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Saturday, 20 December 2014

Blast from the past

Besieged boards need updated defender-in-chief

America’s corporate boards could use a Martin Lipton 2.0. Over a long career, the New York lawyer has become synonymous on Wall Street with takeover defense. But with shareholder activism ascendant and often on target, his contrarian screeds sound increasingly dated. This week’s M&A confab in New Orleans could put them further to the test.

Strident views are nothing new for the 81-year-old granddaddy of the poison pill. In a 1988 memo, for instance, Lipton warned that the nation was “blindly rushing to the precipice” on a wave of hostile acquisitions. Today, he bemoans activist hedge funds “preying on American corporations” through “extortion.”

The Wachtell, Lipton, Rosen & Katz founding partner’s tone hasn’t changed, but the M&A world has. Gone are junk bond-fueled hostile bids - think the 1980s, RJR Nabisco and “Barbarians at the Gate.” Today’s activists more typically acquire small stakes in companies. They often work with institutional investors to negotiate for changes in strategy and in the boardroom.

Evidence is also mounting that activism benefits shareholders. A recent study published by Cornell University, for instance, found that companies are typically more productive and profitable two years after hedge funds push them on reforms.

Anecdotally, consider campaigns like hedge fund TPG-Axon’s recent maneuvers at SandRidge Energy. Efforts to tighten strategic discipline and rein in a spendthrift chief executive can only benefit the company’s owners over the long term. Even Greenlight Capital founder David Einhorn’s dig at Apple, although flawed, aimed at the right target - the giant technology group’s huge cash balance - and exposed shortcomings in the company’s processes.

Knee-jerk resistance and more obstacles to takeovers and shareholder activism, Lipton-style, no longer seem adequate responses. They can make company managers look shifty and occasionally protect indefensible practices. Calling today’s relatively polite activism “extortion” could also undermine what should be debates about the best interests of a company and its owners.

Lipton insists that, even if activists’ tactics have changed, their objectives still come “at the expense of long-term value.” He has a point - at least in some cases - and it’s one that his partner, David Katz, will get a chance to defend before his colleagues on a panel in New Orleans.

But as the current season of annual meetings shows, shareholders’ voices are only growing louder. Simply trying to shout them down is beginning to seem more like entertainment than useful advice.

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Martin Lipton, a founding partner at New York law firm Wachtell, Lipton, Rosen & Katz, on March 8 published the latest in a series of memos that harshly criticize shareholder activism. “In what can only be considered a form of extortion,” he wrote, “activist hedge funds are preying on American corporations to create short-term increases in the market price of their stock at the expense of long-term value.”

Shareholder activism is one of the issues slated for discussion among M&A lawyers and bankers gathering on March 21 in New Orleans for the 25th annual Tulane Corporate Law Institute.

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