Yesterday, my colleague Jason Booth published an in-depth look at this year’s record number of poison pills, drawing on data from Activist Insight Governance. Pills and the reaction to them have changed significantly since 2008 – the last time their use spiked – and it’s far from obvious that activists won’t take them as an incitement to target boards in 2021.
On the other hand, their use might be a help at the negotiating table. Occidental Petroleum settled with Carl Icahn soon after implementing its pill, while Red Robin Gourmet Burgers tweaked its threshold as part of a settlement with Vintage Capital Management (that pill was a response to Vintage’s 2019 takeover proposal). GCP Applied Technologies is increasing its threshold from 15% to 20% and putting an extension to a vote even as it faces a full-board sweep from Starboard Value.
Directors may reckon shareholders will share their sense of uncertainty and appreciate the flexibility that comes with small amendments. They may also feel emboldened. Earlier this year, activists helped do away with a poison pill at Verso as part of a proxy contest but last month shareholders fell behind Institutional Shareholder Services (ISS) at Toshiba Machine, with 62% of votes in favor of the takeover defense.
Starboard's Opportunistic Buying Of Commvault
By March 12, when the S&P 500 Index was already down 15% and lockdowns in response to the COVID-19 pandemic were starting to become normalized, new activist stakes slowed to a minimum. Excluding governance-only campaigners and companies below $100 million in market-capitalization, there have been just over 20 in the past three weeks – many of those the result of months or years of work or re-entries, such Starbucks and Chef’s Warehouse, where activists retreated to what they know.
Amidst the noise, Starboard Value’s purchase of a 9.3% stake in Commvault Systems shows what opportunistic buying might look like. The hedge fund was buying call options at the end of February, according to a regulatory filing, but started buying the data management company’s shares in earnest as it began to recover from its lows after March 18 – stopping nine days later.
Starboard did not respond to a request for comment. A Commvault spokeswoman wouldn’t comment on whether Starboard had engaged with the board or management team but told me the company "embraces open dialogue with our entire shareholder community and will continue to act in their best interest."
Activist Insight Vulnerability had suggested that this former target of Elliott Management might soon find itself in the crosshairs of an activist again as recently as January, after it shrugged off gains during Elliott’s time as a major shareholder (between April 2018 and February 2019, the company surrendered two board seats and its poison pill).
Indeed, Elliott’s prior involvement may have been part of the appeal. Companies coming under fire from different dedicated activists at separate times are rare but hardly unheard of, with about 15 instances where the first campaign started in 2018 or later, according to Activist Insight Online.
Elliott’s run at Commvault showed how high the stock could trade and kickstarted the refreshment of four out of 11 director spots, including a new CEO and chairman. Operating expenses, one of Elliott’s key targets, came down about 2% in 2019 and were on course for a similar fall this fiscal year, after three quarters.
But that may not be enough for Starboard, which tends to target big improvements and is not averse to changing large numbers of directors. The other six directors have between 12 and 23 years of tenure, according to Activist Insight Governance. Given that the company’s nomination deadline isn’t until April 13 and Starboard has kept two proxy contests in play – even justifying them with reference to the pandemic – a further board challenge is not out of the question.
The challenge will be finding a remedy, perhaps further incremental change or a sale to private equity. With that industry apparently focused on existing positions, dealmaking has all but dried up. Who knows if it will be back before markets start to shudder from the prospect of a recession?
Quote Of The Week
Quote of the week comes from Xerox’s statement withdrawing its proxy contest and takeover offer at HP. While saying banks never wavered in their financing support, the company said:
"The current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19 have created an environment that is not conducive to Xerox continuing to pursue an acquisition of HP."