Echoing increasing shareholder activism worldwide, a rising trend in global markets this year has been activist campaigns with an M&A thesis.
New campaigns in the first half of 2019 are fewer relative to the same period last year, according to a report by Lazard. But the financial advisory firm notes that close to half of those campaigns were M&A-driven, showing that activist investors guide such deals more and more.
Let’s see two examples that have a common denominator – and a very influential one, at that.
The Icahn Touch
One such event drew a lot of attention mainly because it involved one of the most influential activist investors in the world: Carl Icahn. The merger between casino operator Caesars Entertainment and Eldorado Resorts, worth US$8.5 billion in cash and equity, was announced a few months after the investor pressured the Caesars board for three seats and a say in selecting a new CEO.
Caesars had previously declined an “inadequate” offer for a reverse exchange of its stock for equity by privately held casino and restaurant firm Landry’s, for US$13.50 per share. The deal with Eldorado ended up bringing a whopping 51 percent premium over Caesars’s stock price from the day Icahn started muscling in.
“The stock was clearly undervalued. Icahn saw what others did, but he acted on it,” wrote Howard J Klein in an Insight on Smartkarma in May, almost a month before the deal was announced.
Klein, an experienced analyst and former executive in the gaming sector, tracked Icahn’s calculated advance within Caesars. In his Insight, he highlighted the fallout from the company’s past bankruptcy as one of the key challenges to overcome.
“[Caesars] has invested billions in what realistically can be seen as non-core assets,” Klein wrote. “These are not necessarily bad assets. Some perform well. But overall they do not register in my experience as the best dispersal of investment dollars that produce the most successful and highly valued gaming companies.”
The new CEO of Caesars, Icahn-backed Anthony Rodio, will likely proceed to “slim down” the new entity, shedding some assets while refocusing on the company’s expected Asian expansion.
Read Howard J Klein’s full Insight: Caesars Can Be Sold if They Can Produce $500m in Savings–Before a Buyer Says Yes
Another prominent, and ongoing deal, has also seen Icahn’s involvement in the proceedings. Occidental Petroleum announced it would acquire Anadarko Petroleum in a US$38 billion transaction, after a bidding war with Chevron earlier this year.
The problem was that the merger hiked up Occidental’s debt to US$40 billion amidst already existing pressure from shareholders and investors, according to Reuters. Occidental’s stock plunged to a 10-year low after the company announced the deal.
As the deal goes to a vote from Anadarko shareholders next month, Icahn (an Occidental investor) has been vocal against it, even suing the company to get access to records regarding the deal. Meanwhile, Occidental CEO Vicki Hollub has been hard at work to sell off assets in order to relieve some of the debt.
So far, the biggest breakthrough has been the agreement to sell Anadarko’s Africa-based assets to French Total SA for US$8.8 billion, but Hollub has insisted she will continue looking for ways to cut costs and make the most of Anadarko’s assets.
As we have seen, activist initiatives can go either way in M&A. While activist investors are involved in a tiny fraction of overall M&A deals today, it’s becoming enough of a trend that company management needs to be aware of it. Here are five things that management must keep in mind in this regard:
Maintain a 360-degree View
Is the company a potential target for an acquisition? Is it operating too many units that weigh down the bottom line? Are there weak points in its structure? Are there areas where an activist could find solid ground to launch an initiative? Management should try to think as an activist even before one shows up.
Let’s remember McKinsey partner Tim Koller’s words from our previous blog: “Am I comfortable not responding to what even a hypothetical activist would do? Am I the best owner of the businesses? Am I growing the businesses adequately? Am I cutting costs where they need to be cut? Am I returning cash to shareholders when I don’t need it? So it’s much more a matter of doing it yourself.”
Know the “Opponent”
Activist investors have different ways of doing things. Anyone dealing with Carl Icahn, for example, knows that he tends to push his agenda and he doesn’t mince words in public. Other activists have different styles – they might be more subtle, seeking to exercise control behind the scenes through key appointments.
Or they might just be seeking to understand more about the business, because management is being opaque and not forthcoming. Understanding how investors operate and what they want to achieve is pivotal to ensure investor and company goals are aligned.
Be Ready to Answer Questions
When an activist launches an offensive, it can be because they have their own agenda to pursue, or they might simply need more clarity on the company’s strategy. Whatever the case, management should have their strategy clearly outlined and ready to communicate to investors and shareholders.
What is the company doing to overcome particular hurdles pointed out by shareholders? What is its strategy for future growth? How exactly does it plan to cut spending, if necessary? What are some strategic moves it’s undertaking (acquisitions, investments, and so on)? The more detailed the strategies, the greater the chances to hold off activist campaigns.
Cultivate a Diverse Network
A diverse shareholder roster and strong relationships with the ecosystem are particularly important. They ensure that, when an activist campaign is underway, the company can present its side of the story and count on its allies to fend off attacks. If it has managed to build up enough good will and trust among its shareholders in times of peace, it’s more likely to weather activist campaigns or work with activists more effectively to advance their common goals.
Keep Communication Lines Open
For all of the above to be effective, consistent and open communication avenues need to be a priority. Whether it’s sharing reports, outlining growth initiatives, or explaining setbacks, management needs to deliver the message directly to shareholders, investors, and analysts. This reduces the chances of misconceptions and false narratives arising and gives management greater control to shape the company’s story.
Maintain your advantage by being connected to an all-encompassing network, where you can reach all stakeholders directly and communicate quickly and transparently. Sign up for a FREE account on Smartkarma’s Corporate Solutions, a brand-new range of services for C-Suite and Investor Relations personnel of listed companies that’s been designed to help IR professionals establish and maintain valuable connections to the investment and analyst communities.
Subscribe to Our Blog