Wachtell Lipton Highlights "Some Thoughts for Boards of Directors in 2011"

Esteemed corporate law firm Wachtell Lipton recently published "Some Thoughts for Boards of Directors in 2011" to highlight the key issues companies must address in the upcoming year. In 2011, companies will have greater difficulty in implementing corporate governance "best practices" that are geared toward building long-term shareholder value particularly due to, WLRK argues, "one-size-fits-all" regulation and increased shareholder activism. Among the latest concerns are: "pending rules regarding proxy access, say-on-pay, enhanced SEC disclosure requirements, compensation clawbacks, board structure", and so forth. WLRK addresses the following in the report:

Proxy Access

Although proxy access is currently stayed (with the case expected to be resolved by late spring 2011), companies are still vulnerable to activists "pursu[ing] shareholder proposals and bylaw amendments to impose proxy access on a company-by-company basis" regardless of the ruling.

WLRK provide a detailed approach to handling proxy access here. They recommend that companies engage discussions with major shareholders, particularly those who have owned 3% of the company continuously for at least 3 years and are now eligible to use proxy access. Firms should proactively monitor their shareholder bases well before any Schedule 14N filing. In addition, firms should take note of the fact that shareholders can "aggregate their holdings in order to meet the 3% minimum ownership threshold". At the same time, companies must be wary of that any communications concerning director nomination will result in the nomination not counting toward the 25% cap. Other considerations involve revising bylaws, director qualifications, board size and dynamics, etc.

In the event that a director is elected by a shareholder initiative under proxy access, "boards will need to work to minimize the potential for adverse effects on board stability, collegiality and effectiveness".

Executive Compensation

New SEC regulations and Dodd-Frank provisions have opened a floodgate of new executive compensation issues for companies.

- Companies holding a shareholder annual meeting on January 21, 2011 or later will need to have a "non-binding say-on-pay resolution seeking shareholder approval of named executive officer compensation", as well as a resolution on how often the say-on-pay vote will occur. WLRK argues that holding the say-on-pay vote once every three years more properly aligns the initiative with long-term goals. With that said,  many proxy advisory firms have recommended an annual say-on-pay vote. 

- Companies will need to disclose "golden parachute" plans via tender offer materials and merger proxy statements, in addition to seeking a non-binding vote on the matter.

- Companies will need to disclose information concerning executive compensation and its relationship to company performance in their proxy statements. Disclosure on stock hedging will be required, as well.

- Companies will need to disclose "the ratio of the median annual total compensation of the company's employees (excluding its CEO) to the annual total compensation of its CEO". This could entail "substantial administrative costs".

- Companies will need to disclose incentive-based compensation and follow newly expanded compensation clawback requirements.

In light of the regulatory and public focus on executive compensation, companies will need to focus on discouraging short-term risk-taking and be careful of allocating so-called "excessive" pay packages, while retaining talented long-term-minded executives.

Risk Management

Recent unfortunate events, like the Gulf of Mexico oil spill and Toyota product recalls, have revealed, and furthered, the importance of proper risk management. New regulation has also sought to establish greater transparency in companies risk management practices.

- "[B]ank holding companies with total assets of $10 billion or more, as well as certain other non-bank financial companies" will be required "to have a separate risk committee which includes at least on risk management expert with experience managing risk at large companies".

- The Federal Reserve Board might require smaller bank holding companies to take similar measures to the one described above.

- Required discussion of board risk oversight and leadership in proxy statements and annual reports.

- Companies must describe how compensation aligns with proper risk management.

Wachtell Lipton advises that directors not involve themselves in risk management on a day-to-day basis. Instead, directors should ensure "that the risk management policies and procedures… are consistent with the company's corporate strategy and risk appetite, that [they] are functioning as directed, and that necessary steps are taken to foster a culture of risk-aware and risk-adjusted decision-making throughout the organization". The CEO and senior executives should be the ones "fully engaged in risk management".

To read more, click here.

Board Composition and Director Qualifications

Wachtell Lipton recommends that companies find a "well-rounded board"--a task, the firm argues, that is being challenged by proxy advisor, regulator, and shareholder activist requests for independent directors. The law firm further states, "one of the 'lessons learned' from the financial crisis is that the tremendous complexity of the businesses and risks facing financial institutions warranted more industry expertise and insider knowledge in their boardrooms." Companies must seek to strike a happy medium between independence and insider knowledge in their boards. This is no easy task due to the nature of those with industry expertise having affiliations with other knowledgeable executives in the field. The NYSE's Commission on Corporate Governance only partially recognizes this when they state, "a properly functioning board can include one non-independent director". Wachtell Lipton argues that "there should be no complaint about adding additional inside directors to a board so long as a majority of the board consists of 'independent' directors".

Click here, to read "Some Thoughts for Boards of Directors in 2011".

Posted by David Schatz

Conference Board Paper Argues for Corporations to Address Proxy Access Sooner than Later

Charles M. Nathan and Paul F. Kukish from the law firm Latham & Watkins recently authored a report for The Conference Board, titled "Private Ordering and Proxy Access Rules: The Case for Prompt Attention". Below is a review of some of the information covered in the report:

Despite the SEC stay of proxy access (see our Oct 4 blog post), the authors argue that it is an "almost-certain… shareholder right" that companies must address. Even regardless of proxy access implementation, corporate governance activism is expected to rise and, along with it, new vulnerabilities to boards. Companies should therefore seek to amend bylaws and governance policies "by summer 2011, well before the likely 120- to 150-day window for the 2012 proxy access nominations that would open in late fall 2011 for year-end reporting companies".

Furthermore, amending bylaws and governance policies is an issue that should be taken care of sooner rather than later. The authors, as stated in the report, believe that a prompt and proactive approach is necessary for the following reasons:

Adjusting takes time - Amending bylaw and governance policy requires thorough analysis. Senior management and the board should have time to adjust to the new rules.

Perception matters, especially in the Delaware courts - Revising bylaws during a proxy contest could backfire against the firm and be viewed as "defensive and unfair". Bylaw changes could be challenged in Delaware courts at an inconvenient time.

Rules or not, pressure from activists continue - There is an expectation for more directors being nominated and elected by shareholder initiatives. "Companies need to be prepared for the advent of a new regime for director selection and ensure that it does not threaten traditional board cohesion and collegial values".

POSSIBLE PRIVATE ORDERING INITIATIVES

Revise advance-notice bylaws, as well as board informational and governance policies 

Explicit Differentiation Option - This would entail companies making it "explicit that the advance-notice bylaw is not intended to apply to proxy access nominations". Such a drafting option would require two different regimes: "one for proxy access nominations and the other for conventional proxy contests". A drawback to this is that it can limit informational requests from nominees than what a unified advance-notice bylaw could otherwise provide. Creating a new advance-notice bylaw exclusive for proxy access purposes also could be criticized as "not reasonable or equitable as a matter of state law". Managing the bylaw could be further difficult if the company is engaged in several proxy contests, in which only some parties make use of Rule 14a-11. "This double-jeopardy-like situation could be avoided by postponing any decisions regarding the proxy access nominee until after the separate advance-notice deadline has passed for conventional election contest nominations" or by "requiring conventional election contest nominees to comply with the advance-notice requirements of the proxy access rule".

Integration Option - This would entail revising the original advance-notice bylaw altogether. According to the authors, of the two revisions, the integration option is "advantageous to most companies". Companies should consider getting more information out of proxy access nominees as a qualification for nomination than that which is required by the SEC under Rule 14a-11 (click here for specific stipulations). Informational requirements should not be an issue under new SEC proxy rules, but they must prove "reasonability and equitability as a matter of state law".

Revise director qualifications and conduct standards

More controversial qualifications that companies should consider establishing, include: (1) stringent independence standards, and (2) "[w]ritten agreement to comply with board governance and informational policies as a condition to nomination". Age, term limits, identity, and stock ownership standards are just some of the requirements that companies need to consider for proxy access nominees. The idea is to make director qualifications and conduct particularly explicit, especially in the context of representatives from special-interest groups.

Revise nominating committee charters and processes 

Firms need to adjust nominating committee charters to thoroughly consider the qualifications of both proxy access and company nominees. Corporations must investigate the qualifications of both respective nominees before recommending a vote. Establishing a nominating committee schedule is also advantageous in evaluating performance and creating a board slate, accordingly. "Among the reasons for such a time table is a provision in the proxy access rules that, if a company engages in a discussion with a nominating shareholder or group before it files its Schedule 14N and subsequently the company puts the proxy access candidate on the board slate, the candidate is not considered a proxy access director for purposes of the 25 percent cap on access nominees". Therefore, companies should create a bylaw stipulation that obliges them to not consider shareholder nominee candidacy proposals before the filing of the Schedule 14N. Doing so would allow companies to fairly decline discussions before the Schedule 14N filing, thus preventing the so-called "proxy access creep".

Review voting standards and size of board 

Since the impending rule caps proxy access nominees to 25 percent and rounding down to the nearest whole number, companies should consider adjusting board size in accordance with their bylaws. The "rounding down" means that, effectively, proxy access nominees could represent at most 25% of a four-member board but only ~14% of a seven-member board, for example. Lastly, majority voting standards could present difficulties when there are several parties seeking board representations.

To see the report from The Conference Board, click here.

Posted by David Schatz

Examining Pershing's Activist Investment in J.C. Penney

(click to enlarge)

Following recent pressure by activist investor Pershing Square, Fortune Brands (Ticker: FO) confirmed this morning their plan to carve up the company into three separate operating businesses. The market's reaction has been positive.  As a result, Pershing has so far generated an unrealized return of over $300 million on their investment in the company in just a few short months. (Read the WSJ article for further details)

With this phenomenal investment return in mind, we decided to take a deeper look at Pershing's other major activist investment in J.C. Penney Company (Ticker: JCP) to better understand the activist's strategy and potential for share value improvement.


Background:
Since October 8, 2010, when Pershing Square and Vornado Reality Trust first disclosed their respective 16.5% and 9.9% beneficial ownership of JCPenney ("JCP"), there has been some speculation about how vulnerable the retailer might be to an activist campaign.  

Certainly, JCP is feeling the pressure, as evidenced by the fact that the company almost immediately employed a poison pill with a 10% trigger, in addition to hiring Goldman Sachs, Barclays Capital, and Skadden, Arps, Slate, Meagher & Flom LLP for financial and legal counsel.

Upon reviewing the company further, we found several areas of dormant value we believe Pershing Square will proactively pursue in an attempt to help "unlock" the company's true potential.  These include (i) realizing the full value attached to the company's real estate assets, (ii) reforming select corporate governance provisions such as director/executive compensation and low insider ownership, and (iii) addressing several operational inefficiencies that appear even more pronounced when comparing the company's recent results with other major department store chains.

Below is a quick look at each of these along with some thoughts about where Pershing Square might focus their efforts if an activist campaign escalates further.  

Extracted from Pershing Square's Q3 investment newsletter dated November 17, 2010

"We were attracted to JCP because of its inexpensive valuation, strong brand name and assets, and well-deserved reputation for overseas sourcing, high quality systems, and large in-house brands. We purchased our holding at an average price of $25.28 per share, an enterprise valuation of 4.1x 2010 EBITDA (adjusted for excess cash and other saleable non-core assets), a low multiple of what we believe to be trough or near-trough pre-tax earnings. At yesterday’s [November 16, 2010] closing share price of $30.80, JCP’s valuation has increased to 5.1 times EBITDA, a valuation that we continue to find attractive."

REAL ESTATE

JCP may be vulnerable to a request to either lease out its real estate holdings or spin off the assets into a REIT operated by Vornado, which (unlike JCP's management) has significant ~28 years experience in the field.

According to the most recent 10-K statement, JCP (a company with a current market value around $8.0 Billion) owned $308 million worth of land and $4.3 billion in buildings. At January 30, 2010, JCP operated 1,108 department stores throughout the continental United States, Alaska, Puerto Rico, of which 416 were owned, including 119 stores located on ground leases.

Despite the attractive real estate, JCP appears to be struggling to effectively manage the optimal value associated with these asset. Todd Sullivan, a General Partner for value investor Rand Strategic Partners, argues that "JCP doesn't need to own its real estate. It makes them no money".

Oppositely, JCP has seemingly done well investing into REITs. While the retailer does not disclose which REITs it is investing in, as of January 30, 2010, the fair value of their investments in REITs was $178 million, experiencing a net unrealized gain of $63 million in 2009.

CORPORATE GOVERNANCE ISSUES

Implementation of anti-takeover provisions without shareholder approval

JCP recently enacted a poison pill with a 10% trigger without the approval of shareholders. The Shareholder Rights Plan expires on October 14, 2011. The retailer's stock price fell 3% upon the news when it first implemented the defense.

Low insider and board of director ownership
Additionally, as Todd Sullivan points out, "Abysmal. As a group".
According to the 2009 proxy statement, the company's directors at the time held a total of 1,176,095 shares, equaling less than 0.5% of the company's total shares outstanding.  Sullivan further commented, "I have not seen that during 2009 or 2010 management made ANY open market purchases of stock." 

Director and executive compensation

Despite their lack of substantial ownership, directors receive an annual stock grant that has a market value of ~$120,000.

The activists may also take issue with the amount of compensation paid to top executives.  From 2007 through 2009 JCP paid their top four executives (Ullman, Cavanaugh, Theilmann and Hicks) close to $70 million during a period when shareholder value eroded by about $6 billion.  Below is a breakdown of JCP's top executives' compensation for the past three years, extracted from its 2009 Proxy Statement:

The activists may also highlight JCP's generous golden parachute plans for their top executives. CEO Myron Ullman's plan, for example, is set at 2.99 times his target bonus and annual salary. In the event that Ullman's job is terminated without a change in control, he would receive ~$12 million if he resigns or retires. However, in the event that there  is a change in control, Ullman receives ~$20.3 million if he resigns or retires.

OPERATIONAL PERFORMANCE

(click to enlarge)

JCP has been facing stiff competition against Kohl's, Macy's, Sears, and other top department chain stores. Arguably, the company's most significant vulnerability to an activist attack is the fact that, from a competitive standpoint, the company has struggled to perform.

Much of the company's loss in share value is, understandably, attributable to the recession, which depressed consumer spending, especially amongst JCP's market. With a consumer market of limited discretionary income JCP - more so than other department stores, slashed prices in an effort to maintain (and hopefully gain) consumers.

In order to determine why Pershing Square and Vornado found the retailer "undervalued" from a comparable market value perspective, we examined the company's change in stock price over the past three years compared to that of its competitors immediately preceding the activists' announcement on August 17, 2010. As illustrated below, just before the activist intervention, JCP had lost in excess of half of its value over three years, reducing total shareholder value by approximately $6 billion during the period. 

(click to enlarge)

The company has also struggled in terms of earnings and margins. On November 12, 2010, the company released disappointing third quarter results. Net sales rose a dismal 0.2% from last year's 3Q results, which totaled $4.19 billion in 2010--below analyst expectations of $4.25 billion. Shares fell 3% on the news. Net income was up 63% from last year at $44 million in 3Q.

The retailer was able to fuel sales growth by discounting its products. However, by doing so, JCP cut into profits. Gross margins were down 3.6% from last year at $1.6 billion, or 39% as a percentage of sales, in 3Q. Profit margins were further limited by JCP's lack of layoffs relative to its competitors during the recession--a point which Pershing Square has notably mentioned in the past.

Pershing Square further commented in their 3Q10 letter to investors:

"[T]here is significant potential for operational improvements at JCP which has underperformed its competitors including Kohl's and other retailers. Trailing earnings are at cyclically depressed levels; margins have been squeezed and sales productivity is low, with sales per square foot now at 2002 levels. 2010 adjusted EBITDA is approximately 30% below its 2007 peak and EBIT margins have deteriorated by about 45%".

CONCLUSION

As the economy further improves and consumer spending recovers, JCP seems to be in a good position to recover much of its lost wealth even without activist intervention. Attractive new brands, like Liz Claiborne and Sephora, have already aided sales growth--and likely will continue to do so. However, it is likely the activists' involvement will help unlock even more value associated with real estate, corporate governance, and operational improvements.

Going Forward:  Important Dates to Keep in Mind:
Expected date of 2011 Annual Meeting: Mid-May 2011
Deadline to Nominate Director Candidates: Mid-February 2011

Posted by David Schatz

Stock Images extracted from Google Finance with comments added by the author.

Icahn Launches Website to Help Elect 5 Directors to Lions Gate Board

On December 6 Icahn launched a website Save Lions Gate in an effort to help elect 5 new directors to Lions Gate's 12-member board.  The annual meeting is scheduled for December 14.

The site contains Icahn's December 3 presentation to ISS titled "Why Change is Needed at Lions Gate" along with a presentation to ISS from the investment bank Salem Partners (prepared at the request of Icahn).  The site also compares Lions Gate's board nominees to Icahn's board nominees.

Lions Gate also presented to ISS.  The Company's presentation is available here.

To read a summary of events going back to February 2009 download a recent December 3, 2010 Catalyst Investment Research Report from Hedge Fund Solutions.

Other relevant information worth examining:
Icahn Definitive proxy materials
Lions Gate Definitive proxy materials

Extracted from www.savelionsgate.com

Harvard Report Finds Negative Impact of Classified Board Structure on Firm Value

Bebchuk, Cohen, and Wang of Harvard University just recently released a report examining the relationship between staggered boards and firm value. While numerous reports have found a negative correlation between classified boards and firm value, one must be cautious in determining causation. Are classified boards merely a product of low-valued firms or are they actually responsible for yielding a negative impact on firm value?

In determining causation, the researchers implemented a quasi-experiment that made use of an October 8, 2010 ruling by the "Delaware Court of Chancery… approv[ing] the legality of a shareholder-adopted bylaw that shortened the tenure of directors". The case concerned a takeover contest between Airgas, Inc. ("ARG") and Air Products and Chemicals, Inc. ("APD"), where the bylaw would move ARG's annual meeting earlier in the year to January (from August). The "January bylaw" would thus have the effect of limiting the extent to which ARG's staggered board could entrench incumbent directors.

As it turns out, following the ruling in favor of the "January bylaw", firms with staggered boards experienced positive abnormal stock returns, compared to those without staggered boards. Companies with late annual meetings, Delaware incorporation, non-supermajority voting requirements, below-industry return on assets, and small firm size, increased most notably in value. All told, five days following the ruling, firms with staggered boards increased 50 risk-adjusted basis points in value over those without staggered boards.

The study goes beyond the scope of prior research by indicating causation: staggered boards negatively impact firm value.

It is no surprise then that Georgeson reports an average of 65%+ shareholders voting in favor of the 187 shareholder proposals to de-stagger boards during the 2006 - 2010 proxy seasons. It should also be of no surprise that between 2000 and 2009, "the number of S&P 500 companies with classified boards declined from 300 to 164".  Download Georgeson's 2010 Annual Corporate Governance Review

With that said, about half of "the over 3,000 public companies whose takeover defenses are tracked by FactSet Research Systems still have staggered boards". That leaves quite a few firms vulnerable to some corporate governance criticism from their investor base.

No doubt the findings in this report will be used to help bolster support for many activist investors seeking to remove a company's classified board structure.  In our opinion, companies interested in taking a proactive approach to avoiding shareholder activism, de-staggering the board may present an attractive option and should be seriously studied in conjunction with the merits associated with the company's other defense mechanisms.  

The report can be found here.

***

IMPORTANT NOTE: On November 17, 2010, ARG appealed Chancellor Chandler's decision to the Delaware Supreme Court. Just yesterday, on November 23, 2010, the Delaware Supreme Court ruled in favor of ARG (overturning Chancellor Chandler's decision) determining the shareholder-approved bylaw to be illegal. ARG fell sharply 5.92% that day to $62. Thus, (assuming no other outside influence on ARG's stock) the report's findings not only remain consistent, but also are further validated.

Posted by David Schatz

Image extracted from (1).

Wachtell Lipton Issues Annual Client Memo: "Key Issues for Directors 2011"

In light of expectations that shareholder activism will rise over the next year, WLRK has issued to its clients a rather timely memo, titled "Key Issues for Directors 2011". The memo is written by the inventor of the "poison pill" and shareholder activist critic Marty Lipton. Given Lipton's track record as a skilled lawyer, the memo provides a helpful guideline for corporations looking for defense. In providing advice, Lipton considers the financial crisis, expectations for the upcoming takeover and shareholder activist environment, as well as new government rules and regulations in the era of Dodd-Frank. 

Excerpt from the memo:

Earlier this year, in The Spotlight on Boards, I published a list of the roles and responsibilities that boards today are expected to fulfill.  Looking forward to 2011, it is clear that in addition to satisfying these expectations, the key issues that boards will need to address include:

          ·         Organizing the business of the board so that each of the increasingly time-consuming matters that the board is expected to oversee receives the appropriate attention of the directors.

          ·         Retaining and recruiting sufficient directors to meet the requirements for experience, expertise, diversity, independence, leadership ability and character, and providing compensation for directors that fairly reflects the significantly increased time and energy that they will need to spend in serving as board members. 

          ·         Developing an understanding of shareholder perspectives on the company, as well as coping with the escalating requests of union and public pension funds and other activist shareholders for meetings with the independent members of the board to discuss performance, governance, compensation and director nominations matters.

          ·         Maintaining the collegiality of the board in light of the balkanization created by the mandatory independent committee structure, and maintaining a collegial relationship with senior management that allows the board to play the important role of a strategic partner in light of the constantly increasing focus on the monitoring function of the board. 

          ·         Developing an understanding how the company and the board will function in the event of a crisis.  Most crises are handled less than optimally because management and the board have not been proactive in discussing how they would function, and the board cedes control to outside counsel and consultants. 

          ·         Most importantly, working with management to encourage entrepreneurship, appropriate risk taking, and investment to promote the long-term success of the company, despite the unrelenting pressures for short-term performance. 

Martin Lipton

Links to some previous thoughts…

Some Thoughts for Board of Directors 2010

Some Thoughts for Board of Directors 2009

Some Thoughts for Board of Directors 2008

Posted by David Schatz

Report by Schulte Roth & Zabel and Mergermarket Sheds Light on the Outlook of Shareholder Activism

Corporate law firm Schulte Roth & Zabel (SRZ), along with Mergermarket, recently released the findings of their annual survey Shareholder Activism Insight at SRZ's inaugural Shareholder Activism Conference in New York City this past week.

Here are a few survey results…

Not surprisingly, both activist and corporate respondents see a rise in shareholder activism over the upcoming 12 months.  60% of activists see a rise in shareholder activism versus 64% for corporate respondents.

This latter number is up from 39% in 2008. Only 4% of executives (and 0% of investors) actually see a decrease in shareholder activism over the upcoming 12 months.

While both activists (88%) and corporates (56%) are in agreement that the most  notable increases in shareholder activism in the next year will come from hedge funds, they disagree on the specifics. In terms of activism, excluding hedge funds, corporate respondents are most bullish on union funds; activist respondents, pension funds. All told, activists see a greater use of activism across all investor groups, except union funds, than corporate respondents do. While 46% of corporate respondents see an increased use of activism for union funds, only 35% of activists agree. Conversely, 40% of activists see a rise in activism amongst sovereign wealth funds, but only 4% of corporates expect an increase.

Perhaps most notably, respondents disagree as to which sectors will experience the greatest rise in shareholder activism over the next year and what catalysts will be responsible for this trend. Although a plurality of corporates (44%) and activists (26%) see shareholder activism rising most in the financial services industry, the latter class evidently has their eyes set on a more diversified portfolio. 22% of activists expect the greatest amount of activism to occur in the energy/utilities and technology/media/telecom industries each. 33% of corporates, not expecting a rise in technology/media/telecom targets, believe the greatest use of shareholder activism will take place in the energy/utilities industry, followed by 11% for chemicals/industrials (which activists, conversely don't expect any rise to take place in.) However, the most significant disagreements between corporates and activists arise when polled about catalysts. While 68% of activists see excessive cash on balance sheets (versus 15% for corporates) as the main driver of shareholder activism, 54% of executives see financial performance (versus 40% for activists) as the main driver. Activists see greater rises in activist investing due to every catalyst than corporates do (and quite significantly, at that), except for financial performance. Lastly, despite 50% of executives viewing activists as short-term market opportunists, nearly a majority (48%) of activists polled stated that their average holding period is in excess of a year.

With that said, there still is significant agreement between executive and activist respondents. For example, the two believe, by a substantial majority, that dialogue/negotiations is both the best strategy for activists, as well as for companies, to take in addressing shareholder activism. A plurality of activists (44%) and a majority of corporate respondents (57%) believe that investors and corporations work constructively on these negotiations most of the time, free from the limelight--which contrasts with media portrayals. Executives' views of activists have also improved over the last year, with 46% of executives viewing them as value driven co-owners and 74% of executives believing that shareholder board representation is important. Additionally, a majority of both parties believe "say on pay" rules will have the greatest impact on the extent of shareholder activism over the upcoming 12 months. 80% of activists and 72% of executives also expect investors to take advantage of proxy access, although technically in the long-term only executives (by a majority) expect this to be a long-term trend.

Despite the perceived impact of new regulations, only approximately 10% of corporates will respond by changing their composition of boards/senior management, their executive compensation structure, or their public relations strategies. Says David Rosewater, Partner at Schulte Roth & Zabel, "It is interesting to note that although more than half of the corporate executives responding state that the Dodd-Frank Act provisions will make them more responsive, very few believe it will change their behavior on relevant issues."

The report, which can be found here, is fascinating in the context of the major proxy campaigns taking place currently, the financial crisis, and the ruling going on over proxy access. Hedge Fund Solutions, LLC., as well as other consultants, have been counseling companies and investors in preparation for this increased and distinctive rise in shareholder activism.

Marc Weingarten and David Rosewater lead SRZ's shareholder activism practice.  

Marc Weingarten

David Rosewater

SRZ has a preeminent practice specialty in activist matters, with an unparalleled expertise in the applicable securities laws, proxy rules and the current state of market practice. SRZ has been counsel in many of the highest-profile activist matters in recent years. Serving both issuers and activists, the firm advises on federal securities law, state corporate law, Hart-Scott-Rodino, proxy rules and related matters, as well as handling investigations and litigations arising out of activist activity.

Charts extracted from Shareholder Activism Insight


Posted by David Schatz

HBS Research Finds Positive Market Value of Proxy Access

In a recently released study titled "Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge", the authors--Becker, Bergstresser, and Subramanian of Harvard Business School--argue "that financial markets place a positive value on shareholder access".

As published earlier, on October 4, the SEC granted a Stay of proxy access following litigation by the Business Roundtable and the US Chamber of Commerce. Consequentially, there has been some ongoing debate as to whether or not proxy access will go into effect. Should it not get into effect, and the paper's conclusions are accurate, firms will miss out in a potential source of value creation.

According to the research, as manifested in the SEC's final Rule 14a-11, shareholder access improves overall shareholder value.

"We find that firms that would have been most affected by proxy access, as measured by overall institutional ownership, lost 17 basis points of value for each standard deviation of ownership.  For firms that were owned more by historically activist institutions, the value lost was nearly four times as large." [emphasis added]

The paper can be found here.

Posted by David Schatz

Carl Icahn vs. Lionsgate: A Breakdown

Over the past few weeks, relations have become particularly tense between Billionaire activist investor Carl Icahn and Vancouver-based film producer Lionsgate (LGF). Since early 2006, Icahn has been building his ownership stake in Lionsgate and has criticized the company for its "reckless" spending and leverage. He has repeatedly issued hostile bids in an attempt to buyout the struggling media company and to protect his investment. Yesterday, Icahn--who currently owns 33.5% of LGF--extended the deadline of his tender offer of $7.50 per share to November 12, 2010. Throughout the battle, the two parties have gone through standstills and attempts at cooperation--all of which have not only proved ephemeral, but have backfired on both. Icahn and LGF have issued rather vicious and sharp-worded litigation against one another in an attempt to influence the outcome of the proxy battle between the two.

ICAHN BUYS UP LGF; LGF MAKES DEBT-FOR-EQUITY SWAP WITH RACHESKY

On October 20, 2008, Icahn Capital filed its initial 13D statement with the SEC, revealing a 9.17% ownership stake in Lionsgate. In Item 4 of the filing, the firm stated its belief that the shares were "undervalued", along with its desire "to continue to have discussions with representatives of [LGF]". The shareholder activists' stake later reached 38%, but shortly thereafter was diluted to 33.5%. What happened was this: In June 2010, Lionsgate refinanced Kornitzer Capital Management's $100 million worth of debt into convertible notes redeemable at a price below the then-current market price. Kornitzer then sold the notes to Mark Rachesky, President of MHR Fund Management. The fund then exercised the notes at $6.20 per share. All told, the debt-to-equity swap increased Rackesky's ownership of LGF from 19% to 29%, while effectively diluting Icahn's from 38% to 33.5%. The situation is particularly fascinating in light of the fact that Rachesky was a former protege of Icahn. Many have incorrectly speculated that Rachesky would support Icahn's activist investment, but rather Rachesky has done just the opposite--support LGF's incumbent board of directors and management. As LGF's second largest shareholder (under Icahn), Rachesky will have considerable leverage in shaping the outcome of the proxy fight.

ICAHN SUES LIONSGATE

Unhappy with being diluted, Icahn did what--some may argue--he does best: sue the company. On July 26, 2010, he filed his complaint concerning Lionsgate's debt-to-equity swap and its breach in a 10-day standstill agreement to the Supreme Court of British Columbia and the New York Supreme Court, respectively.

In the lawsuit, Winston & Strawn, LLP (Icahn's legal counsel) writes, "This case involves an unlawful sham transaction by which an incumbent Board of Directors and their co-conspirators sought to further entrench their own positions and to protect their personal interests in compensation and perks at the sole expense of their company… and its shareholders". In case you are wondering, Winston & Strawn, LLP repeatedly refer to the debt-to-equity swap as "The Sham Transaction". They continue in Icahn-esque tone, "The Sham Transaction is the antithesis of responsible corporate governance; indeed it belongs more properly in the script for a new reality TV program, 'Mad Management'". Ultimately, Icahn is accusing Lionsgate for unlawful tortuous activity, violating stock exchange rules, violating laws, and violating federal securities law. He has asked the courts to reverse "The Sham Transaction" and to "sterilize" Rachesky's new shares--that is, take away their voting rights. As of now, no ruling has been made.

REGULATORS REJECT LIONSGATE POISON PILL - TWICE

In April earlier this year, Canadian regulators rejected LGF's poison pill, which had a trigger of 20%. On July 1, 2010, Lionsgate launched a second shareholder rights plan, which would have gone into effect if a shareholder accumulated more than 38%. The board believed that the second poison pill would pass the legal hurdle, because it was established without the presence an active tender offer. Nevertheless, the British Columbia Securities Commission again rejected Lionsgate's poison pill.

ENTER MGM STUDIOS

Lo and behold, media company Metro-Goldwyn-Mayer Studios Inc. (MGM)--which is facing declining cash flow and high levels of debt--is being asked of its creditors to "discuss alternatives". The company was burdened with debt when it was taken private by a team of investors in 2005 for $2.85 billion--namely by, Sony Corporation, Comcast, Providence Equity Partners, TPG Capital, DLG Merchant Banking Partners, and Quadrangle Group. (Important Note: creditors were later disappointed with the highest buyout bid--$1.5 billion from the Warner Brothers--following the one in 2005.)

Believing that it can enhance the value of MGM's vast film library--which includes more than 4,000 titles--, on October 12, Lionsgate sought a merger with the media company. Under the LGF-MGM merger, Lionsgate would own 45% of the resulting-company; MGM creditors, 55%. Initially, Icahn was opposed to the merger; but, later supported it. In fact, Icahn supported it so much that he bought up 13% of MGM's $4 billion debt and then pressed other creditors to vote their shares his way--that is, in favor of the Lionsgate-MGM merger over the Spyglass alternative.

LIONSGATE SUES ICAHN

On October 28, Icahn got a taste of his own medicine, when Lionsgate sued him over tortious interference, "filing [of] materially false and misleading statements with the [SEC]", and "violat[ing] provisions of federal securities law". 

The company--hiring none other than the famous corporate law firm Wachtell, Lipton, Rosen & Katz--writes, "It turns out that Icahn has been misleading Lionsgate all along. While urging shareholders to support his takeover campaign… to ensure that Lionsgate did not pursue what he called a 'delusional' MGM transaction, Icahn was quietly amassing a huge portion in MGM debt with the undisclosed intention of reaping profits from both sides in an eventual merger." Notably, the case has some choice words to describe Icahn: a "corporate raider", "break[s] up companies", involved in a "double game". Fittingly, that day, Icahn extended his $7.50 tender offer, which is set to expire November 12, 2010, at 11:59 p.m (Vancouver time), unless otherwise amended.

MGM CREDITORS "OVERWHELMINGLY" REJECT LGF-MGM MERGER IN FAVOR OF BANKRUPTCY REORGANIZATION

Yesterday, October 29, MGM creditors officially voted on which alternative to pursue: either a merger with Lionsgate or bankruptcy reorganization. Ultimately, they "overwhelmingly" favored the latter due to its firmer financing arrangement. Under the accepted alternative, the company will file for Chapter 11 around (humorously) Halloween time. Spyglass Entertainment, operated by Gary Barber and Roger Birnbaum, will own 5% of the studio, as well as manage it; creditors will have their aggregate debt converted into 95% of the equity of the resulting company. Although MGM is seeking court approval on around December 2010--and thus there is time for reversal--Icahn, as of the present moment, is supporting the accepted merger, contingent upon concessions in deal terms and gaining a board seat on MGM.

Images extracted from (1) and (2).

Posted by David Schatz

JCPenney, Fortune Brands Respond to Ackman

Bill Ackman generated considerable enthusiasm and attention at the recent Value Investing Congress. Known for his persistence and aggressive campaigns, Ackman has delivered substantial returns to investors—his fund, Pershing Square, has a historical 24% annual return and $7 billion AUM. He gained public attention from his tense six-year battle against bond insurer MBIA Inc. The activist investor ultimately shorted the company for a net return of more than $1 billion—a fascinating showdown that was later chronicled in Christine Richard’s Confidence Game.  Now Ackman has his eyes set on JCPenney (JCP), Fortune Brands (FO) and General Growth Properties (GGP). Putting his money where his mouth is, Ackman has allocated $2 billion of his fund’s net asset value to taking on esteemed-retailer JCPenney and holding company Fortune Brands.

Thus, it was no surprise that Ackman was the center of attention at the Value Investing Congress. The activist investor first stated that he is bullish on the US economy. Ackman argued that, due to the credit crisis and recession, US companies have been hoarding cash. Cash can be applied to share buybacks, dividend distributions, and other measures that juice up stock price either in the short-term or long-term. (JCP, for example, has $2 billion worth of cash and cash equivalents.) Further, companies are currently undervalued—a quality which makes the environment particularly ripe for activist investing. Ackman added that debt financing is relatively cheap, the improving housing market, revitalization of private equity investments, and so forth, are signs of an improving economy. But what exactly is Ackman likely to push for in JCPenney, Fortune Brands, and General Growth Properties—and how is his investments faring thus far?

Evidently, both the managements of JCP and FO aren’t particularly happy of Pershing Square’s latest 13D findings. Pershing Square currently owns 16.5% of JCP and 10.9% of FO. The two companies have both taken measures to oppose Ackman’s impending proxy battle. Fortune Brands is currently seeking out an investment bank (potentially Credit Suisse) for counsel. Pershing Square has not stated how it specifically aims to reshape the company, but many have speculated that Ackman sees value in spinning-off the company’s divisions from one another.

JCPenney, on the other hand, has taken rather direct actions to defend against shareholder activism. On October 22,  JCP employed a poison pill with a 10% trigger. The company writes, “The Board of Directors authorized the adoption of the Rights Agreement, which has a one-year term, to promote fair and equal treatment of the Company’s stockholders in connection with any initiative to acquire control of the Company and in light of recent rapid accumulations of a significant percentage of the Common Stock”. Notably, the trigger is set just above Vornado Reality Trust’s 9.9% ownership. Stephen Roth, Chairman of Vornado Reality Trust, plans to work alongside Ackman in his activist campaign. Should any investor exceed the 10% threshold, other common stockholders have the right to purchase a fraction of JCP’s preferred shares, thus diluting the 10%+ acquirer’s ownership. The poison pill expires on October 14, 2011. JCPenney’s shares dropped 3% following the news. Lastly, Goldman Sachs and Barclays Capital (financial assistance) and Skadden, Arps, Slate, Meagher & Flom LLP (legal assistance) have been hired to help the retailer defend against Pershing Square’s investment. Ackman has mentioned the following as catalysts to boost shareholder value: JCP’s attractive real estate portfolio, excess cash and non-operating assets, cheapness (trading at 3.5x EBITDA), absence of short-term debt, and low company layoffs (relative to the industry).

The Howard Hughes Corporation, a spin-off of GGP that Ackman will chair, is not going to be a REIT. GGP shareholders’ stock will be converted into 0.0983 shares of the spin-off and one new share of GGP. Howard Hughes’ heirs, who resisted the conversion, were promised $230 million. With $250 million worth of commitments, the Howard Hughes Corporation will focus on developing the South Street Seaport, malls, master planned communities, and GGP’s Chicago headquarters. As of now, Ackman’s investment in GGP has increased 650% to $1.5 billion.

While Ackman’s recent stock returns have been considerable, only time will tell whether or not he will be able to generate long-term value for investors and shareholder of JCPenney, Fortune Brands, and General Growth Property. Based on his history, it really can go either way. One thing is for sure, if history repeats, the proxy battles will be exciting to follow.

Posted by David Schatz

DE Supreme Court Reaffirms Selectica's "NOL" Shareholder Rights Plan

On October 4, 2010, the Supreme Court of Delaware upheld the Court of Chancery’s prior decision in favor of Selectica, Inc.—reaffirming the validity of Selectica’s NOL Poison Pill under state law.

BACKGROUND

Selectica (SLTC) is a currently profitless Delaware public corporation that provides sales configuration systems and enterprise software solutions for management. Trilogy—which operates in the same industry as Selectica—owns Versata Enterprises as a subsidiary. Versata, in turn, specializes in technology powered business services.

Since going public in March 2000, Selectica has consistently experienced annual losses. Consequentially, the company has accumulated approximately $160 million in net operating loss carryforwards (NOLs). NOLs are tax losses that can be used by a corporation for a limited time to offset taxes to be paid on operating profits. NOLs can be used to refund prior taxes, or be used to shelter future income from taxation. Their value, therefore, is contingent upon the company either having immediate past profit or reporting future profit. Finally, NOLs become worthless if the company fails to generate profit after twenty years.

A rather specific stipulation held in the Internal Revenue Code ultimately exacerbated the long-standing adversarial relationship between Selectica and Trilogy. Section 382 of the Internal Revenue Code triggers a decrease in value of a company’s NOLs in the event of “ownership change”. The purpose of this rule is to prevent taxpayers from benefiting from other company’s NOLs. Justice Randy J. Holland clarifies that for the “purposes of [Versata Enterprises, Inc. v. Selectica, Inc.] the only shareholders considered when calculating… ownership change… are those who hold, or have obtained during the testing period, a 5% or greater block of [Selectica’s] shares outstanding”. Selectica ultimately determined that it was necessary to take measures to protect the NOLs value after 30% beneficial ownership changed hands—problematic, since over the past three years 5%+ holders experienced about a 40% ownership change.

The measure that Selectica took to thus protect its most valuable assets was namely to implement a NOL Poison Pill. The pill was an amendment to a previous Shareholder Rights Plan.  It would decrease “the beneficial ownership trigger from 15% to 4.99%, while grandfathering in existing 5% shareholders and permitting them to acquire up to an additional 0.5% [the 0.5% permissible increase being contingent on the original 15% cap] without triggering the NOL Poison Pill”. On December 18, 2009, Trilogy— which has been trying for five years now to buyout Selectica—accumulated even more shares of Selectica, growing its ownership to 6.7% and thus triggering the NOL Poison Pill. Trilogy states that it did this intentionally to “’bring accountability’ to the Board and ‘expose’… the ‘illegal behavior’ by the Board in adopting a pill with such a low trigger”. Ultimately, Selectica’s Shareholder Rights Plan instituted an Exchange that diluted Trilogy’s ownership from 6.7% to 3.3% whilst doubling other SLTC shareholders’ common stock. Selectica then reloaded its poison pill back to the 4.99% trigger.

In reviewing the validity of the NOL Poison Pill, the Exchange, and the Reloaded NOL Poison Pill under state law, the Delaware Supreme Court applied the Unocal test. Under Delaware law, the adoption of a poison pill is valid as an anti-takeover measure so long as it meets three stipulations.  To pass the Unocal test, the Shareholder Rights Plan must be both a reasonable and proportionate response to a threat, and not be preclusive or coercive toward that threat. A defensive measure is preclusive where it renders a bidder “mathematically” unable to “realistically… wage a proxy contest and gain control”.

Believing that Selectica’s actions were proportionate and reasonable, while not precluding Trilogy’s ability to wage a successful proxy context, the Delaware Supreme Court reaffirmed the validity of the NOL Poison Pill, the Exchange, and the Reloaded Poison Pill. (Selectica’s cross-appeal for a refund of attorney fees under the bad faith exception to the American Rule was dismissed.) 

Interestingly, near the decision’s closing, the Court had some scathing words to say about Trilogy. The Court described Trilogy as a belligerent force “act[ing] in bad faith” to “harm… a competitor with a contentious history”. Shareholder activists have had some equally harsh words for Delaware corporate law. In particular, they have criticized Delaware for having what they perceive to be a bias in favor of companies’ board of directors, whilst consequentially depressing the rights of shareholders. As evidence, activist investors point out that more than half of US public companies are incorporated there. Ultimately, Versata Enterprises, Inc. v. Selectica, Inc. is particularly significant in that it is representative of some of the tension between companies and their shareholders.

Posted by David Schatz

Shareholder Activism in the European Union

Pavlos E. Masouros, a Fellow in Corporate Law at Leiden University, recently published a research paper concerning the state of shareholder rights in the European Union following the enactment of the Shareholder Rights Directive (SRD).

"This article is essentially an attempt to show that the deficit in the European corporate governance model with regard to the status of the shareholders persists even in the post-SRD era and that we still have a long distance to cover in order to truly empower shareholders in the EU..."

You may find Masouros’ paper, Is the EU Taking Shareholder Rights Seriously? An Essay on the Impotence of Shareholdership in Corporate Europe, posted under “General Commentary” in our recently launched Activist Investing Resource Blog.

For more information concerning Masouros’ research, click here. 

Posted by David Schatz

A Busy Week for Bill Ackman

Last week, activist investor Bill Ackman, founder of Pershing Square Capital Management, was particularly busy. Along with being named the future chairman of the newly formed Howard Hughes Corporation, Ackman filed two Schedule 13D statements: one for J.C. Penney and another for Fortune Brands. Ackman believes that both J.C. Penney and Fortune are "undervalued" and represent "attractive investment[s]". In Item 4 of both filings, Pershing Square states that it "expect[s] to engage in discussions with management, the board, other stockholders of the Issuer and other relevant parties concerning the business, assets, capitalization, financial condition, operations, governance, management, strategy and future plans of the Issuer".  

Hedge Fund Solutions has been closely tracking Pershing Square's activist investments:

General Growth Properties, Inc. ("GGP")

Pershing Square files Schedule 13D

23,953,782 Common Shares (7.5% of the outstanding Common Shares)

54,907,669 Common Shares under certain cash-settled total return swaps

TOTAL AGGREGATE ECONOMIC EXPOSURE: 24.9%

Bill Ackman has been in charge of General Growth's bankruptcy reorganization since the company first entered Chapter 11 in April 2009. Under the reorganization plan, GGP will become two separate companies, financed by $8.5 billion from Pershing Square and other investors. One company will be called General Growth and manage 185 shopping malls; another will be called The Howard Hughes Corporation. The latter spin-off will will consist of a portfolio of real estate assets, master planned communities, malls, GGP's Chicago headquarters, and will be managed by a nine member board. On October 8, 2010, GGP announced that Ackman will become the chairman of The Howard Hughes Corporation.

In a press release, Ackman stated, "I am extremely pleased that we have assembled such an experienced, talented and dynamic group of individuals to serve as directors… I also believe the Howard Hughes name -- which reflects the success and vision of one of our country's greatest entrepreneurs -- is a fitting brand for this world-class portfolio of real estate assets. We look forward to create long-term value for our shareholders"

According to Reuters, "Pershing Square will own 9.5% of Hughes when it emerges from bankruptcy", which GGP expects to occur in November.

From Google Finance: 

General Growth Properties, Inc. (GGP) is a self-managed real estate investment trust (REIT). The Company has ownership interest in, or management responsibility for, over 200 regional shopping malls in 43 states, as well as ownership in master planned communities and commercial office buildings. GGP’s business is focused in two main areas: Retail and Other, which includes the operation, development and management of retail and other rental property, primarily shopping centers and Master Planned Communities, which includes the development and sale of land, primarily in large-scale, long-term community development projects in and around Columbia, Maryland; Summerlin, Nevada, and Houston, Texas and its one residential condominium project located in Natick (Boston), Massachusetts. All of its business is conducted through GGP Limited Partnership (the Operating Partnership or GGPLP).

J.C. Penney Company, Inc. ("JCP")

Pershing Square files Schedule 13D

39,075,771 Common Shares and 4,156,700 American-style call options (16.5% of the outstanding Common Shares)

602,600 notional shares of Common Shares under certain cash-settled total return swaps

TOTAL AGGREGATE ECONOMIC EXPOSURE: 16.8%

Pershing Square started purchasing shares of JCP since August 17, 2010. The activist hedge fund continued to hold below 5% of JCP until September 28 when it purchased call options to 4 million shares. SEC law stipulates that investors have within 10 days to file a Schedule 13D after accumulating 5% or more of a public company's stock. Toward this end, after exceeding the threshold, Ackman started rapidly purchasing JCP to the tune of 23 million additional shares, ~4.2 million American-style call options, and 602,000 cash-settled total return swaps, bringing his aggregate economic exposure to 16.8%. The options' weighted average strike price is $26.23--most of which expire next May; the remainder in January 2012. Pershing Square paid approximately $903 million for its stake in JCP.

Stephen Roth's Vornado Reality Trust also filed a Schedule 13D, revealing its 9.9% ownership of JCP. Vornado is a real estate investment trust (REIT) which owns over 100 million square feet of commercial real estate. Ackman states that he "and the Vornado… intend to consult in connection with each other on strategic matters relating to [J.C. Penney] and their investment in the Common Stock."

Although Ackman has not yet indicated what changes he will specifically push for in JCP, based upon his previous activity with Target and McDonald's, his current investment in General Growth Properties, as well as his overall form of shareholder activism, it is likely that he will focus on real estate catalysts. In his activist campaign against McDonald's Corporation, Ackman stated that the company should not be in the business of operating its own stores. The shift away from a capital-intensive business model, Ackman argued, would allow for McDonald's to repurchase a greater number of its shares and pay out larger dividends to shareholders. For Target Corporation, real estate again was the area of concern for Pershing Square. Ackman proposed an elaborate scheme for Target whereby the company would sell its credit-card business and manage its real estate in a spin-off REIT. Ultimately, Pershing Square lost all of the five board seats that it fought for; however, Target repurchased $10 billion of its shares and sold approximately 50% of its credit-card business. J.C. Penney could very well represent an opportunity for the activist investor to heal the scars earned during the Target battle. In its latest quarterly report, the company stated that it has ~$5.3 billion worth of property and equipment.

In addition to focusing on real estate catalysts, Ackman is also likely to push JCP to pay back some of its debt, distribute dividends, repurchase shares, or some combination of the aforementioned. As of July 31, 2010, the company currently has $2 billion worth of cash and cash equivalents. Furthermore, the retailer has a plan that offers golden parachutes to executives in the event that an investor accumulates more than 20% of the company's stock. (Important Note: a "Group" filing from Pershing and Vornado would exceed the 20% ownership threshold and trigger the right to issue change of control payments) CEO Myron Ullman's golden parachute is worth 2.99 times his target bonus and annual salary. Therefore, corporate governance and "excessive" executive compensation arrangements could be another source of contention for J.C. Penney if it needs to defends itself against shareholder activism.

Lastly, the retailer's stock has struggled to perform on a comparable basis against larger companies like Macy's and Kohl's. According to The New York Times, prior to Ackman's involvement, over the last 12 months J.C. Penney's stock has decreased 7.6%.

From Google Finance:

J. C. Penney Company, Inc. (JCP) is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). The Company is a retailer, operating 1,108 JCPenney department stores in 49 states and Puerto Rico as of January 30, 2010. Its business consists of selling merchandise and services to consumers through its department stores and Direct (Internet/catalog) channels. JCPenney sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside JCPenney and home furnishings. In addition, its department stores provide with services, such as styling salon, optical, portrait photography and custom decorating.

Fortune Brands ("FO")

Pershing Square files Schedule 13D

16,668,636 Common Shares (10.9% of the outstanding Common Shares)

603,486 notional shares of Common Shares under certain cash-settled total return swaps

TOTAL AGGREGATE ECONOMIC EXPOSURE: 11.3%

Unlike J.C. Penney, Fortune Brands has done incredibly well, rising 30% this year; as a result, it is unsuspecting that an investor would press for changes in such a company. However, Ackman is not your typical investor. He is an activist investor who has taken on well-managed companies in the past (read: Target) and has been relentless in his campaigns from beginning to end--Fortune Brands will probably be no exception.

In particular, the company's eclectic brand mix makes it highly vulnerable to spin-off proposals. Fortune has a golf division, which owns Titleist, FootJoy, Scotty Cameron Putters, and Pinnacle Golf; a home and security division, which owns Waterloo Industries, Masterbrand Cabinets, Moen, Master Lock, American Lock, Fypon, Therma-Tru Doors, Vista Window Company, and Simonton Windows; and lastly a spirits division, particularly noted for its Jim Beam, Sauza tequila, and Maker's Mark bourbon products. Based upon the focus of Pershing Square's previous activist campaigns, Ackman is likely to argue that the disharmony of the company's brand mix is evidence that Fortune will be more valuable existing as separate entities.

From Google Finance:

Fortune Brands, Inc. (Fortune Brands) is a holding company with operating companies engaged in the manufacture, production and sale of distilled spirits, home and security products, and golf products. Fortune Brands operates in three segments: Spirits, Home & Security and Golf. In June 2009, the Company acquired the EFFEN vodka brand and related assets from the Sazerac Company, Inc. In June 2009, the Company sold the Old Taylor whiskey brand and assets to Sazerac Company, Inc.

Images extracted from (1), (2), (3), and (4).

Posted by David Schatz, Hedge Fund Solutions