Activist hedge funds continue to find ways to use public M&A transactions as a tool to generate returns for their investors. As a result, market participants need to consider potential activist strategies in determining how to structure, announce and execute their deals.
Activist hedge funds have used three principal strategies to extract additional value from public M&A transactions. The first strategy involves directly challenging the announced deal in an effort to extract a higher price, defeat the merger and/or pursue an alternative transaction or stand-alone strategy. The second strategy involves attempting to use statutory appraisal rights to create value for the activist hedge funds. And the third strategy involves making an unsolicited offer to acquire a target, either independently or in conjunction with a strategic acquirer, to put the target in play. In this article, we discuss examples of recent uses of these strategies by activist investors and point out some general implications of these examples for transaction planners.
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Activist Hedge Funds Strategy One: Challenging An Announced Deal
One strategy that has been employed by activist hedge funds has been to acquire stock in a public merger target shortly after the transaction has been announced, announce opposition to the transaction and seek to encourage other stockholders to also oppose the transaction, support an alternative transaction proposed by the activist hedge funds or pressure the acquirer to restructure the transaction and/or offer additional consideration to the stockholders of the target.
Two examples of public transactions in which activist opposition resulted in a change of deal terms are described below:
- Dell/Carl Icahn.The most highly publicized recent use of this strategy was Carl Icahn’s opposition to the buyout (the “Dell Transaction”) of public stockholders of Dell Inc. (NASDAQ:DELL) by Dell founder, CEO and 16% stockholder Michael Dell and private equity sponsor Silver Lake Partners (the “Silver Lake Group”). Shortly after the Dell Transaction was announced in February 2013, funds affiliated with Icahn announced that they had accumulated a substantial stake in Dell. Icahn and his affiliates joined together with institutional stockholder Southeastern Asset Management and waged a fight to defeat the transaction, in which Icahn engaged in a campaign of letters, press releases, interviews and social media posts attacking the announced transaction.
Icahn filed proxy solicitations opposing the transaction, nominated a slate of directors to replace Dell’s Board and proposed no fewer than three alternative transactions. Notably, Icahn attacked both Michael Dell and the Board of Directors of Dell Inc. (NASDAQ:DELL) as part of his campaign. Icahn argued that Michael Dell was hurting Dell and showed little regard for the interests of Dell’s other stockholders, pointing to the decline in Dell’s stock price since Michael Dell was reappointed CEO in 2007.
Icahn and Southeastern also accused the Board of Directors of Dell Inc. (NASDAQ:DELL) of painting a dark picture of Dell’s prospects to “frighten stockholders into selling Dell to Michael Dell and Silver Lake” and threatened “years of litigation” against directors for breaches of fiduciary duty in connection with the transaction.
The Dell Transaction was ultimately approved by the stockholders of Dell Inc. (NASDAQ:DELL) and was consummated in October 2013 after the Silver Lake Group agreed to increase the consideration payable to stockholders not affiliated with the Silver Lake Group by $350 million.
MetroPCS Communication/John Paulson/Peter Schoenfeld. Another example of this strategy was John Paulson’s and Peter Schoenfeld’s campaign against T-Mobile US Inc (NYSE:TMUS)’s (“T-Mobile”) acquisition of MetroPCS Communication (“MetroPCS”) in a stock-for-stock merger (the “MetroPCS Transaction”). Paulson & Co., Inc. (“Paulson”), one of MetroPCS’s largest stockholders, increased its stake in MetroPCS to 9.9% after the announcement of the transaction in late 2012.4 Together with P. Schoenfeld Asset Management (“PSAM”), which owned approximately 2% of the stock in MetroPCS, Paulson publicly opposed the MetroPCS Transaction.