By David Benoit And Liz Hoffman
Shareholder activism is proving to be big business for Wall
Street, providing banks with opportunities to cozy up to coveted
corporate clients and position themselves to reap hefty fees.
Shareholder activists, which take stakes in companies and
agitate for leadership, financial or strategic changes, reached new
heights this year both in terms of influence and the cash at their
disposal. While many of the top banks, including Goldman Sachs
Group Inc., say they won't work for activists out of fear of
alienating corporate customers, they have found other ways to
profit from their rise, including defending companies against
them.
Few things grab company officials' attention and increase their
vulnerability like being on the other end of an activist campaign
from an investor such as Carl Icahn or William Ackman. As a result,
defense assignments give bankers and lawyers access to executives
and board members that is hard to get otherwise. It can involve
near-daily calls and frequent late-night strategy sessions,
advisers say.
That can put bankers and lawyers in pole position to win
big-ticket deal assignments--when, for example, the activist forces
the company in question to sell a division or issue bonds. Such
assignments are the ultimate prize in activism defense, especially
given that banks can earn outsize fees when they follow defense
work with deal advice. As a result, bankers at firms including
Goldman, J.P. Morgan Chase & Co. and Morgan Stanley have fanned
out across corporate America, peddling advice on how to deter
activists or beat them back if they mount a campaign.
"It's a relationship-building exercise," said Jim Stynes, global
chairman of mergers and acquisitions at Deutsche Bank AG. "You're
in the trenches day after day with key people."
Goldman, the market-share leader among defense advisers, in 2012
landed a role helping Gardner Denver Inc. when ValueAct Capital
Management LP urged the industrial-equipment maker to sell itself.
When Gardner Denver was ultimately sold last year for $3.7 billion
to private-equity firm KKR & Co., Goldman ran the process and
earned $33 million for its work. At nearly 1% of the deal value,
that is a big fee, even by the rich standards of M&A
remuneration.
Morgan Stanley helped defend Family Dollar Stores Inc. against
Trian Fund Management LP in 2011 and stands to reap a fee of about
$43 million for advising the retailer on its $8.5 billion pending
sale to Dollar Tree Inc. Now Dollar General Corp. has lodged a bid
of its own for Family Dollar; should that drive the sale price
higher, Morgan Stanley's fee would rise.
There have been 324 activism campaigns in the U.S. this year,
according to FactSet. That number could grow next year given that,
according to HFR, the investors' assets under management ballooned
to $112 billion as of September.
Activists also are targeting bigger companies than ever before,
such as Dow Chemical Co. and even Apple Inc. While not every
campaign is as lucrative for banks as Gardner Denver and Family
Dollar--and accurate estimates of fees for defense work are hard to
come by--it is clear that it presents a sizable opportunity for
banks.
Perhaps in recognition of that, some firms that have been known
to work with activists are now focusing more on defense, even
though they aren't ruling out working with the investors.
Boutique investment bank Moelis & Co., which has worked on a
number of activist campaigns for hedge funds including Starboard
Value LP and Elliott Management Corp., is one of them, according to
people familiar with the matter. So is law firm Kirkland &
Ellis LLP, which has counted activists including Mr. Ackman's
Pershing Square Capital Management LP as clients, but which these
days is aggressively pitching its defense services, according to
people familiar with the matter.
The advisory arm of Blackstone Group LP, which has also worked
with activists including Pershing Square, is being spun off from
the buyout giant and into a new firm run by Paul J. Taubman. The
ex-Morgan Stanley banker is known for working with large companies
and is expected to make that his firm's focus, too, people familiar
with the matter said.
Activism defense isn't an unalloyed positive for advisers. It is
time-consuming and doesn't pay particularly well if it doesn't lead
to a transaction, bankers say.
When Barclays PLC made a pitch last year to defend Lear Corp.
against Marcato Capital Management LP, the bank proposed a $250,000
retainer, $100,000 in monthly payments and an additional $750,000
if the hedge fund nominated directors or struck a settlement for
board seats at the auto-parts maker, according to a proposed-fee
document viewed by The Wall Street Journal. If the defense were
successful, Barclays would receive a $2.5 million "status quo"
fee--considered relatively small by the standards of the big-merger
business on Wall Street. Barclays got the job, and Marcato later
settled with the company, which agreed to name a new director. It
is unclear what the bank ultimately was paid for the work.
While many banks eschew working with activists, some of them
help the investors in other ways, for example through their
prime-brokerage divisions, which help hedge funds build stakes in
companies and provide them with other services.
Some banks, including Houlihan Lokey, are pursuing activism work
on both sides.
Houlihan, which advises smaller companies on activism defense,
has worked with investors including Marcato. Houlihan often charges
activists between $500,000 and $1 million to use its name on news
releases, according to people familiar with the practice. Typically
in such cases, it helps analyze potential strategic moves for the
activist's target and prepare public presentations meant to bolster
its client's arguments.
Sometimes, defense work proves a dead end. Wells Fargo & Co.
provided activism-defense advice for International Game Technology
after Jason Ader, a former Wall Street casino analyst turned
investor, agitated for a boardroom shake-up at the slot-machine
maker. When the bank pushed for a formal guarantee that it would be
hired should an M&A deal ensue, IGT begged off, said a person
familiar with the matter. When IGT agreed to be sold in July for
$4.7 billion, it worked with Morgan Stanley.
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