M&A is attractive to activists for its rich returns. How can a company steer its M&A deal past (or with) activist hedge funds?

Richard Grossman, a partner in Skadden’s M&A practice, has advice on tackling activist hedge funds during an M&A transaction.

Firstly, structuring a deal that skirts shareholder approval requirements is no guarantee it will get past activist scrutiny. Grossman cites the example of Occidental’s acquisition of Anadarko Petroleum which technically did not need shareholder approval. Carl Icahn’s campaign nevertheless took a different route for the removal of the company’s directors and alteration of its charter documents.

Act as your activist

A company should take a proactive approach and prepare by “acting as its own activist.” That’s done well by proposing a well-reasoned transaction rationale and evidence of careful and professional consideration by the board. Above all, the transaction should, and be seen to, create value for stakeholders.

However, understand that ongoing communication and advance dialogues with shareholders can be instrumental in heading off potential objections amid a deal.

Plan and prepare for activist hedge funds

Plan well for opposition from an activist. Identify potential criticisms from activist hedge funds, and prepare rebuttals in advance.

It’s important also to recognize the tools of the activist’s trade, in other words, their legal arsenal. These include a proxy battle, litigation, or a “books and records” demand. Also, check for lurking loopholes in the company’s governing documents which the activist hedge fund can exploit.

What are the trends?

During the first half of 2019:

• 37 companies faced demands from activists for M&A
• 18 companies faced objections to proposed M&A
• 13 companies fielded demands for breaking up the business or spin-offs

“As activism has become a widely accepted strategy to generate “alpha,” we expect that activism will continue to have a significant impact on M&A deals,” says Grossman.

The article “Deliberate process” by Richard Grossman appeared in M&A Activism 2019, a report published by Activist Insight.