million at time of campaign announcement.

  1. Companies spun off as part of campaign process counted
  2. Calculated as of campaign announcement date. Does not include derivative positions.
  3. 4-year average based on aggregate value of activist

Notable Q1 2019 Public Campaign Launches and Developments—United States ($ in billions)

Notable Q1 2019 Public Campaign Launches and Developments—Rest of World ($ in billions)

Source: FactSet, press reports and public filings as of 3/31/2019

  1. Refers to initial announcement of BlueMountain’s campaign. Campaign by Knighthead, Redwood Capital Management and Abrams Capital launched in March 2019 via 13D filing.
  2. Refers to initial announcement of Cruiser’s campaign

Top 10 Activists by Market Value of Current Activist Positions ($ in billions)

Despite the slower start to the year, the top 10 activists still have $75.5bn deployed in existing campaigns

Source: FactSet, press reports and public filings as of 3/31/2019.
Note: All data is for campaigns conducted globally at companies with market capitalizations greater than $500 million at time of campaign announcement.

  1. Based on the market value of activist positions initiated since 2013 in which the activist still holds a stake. Includes publicly disclosed common stock positions only.
    2 Number of new campaigns launched, includes positions both open and closed.
    3 Based on country of company’s headquarters.

The Activist Role in M&A in Q1 2019

46%1 of campaigns launched in Q1 2019 were M&A-driven, with pushing for a sale being the most common M&A objective

Source: FactSet, press reports and public filings as of 3/31/2019.
Note: All data is for campaigns conducted globally at companies with market capitalizations greater than $500 million at time of campaign announcement.

  1. Activists may push for several objectives at initiation of a campaign; as such, total percentages for all objectives exceeds 100%.

Board Seats Won

Source: FactSet, press reports and public filings as of 3/31/2019.
Note: All data is for campaigns conducted globally by activists at companies with market capitalizations greater than $500 million at time of campaign announcement.

  1. Represents Board seats won by activists in respective year, regardless of the year in which the campaign was initiated.
  2. Board seats “in play” includes currently announced proxy contests at upcoming shareholder meetings as of 3/31/2019.

Long Slate Nominations

Q1 2019 was one of the busiest quarters ever for long slate nominations, signaling that activists are increasingly emboldened when demanding Board change

Source: FactSet, press reports and public filings as of 3/31/2019.
Note: Long slates defined as instances where an activist nominated Directors to replace 50%-plus of the incumbent Board.

  1. BlueMountain has not yet made a public statement regarding PG&E’s announcement of a new CEO and 10 new Directors.
  2. On April 5, 2019, Starboard announced the withdrawal of its nominations.
  3. King Street has only indicated that it intends to nominate a majority slate.

Upcoming Notable Potential Proxy Votes

The 103 seats in play—including 65 as part of long slates—at the end of Q1 2019 portend a busy proxy season ahead

Source: FactSet, press reports and public filings as of 3/31/2019.
Note: Board seats “in play” includes currently announced proxy contests at upcoming shareholder meetings as of 3/31/2019. Total does not include campaigns where an activist has signaled an intention to nominate Directors but has not named the size of the slate. Long slates defined as instances where an activist nominated Directors to replace 50%-plus of the incumbent Board.
* Denotes estimated date based on historical precedent.

  1. BlueMountain has not yet made a public statement regarding PG&E’s announcement of a new CEO and 10 new Directors.
  2. On April 5, 2019, Starboard announced the withdrawal of its nominations.
  3. King Street has only indicated that it intends to nominate a majority slate.

Q1 2019 International Shareholder Activism ($ in billions)

Source: FactSet, press reports and public filings as of 3/31/2019.
Note: All data is for campaigns conducted globally at companies with market capitalizations greater than $500 million at time of campaign announcement. APAC includes all of Asia and
Australia and New Zealand.

  1. Calculated as of campaign announcement date for all publicly disclosed common stock stakes. Does not include derivatives.

Shareholder Activism in Europe—Limited New Campaigns, Not Limited Activity

While there were limited new targets in Q1 2019 in Europe, activists have raised their voices on existing campaigns

Shareholder Activism in Europe—Limited New Campaigns, Not Limited Activity
Note: All data is for campaigns conducted in Europe at companies with market capitalizations greater than $500 million at time of campaign announcement.

  1. Not a member of the Board, but a member of the shareholder-comprised Nomination Board. Cevian requested a Nomination Board position after disclosing its
    investment.

Active Managers Increasing Engagement: Wellington and Neuberger Berman

Recent actions by Wellington and Neuberger Berman signal that active managers are embracing a role that goes beyond vocalism in activist situations

“The goal here was to try and put this to bed, but the shareholders will decide… We thought this outcome was significantly superior than the execution risk, the distraction risk and the nastiness of the alternatives.”

—Charles Kantor, Senior Portfolio Manager, Neuberger Berman, January 13, 2019 (emphasis added)

While Wellington agrees that Bristol-Myers should be active in business development that secures differentiated science and broadens the future revenue base, Wellington does not believe that the Celgene transaction is an attractive path towards accomplishing this goal. Wellington’s conclusion is based upon three tenets: 1) the transaction asks BMY shareholders to accept too much risk and the terms offer BMY shares to CELG shareholders at a price well below implied asset value; 2) execution success could be more difficult to achieve than depicted by Company management; and 3) alternative paths to create value for BMY shareholders could be more attractive.”

—Wellington Management (Press Release), February 27, 2019 (emphasis added)

Additional Active Managers Increasing Engagement

Q1 2019 saw traditional active managers employing a vocal approach in activist situations across geographies

Passive Manager Influence Continues to Grow ($ in billions)

Source: FactSet, press reports and public filings as of 3/31/2019.

  1. Equity mutual fund flows include net new cash flow and reinvested dividends. Data excludes mutual funds that invest primarily in other mutual funds.
  2. ETF distribution 14
  3. All mutual index funds (excludes ETFs).
  4. All mutual funds that are not index
  5. Represents data through 4Q
  6. Includes BEL 20 (Belgium) and AEX (Netherlands).

Passive Managers Focusing on Culture and Purpose

Passive managers are using their increasing influence to discuss how corporate culture and purpose can affect long-term performance

Larry Fink, Chairman and CEO, BlackRock

“Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time—not only shareholders, but also employees, customers and communities… Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.

“One thing, however, is certain: the world needs your leadership. As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions and communities where they operate, particularly on issues central to the world’s future prosperity. Companies cannot solve every issue of public importance, but there are many—from retirement to infrastructure to preparing workers for the jobs of the future—that cannot be solved without corporate leadership.”

Companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long term. Companies that ignore them stumble and fail. This dynamic is becoming increasingly apparent as the public holds companies to more exacting standards.”

—Larry Fink, “Purpose & Profit,” January 2019 (emphasis added)

Cyrus Taraporevala, President and CEO, State Street Global Advisors

“This year we will be focusing on corporate culture as one of the many, growing intangible value drivers that affect a company’s ability to execute its long-term strategy. We acknowledge that corporate culture, like many other intangible assets, is difficult to measure and manage. However, we also recognize that at a time of unprecedented business disruptions, whether in the form of technology, climate or other exogenous shocks, a company’s ability to promote the attitudes and behaviors needed to navigate a much more challenging business terrain will be increasingly important.”

“Indeed, we have found that boards sometimes fail to adequately ensure that the current corporate culture aligns with corporate strategy. This is especially important in times of crisis or strategic change, such as the transition of a CEO or during mergers and acquisitions or strategic turnarounds. These are critical inflection points during which a lack of focus on culture can delay, or even derail important strategic objectives and pose existential challenges for management.

“We believe that at a time of historic disruption, increased focus on corporate culture and how it supports strategy is essential to sustainable, long-term value creation.”

—Cyrus Taraporevala, Letter to Boards, January 2019 (emphasis added)

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