During the last ten years of my life I have had the good fortune of experiencing the booms and busts of the markets, and have seen many incredible things occur over this time frame. In particular, working on the Sales & Trading Desk at a boutique dealer generating ideas for hedge funds gave me some really great experiences in terms of being on the forefront of what is happening in the world, especially in the M&A and risk-arbitrage space.
Over my time in the markets, one thing I have noticed is the massive difference between Canadian and foreign M&A rules and regulations. Specifically, I notice much more inequity in foreign M&A, especially when it comes to calling special shareholder meetings, the rampant use of poison pills (in the US in particular), and in the recent case of Novartis and Alcon, the treatment of minority shareholders (http://online.wsj.com/article_email/SB10001424052748704140104575057841177401382-lMyQjAxMTAwMDEwMTExNDEyWj.html).
In this case, Novartis, a 25% holder of Alcon, made an all-share offer to the remaining Alcon shareholders. Two issues arise here. First of all, all-share offers expose shareholders to market risk, which is evident as the 2.8 Novartis share offer, originally valued at ~$180, has traded down to ~$160. The deal is quite clearly much less attractive to any shareholder that did not hedge their stake in Alcon, which quite frankly, would be the vast majority of minority shareholders. As you can imagine, any shareholder who was expecting $180 per share and is getting $160 in actuality would be upset with the outcome. Secondly, Nestle is the majority owner of Alcon with a 52% stake, so they basically control any and all actions of Alcon. This is especially true in M&A situations, because it is clear that both companies (which own a cumulative 77% stake) want the deal done. Under Swiss securities laws, the 23% of minority shareholders have very limited say.
In comparison, such a situation in Canada would be settled rather easily and amicably. For example, in Canada we have a simple provision called a “majority of the minority”, which directly addresses minority shareholder concerns in M&A and / or other major shareholder vote situations. This rule was instated by regulators to give minority shareholders a voice, because traditionally, minority shareholders would be steam-rolled by corporations and / or large shareholders that may not have the best interests of ALL shareholders in mind. If the Novartis / Alcon deal were to occur in Canada (under OSC rules and regulations), there would be two votes required in order to get the deal done. First, there would be an overall shareholder vote that would include Alcon, Nestle, and the remaining minority shareholders. In the worst case scenario, this vote would still go through as the 77% held by Novartis and Nestle would supersede the 66.66% of votes required by Ontario securities laws. The second vote would occur for just the minority shareholders, with Nestle and Alcon abstaining. If greater than 50% of the 23% minority shareholders voted in favour of the transaction, it would proceed. You can see how this is a much more fair method in terms of giving a voice to the minority shareholder.
Like many exciting market / legal events such as Novartis / Alcon, the precedents set in the past were exciting landmark events as well. In Canada’s case, the importance and strength of the “majority of the minority” provision was really exemplified in the 2005-2006 case brought against Sears Holding Corporation (SHLC) (http://www.ogilvyrenault.com/en/resourceCentre_1622.htm) by a group of hedge funds (Hawkeye, Knott Partners, and Pershing Square). In this case, SHLC was a majority shareholder (56%) of Sears Canada (SCC), and attempted to wrest control of the company by offering a premium to the shares of ONLY one other major shareholder (Vornado Realty Trust) relative to the minority shareholders ($18.00 compared to $16.86). There were many twists and turns to this case with several other issues at hand, however, the OSC ended up ruling in favour of the hedge funds because SHLC effectively tried to give additional consideration to one particular shareholder at the expense of all others. This is simply not allowed under Canadian Securities laws, as the consideration paid for one security must be pari passu with another security that possesses identical features. In the end, SHLC withdrew its bid and decided to acquire a greater stake in SCC by purchasing stock piecemeal on the open-market. However, if SHLC had proceeded, it would have been forced to give a “majority of the minority” vote for SCC shareholders, which they would have ultimately lost as the hedge funds effectively controlled that majority.
Circling back to the Novartis / Alcon deal, I must say that even though Alcon cannot invoke a “majority of the minority” vote, I find it fascinating that the Board of Directors of Alcon had enough foresight and heart to establish a Special Committee to review Takeover Bids in order to prevent the oppression of minority shareholder rights. Furthermore, it is good to know that corporate governance is alive and well somewhere in this world, as the Alcon Special Committee is actually in the process of establishing legal actions to prevent this deal from occurring, or at least ensure that minority shareholders get what they deserve.
Thursday, February 18, 2010
Thursday, February 11, 2010
A Social Perspective On Shareholder Activism
With the explosion of corporate social responsibility in recent years, many corporations have been asked to be more accountable for their actions by social groups, governmental bodies, special interest organizations, and paradoxically, their own shareholders. While the first three have always been present in some form, the latter is a new development that is growing in power and influence.
A prime example is what occurred over the last few days, with a small group of BP’s shareholders staging a public campaign to prevent BP from moving forward with its investment in and development of their oil sands assets. Specifically, an organization called FairPensions (www.fairpensions.org), backed by well-funded charities such as OxFam, WWF, and GreenPeace, engaged BP on behalf of various institutional and individual investors (http://www.fairpensions.org.uk/news/tarsands/080210). On behalf of these investors, FairPensions tabled a Shareholder Resolution for BP’s annual meeting on April 15th requesting more accountability on their oil sands activities. On the surface, this appears to be a daunting task in terms of taking on such a large corporation head-on; however, FairPensions recently had success in influencing Royal Dutch Shell to disclose more information on its oil sands operations. To me, this clearly shows that this nouveau method of social activism is the beginning of a long-term trend that is taking hold in the markets, and is having real and measureable effects.
In addition, this campaign really highlights how activism, whether it is social or shareholder, has progressed over time. Initially, activists had to “scream and shout” at shareholder meetings or make high-impact demonstrations repeatedly in order to get what they want. Although this still occurs to an extent, new paradigms and processes have emerged for activists to voice their concerns and have an impact on what matters to them.
Finally, this example also highlights a structural shift in activism towards large, institutional investors taking the time to research CSR issues, and to voice their perspectives to management teams and boards, whether this is through themselves or through other organizations. This has typically not been the case in the past, as institutional investors own hundreds of securities, which makes it difficult to keep up with anything more than quarterly and annual reports as well as proxy materials. Pension funds such as CALPERS, CALSTERS, and OTPP have been on the cutting edge of these industry changes, and I would expect that it becomes a larger shift within the markets as a whole over time. The simple fact is that CSR is a priority of upcoming generations, and therefore, is not going away anytime soon. As such, financial institutions will be forced to incorporate it into their decision-making process going forward.
While I cannot always agree with social activist’s viewpoints, I have the utmost respect for their methodologies. Activism is activism, whether it is on behalf of shareholders or the environment, and I respect the bias for action and support the push for change.
A prime example is what occurred over the last few days, with a small group of BP’s shareholders staging a public campaign to prevent BP from moving forward with its investment in and development of their oil sands assets. Specifically, an organization called FairPensions (www.fairpensions.org), backed by well-funded charities such as OxFam, WWF, and GreenPeace, engaged BP on behalf of various institutional and individual investors (http://www.fairpensions.org.uk/news/tarsands/080210). On behalf of these investors, FairPensions tabled a Shareholder Resolution for BP’s annual meeting on April 15th requesting more accountability on their oil sands activities. On the surface, this appears to be a daunting task in terms of taking on such a large corporation head-on; however, FairPensions recently had success in influencing Royal Dutch Shell to disclose more information on its oil sands operations. To me, this clearly shows that this nouveau method of social activism is the beginning of a long-term trend that is taking hold in the markets, and is having real and measureable effects.
In addition, this campaign really highlights how activism, whether it is social or shareholder, has progressed over time. Initially, activists had to “scream and shout” at shareholder meetings or make high-impact demonstrations repeatedly in order to get what they want. Although this still occurs to an extent, new paradigms and processes have emerged for activists to voice their concerns and have an impact on what matters to them.
Finally, this example also highlights a structural shift in activism towards large, institutional investors taking the time to research CSR issues, and to voice their perspectives to management teams and boards, whether this is through themselves or through other organizations. This has typically not been the case in the past, as institutional investors own hundreds of securities, which makes it difficult to keep up with anything more than quarterly and annual reports as well as proxy materials. Pension funds such as CALPERS, CALSTERS, and OTPP have been on the cutting edge of these industry changes, and I would expect that it becomes a larger shift within the markets as a whole over time. The simple fact is that CSR is a priority of upcoming generations, and therefore, is not going away anytime soon. As such, financial institutions will be forced to incorporate it into their decision-making process going forward.
While I cannot always agree with social activist’s viewpoints, I have the utmost respect for their methodologies. Activism is activism, whether it is on behalf of shareholders or the environment, and I respect the bias for action and support the push for change.
Monday, February 8, 2010
2009 vs 2010: Developments In The M&A Market
While we have a brand new year ahead of us with the start of 2010, I believe it is important to examine the recent past in order to help us determine the near future. With that said, I thought I would highlight the M&A market in 2009 to give us a sense of what I personally expect in 2010. The graphics below are from www.wsj.com, which sourced them from www.dealogic.com.
From a regional perspective, we can see that there was effectively a massive dip in M&A activity throughout Q2 and Q3, which is not much of a surprise to anyone that paid attention to the front page of the newspaper over the course of the year. The majority of the differences between the regional markets is effectively because of the mega-deals that occurred. Specifically, I would say that the US market seems to be off kilter relative to the rest of the world because of the involvement of the government in so many industries and financial institutions. It has taken a lot of time for the system to start working again, and I believe much of the M&A activity has been pushed back further and further as companies have tried to delay the inevitable. One other thing to note is that despite the low absolute levels of activity in the smaller markets such as Latin America, Africa, and the Middle East, there appears to be only a moderate drop-off in activity over the course of the past year. I believe this is partially due to the size of the overall M&A markets and the focus of the regions themselves (operational compared to deal focused).
Following on the previous chart, the one below really highlights to me how much the US makes up in terms of the global M&A market. In some months, the US makes up all if not the vast majority of activity, which is an amazing sight to see. Although a regression cannot be run on those statistics, I would be really curious to see a correlation analysis between US M&A activity and the rest of the world, both as a whole and split country by country. While there would obviously be major differences on a country by country basis due to different regulatory regimes and business cycles, my instinct tells me that the correlation on a US versus global basis would be quite significant. However, I should say that the majority of the activity would be driven by the availability of credit, which is certainly different across markets. Perhaps that is the main reason for the difference in size of the M&A market in the developed and emerging markets.
It should be no surprise to anyone that M&A deal volume was off significantly relative to 2008, as evidenced by the chart below. Effectively no, dealer posted better numbers than 2008, except for Morgan Stanley and Barclays. Goldman moved from 2nd to 1st in the global league tables, taking JP Morgan’s spot. With the markets in turmoil and the BoA / Merrill merger underway, clients clearly did not trust BoA with their M&A activities, which pushed BoA from 3rd last year to 5th. On the face of it, there might not be a lot to take away from this particular graph, however, I would want to see some analysis of how much, historically speaking, deal volume has fallen from its peak, and how long it has taken to reach that peak again, or at least stabilize. If we had access to that information, I think it would give us at least a basis for predicting where the M&A market will head in the future. As we have seen stabilization across the board from the Q2 / Q3 2009 lows, I think we are going to see a slow recovery process as the taps are opened once again, and credit begins to flow more freely. In terms of the particular dealers, although there will definitely be more political and social oversight of these companies, I do not foresee them going anywhere. The only major points to make are that 1) the relative ranking will remain relatively static with the Goldman Sachs and Morgan Stanley’s of the world staying at the top, and 2) The financial institutions that have gone through restructuring, mergers, or are still tied to the government via TARP (or its foreign equivalent), will continue to suffer. The M&A business is built on reputation of the people involved in the process. If turmoil occurs at these firms, the best people tend to leave, and the business tends to go with them.
The chart below should, once again, come as no surprise to anyone. The volume and value of transactions are down across the board. However, the glaring difference year over year is in the finance sector where M&A dried up. As firms could barely understand their own books in a risk-focused environment, they were certainly unwilling to merge and acquire other firms, as many of them were wary of acquiring future potentially unknown liabilities. As such, M&A volume, although large, fell off a cliff. Most of the focus shifted to restructuring, with a large contingent of banks going belly-up, as well Bear Stearns and Lehman having an effect. I think what we can take away from this graph is the simple fact that M&A trends in 2008 continued into 2009 in terms of sectors. Oil and Gas, Healthcare, and Telecom were major contributors to the overall activity. Will this trend continue in 2010? I believe that it will, although I must say that with Berkshire buying Burlington Northern and the frenzy of activity surrounding Cadbury which culminated in its purchase by Kraft, there is definitely interest in strategic acquisitions in the Transportation and Food & Beverage sectors. However, I believe there are simply fewer opportunities for major deals in these sectors primarily due to firm size and market share, which drive anti-trust concerns.
Although, overall deal volume fell off significantly across the board, there was still a dearth of mega-deals. Looking at the largest ones, there was no overall theme in terms of sector. However, energy, materials, and pharmaceuticals were at the top of the heat. Once again, we see the dominance of the US throughout the global ranking of deals. This dominance will not dissipate in the near term, as the US market is simply configured to do deals by virtue of its political, social, regulatory, legal, and credit regimes. With credit finally coming back, expect more mega-deals coming to fruition in 2010. Also, expect an increasing number of large-cap and mid-market deals as we progress throughout the year.
As markets inevitably go through boom and bust cycles, the graph below really highlights the shift in focus of the markets from M&A to restructuring. If we lined up the IPO market activity with the two graphs below, I am positive we would see the life cycle of the market, from birth through growth up until to death. Going forward, I would expect M&A volume to recover slowly, as evidenced by the stabilization in Q1-Q4 of 2009. This will obviously be driven by the US and Euro-land primarily. I would also like see a longer time period which would give us more information about the previous boom and bust cycles, and I would want to regress these datasets against each other in order to see if there are any correlations amongst the markets. With this type of information, we might be able to better to predict what will occur in terms of activity in the M&A in 2010.
From a regional perspective, we can see that there was effectively a massive dip in M&A activity throughout Q2 and Q3, which is not much of a surprise to anyone that paid attention to the front page of the newspaper over the course of the year. The majority of the differences between the regional markets is effectively because of the mega-deals that occurred. Specifically, I would say that the US market seems to be off kilter relative to the rest of the world because of the involvement of the government in so many industries and financial institutions. It has taken a lot of time for the system to start working again, and I believe much of the M&A activity has been pushed back further and further as companies have tried to delay the inevitable. One other thing to note is that despite the low absolute levels of activity in the smaller markets such as Latin America, Africa, and the Middle East, there appears to be only a moderate drop-off in activity over the course of the past year. I believe this is partially due to the size of the overall M&A markets and the focus of the regions themselves (operational compared to deal focused).
Following on the previous chart, the one below really highlights to me how much the US makes up in terms of the global M&A market. In some months, the US makes up all if not the vast majority of activity, which is an amazing sight to see. Although a regression cannot be run on those statistics, I would be really curious to see a correlation analysis between US M&A activity and the rest of the world, both as a whole and split country by country. While there would obviously be major differences on a country by country basis due to different regulatory regimes and business cycles, my instinct tells me that the correlation on a US versus global basis would be quite significant. However, I should say that the majority of the activity would be driven by the availability of credit, which is certainly different across markets. Perhaps that is the main reason for the difference in size of the M&A market in the developed and emerging markets.
It should be no surprise to anyone that M&A deal volume was off significantly relative to 2008, as evidenced by the chart below. Effectively no, dealer posted better numbers than 2008, except for Morgan Stanley and Barclays. Goldman moved from 2nd to 1st in the global league tables, taking JP Morgan’s spot. With the markets in turmoil and the BoA / Merrill merger underway, clients clearly did not trust BoA with their M&A activities, which pushed BoA from 3rd last year to 5th. On the face of it, there might not be a lot to take away from this particular graph, however, I would want to see some analysis of how much, historically speaking, deal volume has fallen from its peak, and how long it has taken to reach that peak again, or at least stabilize. If we had access to that information, I think it would give us at least a basis for predicting where the M&A market will head in the future. As we have seen stabilization across the board from the Q2 / Q3 2009 lows, I think we are going to see a slow recovery process as the taps are opened once again, and credit begins to flow more freely. In terms of the particular dealers, although there will definitely be more political and social oversight of these companies, I do not foresee them going anywhere. The only major points to make are that 1) the relative ranking will remain relatively static with the Goldman Sachs and Morgan Stanley’s of the world staying at the top, and 2) The financial institutions that have gone through restructuring, mergers, or are still tied to the government via TARP (or its foreign equivalent), will continue to suffer. The M&A business is built on reputation of the people involved in the process. If turmoil occurs at these firms, the best people tend to leave, and the business tends to go with them.
The chart below should, once again, come as no surprise to anyone. The volume and value of transactions are down across the board. However, the glaring difference year over year is in the finance sector where M&A dried up. As firms could barely understand their own books in a risk-focused environment, they were certainly unwilling to merge and acquire other firms, as many of them were wary of acquiring future potentially unknown liabilities. As such, M&A volume, although large, fell off a cliff. Most of the focus shifted to restructuring, with a large contingent of banks going belly-up, as well Bear Stearns and Lehman having an effect. I think what we can take away from this graph is the simple fact that M&A trends in 2008 continued into 2009 in terms of sectors. Oil and Gas, Healthcare, and Telecom were major contributors to the overall activity. Will this trend continue in 2010? I believe that it will, although I must say that with Berkshire buying Burlington Northern and the frenzy of activity surrounding Cadbury which culminated in its purchase by Kraft, there is definitely interest in strategic acquisitions in the Transportation and Food & Beverage sectors. However, I believe there are simply fewer opportunities for major deals in these sectors primarily due to firm size and market share, which drive anti-trust concerns.
Although, overall deal volume fell off significantly across the board, there was still a dearth of mega-deals. Looking at the largest ones, there was no overall theme in terms of sector. However, energy, materials, and pharmaceuticals were at the top of the heat. Once again, we see the dominance of the US throughout the global ranking of deals. This dominance will not dissipate in the near term, as the US market is simply configured to do deals by virtue of its political, social, regulatory, legal, and credit regimes. With credit finally coming back, expect more mega-deals coming to fruition in 2010. Also, expect an increasing number of large-cap and mid-market deals as we progress throughout the year.
As markets inevitably go through boom and bust cycles, the graph below really highlights the shift in focus of the markets from M&A to restructuring. If we lined up the IPO market activity with the two graphs below, I am positive we would see the life cycle of the market, from birth through growth up until to death. Going forward, I would expect M&A volume to recover slowly, as evidenced by the stabilization in Q1-Q4 of 2009. This will obviously be driven by the US and Euro-land primarily. I would also like see a longer time period which would give us more information about the previous boom and bust cycles, and I would want to regress these datasets against each other in order to see if there are any correlations amongst the markets. With this type of information, we might be able to better to predict what will occur in terms of activity in the M&A in 2010.
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