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THE
WALL STREET JOURNAL.
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MARKETS
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Markets
Banks Find
Niche Helping Firms Defend Against Activists
Assignments Can Help
Land Fees for Deal Advice
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Morgan
Stanley hooked up with Family Dollar to defend against Nelson
Peltz’s Trian Fund. FROM LEFT: BLOOMBERG NEWS;
ASSOCIATED PRESS; CNBC
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By
David Benoit
And
Liz Hoffman
Dec. 17, 2014 7:50
p.m. ET
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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