December 12, 2013 4:53 pm

Advisers play at activism to pre-empt the next Icahn

By Ed Hammond, US M&A Correspondent

The heads of some of America’s largest companies are preoccupied by an unusual question: what would Carl Icahn do?

Interventionist investors such as the rumbustious septuagenarian, who over 35 years has besieged companies from RJR Nabisco to Apple, have turned activism from an irritation into a multibillion-dollar industry, swaying strategies at some of the world’s biggest companies.

Now, the advisers that companies rely on for everything from dealmaking to customer relations are telling clients to think like an Icahn before the barbarians appear at their gates. The hope is that the exercise may help them see off the activists before they show up.

“Executives are now realising that the best way to take away the activist’s arrows is to get out there, look for the weaknesses in exactly the same way an activist would and fix them,” says Daniel Kerstein, a managing director of Barclays’ strategic finance group.

“As recently as a year ago, companies would only do self assessment at certain events – the merger of two rivals, the retirement of a chief executive or a market crisis. Now boards and management are welcoming it as part of the corporate routine,” he says.

Barclays is among several banks to have created units dedicated to defending against activists. Goldman Sachs, JPMorgan, Credit Suisse, Citi and Evercore all have specialist defence teams to which they are dedicating increasing resources. Law firms, such as Cadwalader and Wachtell, Lipton, Rosen and Katz, are also increasingly focused on helping their blue-chip clients interpret the activist threat and establish possible responses.

The arms race reflects both the rising number of activists and the realisation among boards and senior executives that no company is off limits; scale and brand power are no longer impediments to a motivated activist.

In 2009, just seven campaigns targeted companies with a market value of over $10bn, according to research from Citi. Last year, that figure rose to 20, with those targeted including Procter & Gamble, BAE Systems and Xstrata.

The pitch to clients is a simple one: in understanding the avenue of attack an activist might take, boards can both take credit for fixing a weakness and stifle the threat of a future incursion.

However, as activists become more sophisticated in their demands, so too the depth of preparation has increased. With roughly $100bn of assets under management, the activist hedge fund industry has matured from one that typically pursued a narrow – and often bruising – agenda to force change, to having a multitude of approaches.

To help companies prepare for this more nuanced threat, many banks now offer a “fire-drill” service where executives are put through mock attack scenarios.

The tough-love training exercise involves the bank writing a letter, often running into dozens of pages, identifying and attacking the weak points in a corporate anatomy. Senior executives are then encouraged to answer a series of questions, such as: do we have excess capital that we could distribute to shareholders? Or: should we be making divestitures?

“Normally, we are nice to our clients but, to get this right, we have to play the role of a tough guy activist,” says Chris Young, head of contested situations at Credit Suisse.

“It’s not the most pleasant service we offer and some boards are not ready to hear it, but it’s much better to do it as role play, rather than have it go out in real time and spin out in the papers every day”

Some companies have gone further by inviting senior executives at activist hedge funds to come in and give presentations to employees about how they view the business. None of the activists contacted by the Financial Times would comment on whether they had participated.

Chris Ventresca, global co-head of M&A at JPMorgan, says: “It’s very healthy in the long run. Companies need to be self-critical and proactively self correct any issues, not wait for someone else to point out deficiencies publicly”.

But this extreme form of self-assessment says as much about the changing nature of activism as it does the willingness of companies to think more deeply about threats facing them.

Indeed, a growing number of activists are reimagining the wolf in the sheep-pen model and are instead trying to persuade companies that they are forces for good. One such hedge fund, Value Act, asks the management at previous targets to provide references to new targets.

Other funds meet regularly with the bankers and lawyers specialising in defending against activists. These corporate conclaves provide both sides with useful insight into how to better do battle in future.

Thus far, though, no large US bank will work alongside an activist. Bankers’ concern is that by aligning with an investor that may ultimately attack one of their clients, they risk irreparably damaging lending and other advisory relationships.

“This is activism’s ‘Barbarians at the Gate’ moment,” says one investment banker. “Twenty years ago, no one would work with private equity funds because they were taking down our clients. This too will change.”