Activist investing is up — way up — and that has been great news for Wall Street’s top investment banks.
Hedge fund managers that agitate for changes at public companies, asking for everything from bigger dividends to outright sales, have grown their war chests, been taking on more targets, and had larger victories than ever.
They have successfully instigated a larger dividend from General Motors, the split of PayPal from eBay, and the $US70 billion sale of Botox-maker Allergan.
And no company is safe, regardless of size or standing, as shown by Carl Icahn’s decision to agitate for a buyback at Apple.
“Given that Apple had activists and they were successful, I think it it safe to say no company is immune due to its size,” said David Rosewater, the head of the activism defence practice at Morgan Stanley.
For Wall Street, this means big business, both in helping fend off the activists, and — more lucratively — in structuring the deals that follow when a board gives in to the demands of managers like Carl Icahn or Bill Ackman. Even dividends and buybacks can lead to fee-income for the banks, when companies fund them with bond sales like Apple is doing.
Next up on the activist menu is Macy’s, where Starboard Value is pushing the retailer to cleave off its real estate assets into a separate division. The activist thinks it could boost Macy’s value by 70% — not unthinkable, given how shares of Darden Restaurants have performed after the same investor forced it to make the exact same move.
Starboard Value isn’t the only activist operating from a recycled playbook in 2015. Under Bill Ackman’s leadership, Pershing Square Capital has turned to mega-M&A activist campaigns to fortify returns, and he’s at it again.
Now, the investor may try to push foodmaker Mondelez International into a merger after investing $US5.5 billion in the company, which could see the company selling itself to or merging with Kraft Heinz.
Even when an activist isn’t involved, their big victories have company boards proactively seeking advice on how to beat them to the punch, by boosting dividends or spinning off underperforming businesses before a fund manager can begin agitating for it.
Most banks won’t work for the activists themselves (at least not openly), for fear of alienating their corporate clients.
Several bankers said that typical agreements for an activist defence consist of a monthly or quarterly retainer for the investment bank, but that’s not the real payday. Banks typically also wind up up taking a the lead role on any transactions that come of the situation, meaning that win or lose, banks are in a good position.
Demands are up. Just in the first half of 2015, activists called for the outright sale of 28 companies according to data from Activist Insight. That’s more than in any of the prior five years.
And there’s no reason to think this’ll change for now, as the funds have seen their assets swell: Activist hedge fund assets under management were $US130 billion in the first half of 2015, compared with under $US50 billion in 2010, according to analytics service Hedge Fund Research.
In part, that reflects their success in generating standout returns in an otherwise tight market.
“Generating alpha for active managers has been extraordinary difficult,” said Steve Barg, co-head of Goldman Sachs’M&A shareholder advisory group. “This is going to go on for a while.”
Already this year, according to FactSet data, 92 proxy fights have been waged and nine are still pending. That matches last year’s tally for proxy fights, and the year isn’t even out yet.
“It will be very busy this fall,” says Ele Klein, partner with Schulte Roth & Zabel, which represents dozens of hedge funds in activist campaigns. “Activists have become a recognised asset class and a recognised strategy. I think it’s no longer a dirty word.”
But Klein thinks proxy fights will be less prevalent in the future as more corporate boards have come around to settling with activists rather than gambling and waiting out a shareholder vote.
Goldman Sachs tops the FactSet rankings among the company defence advisors, with credit for 10 assignments like its work on Time Warner Cable, Netflix and Apple.
It is followed by Credit Suisse and JPMorgan. The rankings of defence advisors don’t indicate how much in fees the banks might be earning.
Probably the most lucrative outcome for the investment banks is the sale of a company.
It not only leads to advisory fees for the M&A bankers, but the banks also generate income off of bond sales and other financing deals that might come alongside.
Actavis, the drugmaker that acquired Allergan following a hostile takeover bid that included activist Bill Ackman, raised $US21 billion from a bond sale this March. Factoring in underwriting and arrangement fees beyond the $US21 billion bond offering, Allergan spent about $US500 million on advisory and financing fees, according to consultant Freeman & Co.