Tuesday, January 18, 2011

Kicking Off the Shareholder Activist New Year with a Bang

Image Extracted from Barron's by Dan Picasso
Only ~3 weeks into the New Year and we are already seeing an explosion of shareholder activist activity. Investors kicked off 2011 with an impressive frenzy of filings. In the first week of 2011 alone there were 18 activist investments made, according to Hedge Fund Solutions' Catalyst Equity Research Report (subscribe here). Then, the next week, The Wall Street Journal ran an article that claimed "The Activists" run Wall Street (that is, they "are in the driver's seat"). In preparing for what is expected to be a milestone year for activism, boards should consider the nature of activist investing thus far and how it will evolve throughout the year in the context of a new regulatory environment.

A taste of what's to come...

Ameron International Corporation (AMN)
Activist Investor: Barington Capital (3.8% beneficial ownership)
Seeking Catalysts: Replace the Chairman, President, and CEO; focus portfolio; contain costs; consider using large cash balances to implement a share repurchase program, among other options; and establish a slew of corporate governance improvements entailing executive compensation matters, board declassification, majority vote standards, appointing an independent Chairman, and improving corporate communication.

Ameriana Bancorp (ASBI)
Activist Investor: Financial Edge Fund (5.4% beneficial ownership)
Seeking Catalysts: Reduce non-performing assets and minimize the negative impact of credit losses; reduce overhead expenses, which appear to be excessive given the size of the Company; manage the capital structure of the holding company and the bank, including the $10 million of trust preferred securities issued by the Company; and maximize the value of the Common Stock.

ATNA Resources, Ltd. (ATN.TO; ATNAF.OB)
Activist Investor: Lloyd Miller (11.9% beneficial ownership)
Seeking Catalysts: Enhance shareholder value by possibly changing board composition.

Home Federal Bancorp of Louisiana (HFBLD)
Activist Investor: Joseph Stilwell (7.9% beneficial ownership)
Seeking Catalysts: Pay dividends; employ excess capital to share buybacks; seek board representation if the Company dilutes tangible book value per share.

H&Q Life Sciences Investors (HQL)
Activist Investor: Western Investment (4.1% beneficial ownership)
Seeking Catalysts: Declassify the board.

Immersion Corp. (IMMR)
Activist Investors: Ramius Capital (8.2% beneficial ownership); Dialectic Capital (5.2% beneficial ownership)
Seeking Catalysts: Dialectic Capital has nominated two individuals for election to IMMR's board at the 2011 annual meeting.

National Technical Systems (NTSC)
Activist Investor: Sandler Capital Management (8.09% beneficial ownership)
Seeking Catalysts: Explore a sale.

Red Robin Gourmet Burgers (RRGB)
Activist Investors: Clinton Group and Spotlight Advisors (8.95% beneficial ownership)
Seeking Catalysts: Explore a sale; remove poison pill and pledge not to adopt another one without shareholder approval.

SurModics Inc. (SRDX)
Activist Investor: Ramius Group (12% beneficial ownership)
Settlement Agreement: Company will increase board size from 10 to 12 to add two individuals recommended by Ramius; following the 2011 meeting, the board size will return to 10 members. The Company agreed to establish a committee to review strategic alternatives, which the two Ramius representatives will join.

Perhaps one of the most noteworthy highlight so far in 2011 has been from activist shareholder Ralph Whitworth of Relational Investors. With a 3.93% ownership of the industrial conglomerate ITT Corp (ITT.N), Relational Investors successfully pushed for a breakup of the company. ITT agreed to spin-off into three separate companies, although the board claims that this decision was made with no investor pressure. Nevertheless, according to Reuters, "[t]he steps taken by ITT will likely have averted a proxy contest with Relational Investors", which had earlier nominated three directors to ITT's board.

And all of this appears to be just the beginnings of the 2011 rise in activism. As mentioned earlier, according to a Schulte Roth & Zabel and mergermarket report,  64% of surveyed executives and 60% of surveyed activists see a rise in shareholder activism in the next 12 months following Q3 2010. Furthermore, this rise will greet more vulnerable targets than normal, thanks in part to Dodd-Frank. Although proxy access has been stayed and won't be relevant until, at the soonest, the 2012 proxy season; say-on-pay will go into effect in a matter of a few days, namely January 21, 2011. According to a poll of 135 publicly traded companies by Towers Watson, 51% of respondents expect to hold annual say-on-pay votes; 10%, biennially; 39%, triennially. 40% believe that shareholder accountability will serve as one of the greatest influences on vote-frequency recommendation. Say-on-pay will have far-reaching implications on corporate governance campaigns, as 75% of activists see that as having the greatest impact on shareholder activism over the next year among the new rules/regulations, over 17% for proxy access. 

The ongoing corporate governance campaign against Occidental Petroleum (OXY) by shareholder activists Relational Investors and CalSTRS provide a noteworthy case study on the implications of say-on-pay. On January 26, 2009, the board of Occidental Petroleum approved establishing a non-binding say-on-pay policy, which went into effect at the company's 2010 shareholders meeting. CEO Ray Irani has long been criticized for being one of the most highly paid executives, picking up a package of $857 million over the last decade--third to only Larry Ellison and Barry Diller. The result? Despite Irani producing excellent returns to shareholders over the last decade on a competitive basis to any reasonable peer group, a majority of shareholders voted against OXY executive compensation packages through a non-binding say-on-pay vote. According to Spencer Abraham, an OXY board member and the chair of its compensation committee, the negative say-on-pay vote in May was the "main catalyst for change".

It indeed was a "downhill" battle for Ray Irani following the say-on-pay vote. Relational Investors and CalSTRS collectively accumulated ~1% of Occidental Petroleum and continued to push management to cut executive compensation. The result? Ray Irani agreed to step down as CEO in 2011 and cut pay packages to make them more aligned with those of peer companies. According to Charles Elson of the Weinberg Center for corporate governance at the University of Delaware, "Investors are increasingly agitated and they have increased power to do something with that agitation… [Executive pay cuts] are going to happen more and more".

With an intense first 3 weeks of 2011 for activist plays, as well as a different regulatory environment, companies must prepare for a version of shareholder activism never seen before. Successful preparation is difficult, but attainable--for while some of the once-hailed defensive tactics are no longer relevant, there are many proactive initiatives that companies can now take to create long-term value.

Posted by David Schatz