The Contested M&A and Shareholder Activism Landscape

69 Pages·2014·1.92 MB·English

Confidential
The Contested M&A and Shareholder Activism
Landscape
August 13, 2014
PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION
These materials may not be used or relied upon for any purpose other than as specifically contemplated by a written agreementwith Credit Suisse AG or its Affiliates (hereafter “Credit Suisse”).
Table of contents
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1. Why Credit Suisse
Confidential
2
Introduction to the Contested Situations Team
Credit Suisse’s Contested Situations Team is dedicated to supporting clients on takeover
defense, contested M&A transactions, shareholder activism and corporate governance matters
 Credit Suisse has an in-depth understanding of the latest trends affecting activist and institutional
Domain
shareholder strategies
expertise
− Weak relative performance and actionable value levers are catalysts for activism
− Chris Young has focused on contested situations 24/7 for the past decade
Shareholder  Credit Suisse proactively maintains a unique dialogue with major institutional shareholders
insights − Hedge fund activists (e.g. Nelson Peltz, Carl Icahn, Bill Ackman)
− Pension funds (e.g. CalPERS, TIAA-CREF)
− Arbs (e.g. Paulson, Millennium, Eton Park)
− “Vanilla” funds (e.g. Blackrock, T. Rowe Price, Cap Re)
ISS  Chris Young, the Head of Credit Suisse’s Contested Situations Team, founded and headed the M&A
expertise and Proxy Contest Group at ISS for ~7 years
− Chris developed the proxy fight and M&A analytical framework that the current ISS team uses to
reach its recommendations
 Credit Suisse has an insider perspective of ISS, the world's largest and most influential proxy
advisory service
− How ISS policy is evolving
− Who to talk to at ISS, and how to talk to them
No other financial advisor can provide the shareholder insights of Credit Suisse
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3
Chris Young – Head of the CS Contested Situations Team
Chris Young JD, CFA
The Deal – “Ready for Battle”
Chris Youngspent the past six years advising institutional investors on how to vote in proxy fights
2010 –Current and contested mergers. With his June 1 move from RiskMetricsGroup Inc.'s Institutional
Shareholder Services Inc. to Credit Suisse Securities LLC, the 42-year-old Young is now offering
Managing Director, Head of Contested Situations his insights on institutions to corporate clients.
Responsible for takeover defense, contested M&A transactions, "He knows how the institutions think about things, so he'll bring a different perspective than a lot of
people in the room," says James Morphy, an M&A partner at Sullivan & Cromwell LLP.
shareholder activism and corporate governance matters
Young is heading the takeover defense practice within Credit Suisse's M&A group, led by Boon
[phone] / [email protected]
Sim. In his time at ISS, Young says, "I sensed an incredible hunger from directors and managers for
the unvarnished truth about how shareholders are looking at the world, because the last thing they
want is to be blind-sided at the ballot box. In my view, there were a lot of situations that should have
been resolved before going to a vote, and to the extent we can do that, I think it will be good for
2004 –2010 Credit Suisse clients and for shareholders as well."
Director of M&A and Proxy Fight Research Young was hired by ISS in 2004 to strengthen its analysis of contested situations. Initially focused on
more traditional corporate governance concerns, the proxy advisory firm was pilloried in some
Advised institutional investors on hundreds of contested M&A quarters for lacking financial sophistication in its recommendation that shareholders approve the 2002
transactions and shareholder activist campaigns merger of Hewlett-Packard Co.and Compaq Computer Corp. Young offered ISS both legal and
financial expertise. After graduating from Georgetown University in 1990 and Boston University Law
School five years later, Young practiced at White & Case LLPbefore moving to Sullivan, where
Notable transaction experience: Morphywas one of the lawyers he worked for.
 Hedge fund-led proxy fights at Actelion, Heinz, CSX Corp., Target In 1998, Young jumped to Bear, Stearns & Co. as an investment banker focused on the technology
sector. When the Internet bubble collapsed, Young says, he started looking at opportunities on the
Corp., Motorola, Yahoo, H&R Block, Atos Origin, Tui, and Biogen buy side. Martha Carter, head of research at ISS, hired him as director of M&A and proxy research.
 Hostile bids including GlaxoSmithKline for Human Genome, "He elevated their profile on these matters," says Morphy. "I think he brought greater sophistication
to the analysis. You might not always have agreed with him, but you could tell Chris knew what was
ConAgra for Ralcorp, sanofi-aventis for Genzyme, Relational/Icahn
going on."
for Genzyme, Exelon for NRG, Agrium for CF Industries, CF
Young cites Nelson Peltz's2006 proxy fight at H.J. Heinz Co.as a bellwether battle. ISS
Industries for Terra Industries, and BASF for Engelhard recommended that shareholders vote for Peltz'sslate of three directors, two of whom ended up
winning election to the Heinz Board. The next year, ISS supported the slate that U.K. activist the
 Contested M&A transactions including the Dell buyout, Cablevision Children's Investment Fund Management (UK) LLPput up for election at CSX Corp., and they,
buyout, Lilly-ICOS, Caremark-CVS-Express Scripts, Clear too, won election. Both situations "were construed as evidence of our influence," Young says. His
group also evaluated many of the large buyouts of the frothy period between 2005 and 2007 and in a
Channel and TXU buyouts, Biomet, Lear and Genentech
few cases recommended shareholders reject deals because private equity shops were underpaying.
"I knew it was going to be a position where I could have an impact, but as far as the amount of the
Additional experience profile, that exceeded expectations," Young says. "It was a natural result of the increasing profile of
ISS and a more contentious environment. Hedge funds took on bigger and bigger targets. There was
an increased willingness of plain-vanilla investors to challenge transactions. All of that exploded in the
six years I was at ISS."
Young will be a managing director at Credit Suisse and plans to hire a vice president, associate and
an analyst. The new group will support CS bankers in proxy fights, hostile situations and corporate
governance, Young says. "My team will be able to bring the shareholder perspective so that directors
and managers can make informed decisions," he adds. --David Marcus (The Deal, June 7, 2010)
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Credit Suisse – Bridging the gap between companies
and shareholders
University of Pennsylvania Law School – “Shareholder Eugenics in the Public Corporation"
III. Tools for Crafting the Shareholder Base
C. The New Investor Relations: Strategic Engagement with Key Shareholders
By Edward B. Rock
It is now accepted that the shareholder base has been transformed: ownership is more concentrated than ever; shareholders have been given more and more things to vote on;
shareholder activism is a fixture of the corporate governance landscape, with proxy contests, short slate proxy contests and “just vote no” campaigns relatively common; ISS has emerged
to play a critical role, either as a catalyst, a conduit or an initiator, depending on one’s perspective; and shareholder passivity seems to be a thing of the past.
While some continue to bemoan these developments, others have recognized the opportunities that arise out of these changes inthe corporate governance landscape. A few pioneers,
with deep contacts among institutional investors, have begun to play an intermediary role between issuers and their shareholders. In contrast to traditional investor relations efforts –the
continuous, communication function described above –this “New Investor Relations” function tends to be more episodic, led by high level outside actors, and involving the highest levels of
the company.
This version of “managing the shareholder relationship” takes seriously the current importance of empowered shareholders and seeks to shape that relationship in a productive direction. It
thus can be understood as a potentially important part of the second type of shareholder eugenics, namely, the shaping of shareholders of a negative or unknown type into shareholders of
a good type.
Examining a couple of the pioneers of the “New Investor Relations” will help to bring the role into better focus….
… Christopher Young provides another glimpse over the horizon. In 2004, Young joined ISS as Director of M&A and Proxy Fight Research. In that capacity,
his role was to build ISS’s analytic capacity in evaluating contested transactions and proxy fights, in order to provide better voting advice to ISS’s investor clients. He came to this role with
a background in investment banking and M&A law. While at ISS, he played a role in nearly every high profile deal or proxy fight and, in doing so, developed contacts with a wide range of
leading institutional investors.
In the spring of 2010, Young left ISS for Credit Suisse to become head of the Takeover Defense practice within the M&A group. To his new role, he brings a
rolodex full of shareholder contacts as well as a strong sense of what they care about.This puts him in a position to alert companies to emerging shareholder dissatisfaction, and
to work with companies to better explain themselves to their key shareholders. The idea seems to be that investors, who know andtrust Young from his days at ISS, will still be willing to
return his phone calls.
This is an “investor relations” function, but with a twist: it focuses on contentious or potentially contentious situations; it becomes crucial when there is a proxy fight over a transaction or a
Board election; it is directed at the highest levels of the company and investor community; and, when it works, it is a spring Board for an investment banking relationship with the company.
What is so interesting about the role is that it takes shareholder empowerment as a given, and asks how firms can improve
their relationships with their shareholders so that the shareholders will be supportive rather than in opposition.
Young [is] betting on a new corporate governance reality in which influential shareholders are a salient feature. With that starting point, he is carving out roles facilitating
productive engagementbetween firms and their shareholders, engagement that goes beyond “check the box” corporate governance, and that can shape the
shareholders’ involvement in the firm. That engagement is in the interests of both firms and shareholders and will sometimes be decisive.
--Edward B. Rock (University of Pennsylvania Law School, August 12, 2011)
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2. Contested M&A
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M&A market conditions – global
Global announced transactions M&A observations
($ in billions) 42,492 40,672  Global volume of $1,772 billion through June 2014 is up 73% from a
39,608
37,204 36,958 40,778 37,946 36,820 year ago
31,701 32,568 $4,483 38,345 36,638  Global volume of $2,393 billion in 2013 was down 6% from 2012
27,256 28,828 $3,799
23,166 $3,439$3,497 30,427 $3,544  2012 global volume was up 2% from 2011
27,753
19,093 26,270 $2,936 $2,589
22,642 $2,704 $2,572
22,027 $2,581 $2,438 $2,393  Financial sponsor M&A activity of $431 billion is up 43% from a year
$2,075
$1,745 $1,949 ago and represents 24% of global volume
$1,676
$1,146 $1,207$1,333 − 2013 sponsor volume of $595 billion was up 8% from 2012 and
$980
$590 $1,772 represented 25% of global volume
− Sponsor volume in 2012 was down 7% from 2011 and represented
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(1) 22% of global volume
Source: Thomson Reuters.
(1) Dollar volume and number of deals annualized as of 6/30/14.  Most global deal volume involves all or part cash
− 86% of global deals are financed with all or part cash in 2014
− 90% of global deals are financed with all or part cash in 2013
Types of consideration offered
− 88% of global deals were financed with all or part cash in 2012
Global announced transactions − Following are examples of 2014 transactions involving a combination
Percentage by dollar volume
of cash and stock consideration:
− AT&T / DirecTV ($67.2bn)
26% 27% 25%
50% 36% 37% 38% 36% 47% 44% 44% 48% 49% 55% 56% 45% 52% 51% 45% 44% 36% − Valeant Pharmaceuticals / Allergan ($56.3bn)
− Medtronic Inc. / Covidien PLC ($47.9bn)
39%
49% 51%
41% 40% 40%
37% 50% 35% 45% 49% 44% 42% 35% 36% 46% 38% 38% 43% 46% 50%  H−o2s0ti1le4 a YcTtiDvit yh oiss tdileri vdeonl labry vhoigluhmlye s otrfa $te3g5i2c biniltlrioa-nin ids uuspt r2y 3tr2a%ns afrcotmio nas
12% 23% 23% 22% 34% 24% 25% 14% 18% 11% 7% 8% 10% 10% 9% 8% 10% 11% 12% 10% 14% − y2e0a1r3 a hgoos atinled v roelupmrees eonf t$s 11275% b iollifo onv reerpalrle gsleonbtaeld v o5l%um oef overall global
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
volume
All stock Stock and cash All cash
− 2012 global hostile activity of $105 billion represented 4% of overall
Source: Thomson Reuters.
Note: Percentages by dollar volume of global transactions of $50 million or more in value. global volume
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S&P 500 trading multiples are relatively low by
historical standards…
35.0x
63%
58%
53%
51% 50%50% 50%
30.0x 48% 48%46% 47%46%48%
44%
39%40% 38%37%41%26.4x 40%36% 41%
34%
25.0x 24.1x 30%
22.4x 26%27%26%
Average:
21.2x
16.7x
18.9x
20.0x 17.8x 19.1x
17.5x 16.3x 17.5x17.3x
16.4x 16.5x 16.1x15.8x 16.2x 15.9x
15.3x15.4x 14.9x
15.0x 13.5x 13.8x 13.6x 13.2x
12.5x12.5x 12.3x
10.0x
4.2x
5.0x 3.8x 3.7x 3.3x
2.0x 1.5x 1.6x 1.8x 2.4x 2.3x 2.1x 1.9x 2.1x 2.6x 2.5x 2.5x 2.6x 2.6x 2.6x 2.0x 1.9x 1.7x 1.9x 1.7x 1.5x 1.7x 2.0x
0.0x
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
NTM P/E P/E to earnings growth ('PEG') average line
Source: Thomson Financial Securities Data Company and FactSet.
Note: Yearly NTM P/E multiples and PEG ratios represent averages.
As of 12/31/13.
Premium represents 4 week offer price to target stock price premium for deals with a U.S. target and U.S. acquiror, and a transaction value greater than $50 million. Percentages are as of year-end each year.
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The average premium paid for US targets is low while
the S&P 500 and US M&A volume are increasing
($ in billions)
53%
50%
48% 47% 46% 48%
44%
40% 41% 42% 40% 41%
38% 37% 36% 1,960
34%
30%
28% 28%
26% 39%
1,848
1,455
1,418 1,468 1,426
1,320
1,228 1,212 1,248 1,257 1,257
1,148
1,111 1,115
970 $1,581 880 903
741 $1,443$1,461
$1,330
$1,244
$1,191
459
$989
616 $894 $884
$737 $780 $750
$685 $662 $632
$538 $589
$452
$393
$305 $375
$622
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(1)
US M&A S&P 500 Premium 4 weeks
The average 4 week premium of 39% is low compared to recent years
Source: Thomson Reuters.
Note: Based on US domestic deals (intra-US)>$50 million. Confidential
(1) Dollar volume annualized as of 6/30/14.
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