Global industrial trendspotter: Conglomerates attract more attention from activists
23 May, 2013
- Could fuel divestitures, spinoffs and other M&A
- Settlements with activists on the rise
A “Who’s Who” of global industrial conglomerates is being targeted by shareholder activists this year. The heightened activism, among other factors, raises the specter of a host of divestitures or even outright sales of these companies in the months to come, industry sources told Mergermarket.
Activity tends to heat up ahead of the spring annual meeting season in the US. “It’s like buds coming out on your trees in your garden. So do activist investors,” said Christopher Chase, managing director of Morgan Joseph TriArtisan.
New activists are being spawned by pioneer activists, a Chicago-based banker said. For instance, “two or three” activist funds were launched by investors who started their career with Carl Icahn, he said, such as Corvex Management.
Activists also include large institutional investors such as the California Public Employee pension funds, mutual funds, hedge funds and private equity groups.
The corporate raiders of the 1980s have evolved into shareholder activists, said Gregg Feinstein, head of the activism practice for middle-market companies at Houlihan Lokey. Speaking during the firm’s recent industrials conference, he said today’s activists don’t want to acquire companies but want to change them, by getting them to sell assets or spin off divisions. This is often achieved by threatening proxy contests to replace members of the board. “That’s currently the biggest threat to most of our clients,” he said. Activist hedge funds have USD 80bn in assets, a fivefold increase in the last five years, he said.
Feinstein said corporations are increasingly trying to appease activists by giving them one or two seats on the board, but even without a control position, the activists make more of a mark on the company than management might expect.
Sometimes an appeasement strategy works. Ingersoll-Rand (NYSE: IR) compromised with activist Nelson Peltz so that the industrial conglomerate would not be broken up. Peltz joined the Ingersoll board last year after taking a 7% stake in the company, and his addition averted a potential proxy fight, according to media reports.
Institutional investors have historically voted with management. “They’re not doing that anymore,” Feinstein said. “Lately, institutional investors have supported activists in three-quarters of cases.” As a result, the number of settlements has increased.
The payoff for activists can be substantial. This year, activist investors are targeting higher returns than last year, with just under half stating an expected range of 20% to 30%, according to a survey early this year by Mergermarket and Schulte Roth & Zabel.
While activists have always been a part of the M&A landscape, Chase noted that toward the end of 2012 “the economy and stock market got a little soft” and industrial company valuations came down a bit. This created an entry point for activists who “saw an opportunity to jump in.”
Most of the boat-rocking is happening at US-based companies, though recently Sony (NYSE:SNE) found itself the target of hedge fund Third Point, which is calling for the Japanese electronics giant to spin off its entertainment division.
Here are other examples of global industrial companies that have recently been targeted by activists:
* Ferro (NYSE: FOE) reached a deal with activist shareholders ahead of the Ohio-based company’s annual meeting on 22 May. Two members of the activist group, FrontFour-Quinpario, will stand for election as Ferro nominees. In exchange, the FrontFour-Quinpario Group has agreed to abide by certain “standstill” restrictions. The group collectively owned 4.3% of Ferro as of 26 March. On 4 March, Ferro received an unsolicited cash and stock offer from A. Schulman for USD 6.50 per share that valued the company at approximately USD 850m, which it rejected.
*Quinpario has also targeted Zoltek Companies (NASDAQ:ZOLT). As a result, the carbon fiber producer pursued a strategic review which is seen as likely to result in a sale, according to a report by this news service. Quinpario has signaled its interest in assuming control of Missouri-based Zoltek. In November, it sent a letter to the company offering to acquire all the outstanding shares at a price per share in the mid-teens or to recapitalize the company. An industry lawyer speculated that while in the case of Ferro Quinpario was trying to shake things up, in the case of Zoltek the activist is more interested in a takeover.
*In December 2012, Illinois Tool Works (NYSE: ITW) reiterated its intent to divest up to 25% of its portfolio over the next few years following pressure from activist shareholder Relational Investors, which acquired its stake in late 2011, according to media reports. For example, it is expected to launch a sale process for its industrial packaging segment in the second half, according to this news service.
*In April, Ashland (NYSE: ASH) shareholder Jana Partners disclosed a 7.4% stake in the Kentucky-based company and called the shares undervalued in an SEC filing. The filing came days after Jana lost its bid for board representation at Agrium (NYSE: AGU). In the case of Ashland, “I don’t think it’s going to go anyplace. They just lost Agrium and now they’re turning to Ashland,” the industry lawyer said. The lawyer added that Ashland has “had a very good run,” transforming itself into a specialty chemical company and turning around its earnings and revenues.
Activists are “without question” becoming more aggressive, especially over the last six to nine months, said the Chicago-based investment banker. For instance, Indiana-based Accuride (NYSE: ACW) adopted a shareholders’ rights plan about 18 months ago, the banker said, in response to activists. Chad Monroe, the director of IR for Accuride, said that the shareholders’ rights plan or “poison pill” was adopted because the company experienced a drop in stock price. The board wanted to prevent someone from coming in and generating a control position in the company, he said. In sum, it was a preventive measure, he said.
Meanwhile, Ohio-based Timken (NYSE:TKR) may face challenges from at least one proxy advisory firm at next year’s annual meeting if it does not act on a shareholder-supported spinoff proposal, according to a report by sister publication Dealreporter. Earlier this month, Timken shareholders voted in support of a nonbinding proposal by Relational Investors and the California State Teachers’ Retirement System to spin off the company’s steel business from its bearings business. In response, Timken announced it would “carefully evaluate the views of our shareholders” and announce its next steps within 45 days.
Relational Investors is also pushing North Carolina-based SPX(NYSE: SPW), in which it owns a 9.9% stake, to increase operating margins by, among other things, divesting underperforming assets. SPX unsuccessfully attempted to buy Pennsylvania-based Gardner Denver (NYSE: GDI) for USD 4 bn in December 2012.
“With the economy that’s at least steady and the M&A market in recovery, activist investors can feel pretty confident if they take a stake in an undervalued company that they will be likely to respond,” said Morgan Joseph’s Chase.
Looking ahead, the trend toward more activists could grow stronger, the banker said. They will be seeking spinoffs, splitting companies in parts, increasing divestitures and returning cash to shareholders.
The beneficiary of the trend is “presumably” all shareholders, the Chicago banker said. But he added: “Management hates it like hell and fights it like crazy.”
There is more shareholder activism today than just a few years ago, said Jeffrey Golman, head of the investment banking practice of Mesirow Financial, specializing in industrial companies as well as other types of businesses.
One reason is that the practice of greenmail — the purchase of enough shares in a company to threaten a takeover, thereby forcing the target firm to buy those shares back at a premium to suspend the takeover — has gone away because of legal requirements in some jurisdictions and tax treatment of greenmail gains, he said. In 2005, Section 5881 of the US Internal Revenue Code imposed a tax equal to 50% of the gain or other income realized by any person on the receipt of greenmail, whether or not the gain or other income is recognized.
The rise of hedge funds is another factor, Golman said. He pointed to Warren Lichtenstein’s Steel Partners, Bill Ackman’s Pershing Square Capital Management and Carl Icahn’s eponymous firm. Steel Partners, which is a USD 4bn fund, takes positions in companies to squeeze out shareholder value regardless of how long it takes. Such techniques as implementing lean manufacturing, creating a purchasing council and combining management functions make companies in Steel Partners’ portfolio more competitive, according to the organization’s website.
In terms of future activist activity, there’s no sign of a slowdown for industrials. The sector was second only to financial services in terms of where the most activist activity is expected next year, according to the survey by Mergermarket and Schulte Roth & Zabel. The survey also found that the middle market is the most attractive place to execute such strategies.
by Marlene Givant Star in New York and Craig Barner in Chicago
Write to Marlene Givant Star at email@example.com