Shareholder fights between activist investors and publicly traded companies are getting nastier, especially in some industries, and a lot of them don’t involve corporate giants like General Motors and Procter & Gamble.
In 2015, according to Raymond James, 208 activist campaigns were launched against 169 companies valued between $50 million and $1 billion. Since 2009, the number of campaigns against companies that size has grown 163 percent.
In the Tampa Bay area, Bloomin’ Brands, with a market capitalization of around $2 billion and a portfolio of restaurants like Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill, has heard New York hedge fund Jana Partners make noise about selling the business after snapping up nearly 9 percent of Bloomin’s shares.
So about a year ago Raymond James started an activism response and contested situations business to advise small to medium-sized publicly traded companies on preparing for and fending off campaigns launched by activist shareholders.
At 5 p.m. Thursday, Raymond James attorney Duncan Herrington, who heads the practice, and the Holland & Knight law firm will host a "mock proxy sparring session" for local public company executives, board directors and others on preparing for activist investor campaigns. (Interested in going? Call (813) 227-6310 to register.)
Herrington recently talked with Tampa Bay Times business reporter Richard Danielson about the dynamics of such contests and the importance — to both sides — of listening carefully and being nice. Here is the conversation, edited for length:
Q — Why did Raymond James create this particular practice in shareholder activism defense?
A — Before I joined Raymond James, I was at Credit Suisse in their activism defense team for a number of years. The interesting thing I observed was that the majority of activism happens at a much smaller market cap range than people notice. Over 80 percent of activism campaigns are at companies that are below $1 billion in market cap, so there’s a really large under-served gap in the market. We generally advise companies from around $50 million to around $1 billion in market cap.
Q — What should a company think about before an activist investor pops up on their radar?
A — Some people might perceive the risk of being approached as small. The problem is that once it happens, it’s too late for you to be thinking about where are you vulnerable as a company, how could you mitigate that, how should you be prepared to respond. It’s like driving and deciding to look into buying insurance after you get in a car accident.
So what we advise most of our clients is that it’s a very short investment of time to be as informed and prepared as you possibly can be. The two prongs to that are a vulnerability analysis and having in place in advance a response plan and team within your company. When an activist comes after your company, this is really a pivotal time strategically and probably will be one of the most important shareholder meetings you might ever have if it goes to a proxy fight. But most companies will have never been through an experience like that before. Directors and management teams, as stewards of their shareholders’ interests, shouldn’t go into these situations flying blind.
Q — When you consider your vulnerabilities, one of the things you’re looking at is whether you’ve already got unhappy shareholders, and, if so, what’s their beef. Right?
A — A big part of what we preach to our clients is really enhanced shareholder engagement. It’s setting aside a period of time each year or every other year to try to talk to as many of your top shareholders as possible and really listen to what they’re saying. Shareholders may have a beef about something, but some of that could just be a misunderstanding from a lack of communication from the company to the shareholders.
Other things could be legitimate issues that, when communicated to management, need to be taken to the board and considered. You can’t please everyone all the time, but there are things that are very easy to give that make a lot of sense. Those are things that you think of now rather than after you have an activist approach your company and then you already have some unhappy or disgruntled shareholders who might be more receptive to listening to some kind of call for change.
In 2017, activists really stepped up their level of aggression and some of the tactics they used. You saw a big increase in the number of times activists actually publicly targeted the CEO and called for the CEO’s removal. Probably not coincidentally, companies were much less willing to settle with activists this year and were more willing to fight.
Generally last year, the overall activity was maybe down slightly or about even with the year before. And probably a big reason for that was that the stock market has been doing well, a lot of companies have happy shareholders making nice returns on their investment. But there were certain sectors that were under-performing. In particular, consumer retail, restaurant companies really got hammered a lot harder. The number of campaigns in that sector really went up.
Q — Can you say what your services cost?
A — No. It’s different from how regular investment banking fees are structured, because usually investment banking fees are structured off of a transaction where you get paid some kind of spread or percentage based on the size of a transaction. In an activist campaign, there’s not a transaction. We charge an advisory fee, but we try to make it as palatable for companies as possible because a lot of our companies are smaller. We want to prove to these companies in a very important moment in their corporate history that we can be a trusted advisor standing shoulder to shoulder with them. What we really want is to develop the longer term relationship.
Q — Have you had clients at Raymond James so far that have been through an activist campaign? How did that go?
A — We advised a retail client last year called Citi Trends. They were in a proxy fight with an activist called Macellum Capital. Their size of their stake was relatively small, but they were demanding three board seats on a seven-person board, including removal of the chairman who had been with the company for a long time.
The company tried very hard and unfortunately they weren’t able to find a suitable compromise, so we advised them in the proxy fight. It did go all the way to a shareholder vote. In the end, we held them to just one seat, including keeping the chairman on the board, which is probably where it should have settled in the first place and we think was in the end a good result for the company.
Q — Your invitation is directed at executives and board members from publicly traded companies. Are others welcome to attend as well?
A — Sure. Anyone who has an interest in the topic.
Q — What if an activist investor wanted to attend?
A — We’d love to have them there. The last panel I did down in Tampa was a few months ago, but one of the people on the panel with me was the general counsel from Corvex Management, a top-tier activist. We had a great discussion.
Look, from my perspective, the advice you give companies shouldn’t always be just fight, fight, fight, fight. It should initially be let’s hear the other side out, because they’re a significant investor and shareholder in your company. They may have legitimate concerns. There could just be a misunderstanding or lack of communication. You should always exhaust every other possibility before you’re painted into a corner of having to go to a proxy contest.
There would be some takeaways in both directions. A lot of activists would want to communicate that not all activists are the same. Some really do want to have a more constructive engagement with the company. Hear us out before you slam the door in our face.
And I think companies would want to communicate something similar back that if you do want to find a reasonable middle ground where our interests overlap, the way you approach us can have a huge impact on the level of discourse and keeping the animosity to an absolute minimum.