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3/6/2025

Dealmakers in Wait and See Mode, Expect M&A Pace to Pick Up Later in 2025

Reuters (03/06/25) Summerville, Abigail; Vinn, Milana; Herbst-Bayliss, Svea

Facing unexpected market volatility and geopolitical uncertainties, normally optimistic dealmakers are sounding a more cautious note for the coming weeks and months but are confident the pace of mergers and acquisitions will pick up later this year. "Our clients are waiting and seeing to see how things work out," said Paul Weiss partner Scott Barshay, one of Wall Street's most prominent dealmakers. "We are busy ... It's hard to see the year ending on a slow note," he said, adding that large deal announcements should start popping up within the next few months. Top M&A lawyers, bankers, proxy advisors, and proxy solicitors gathered on Thursday and Friday in New Orleans for the 37th annual Tulane Corporate Law Institute conference to discuss trends in the industry and highlight upcoming concerns. Attendees described a current chill on dealmaking, attributing it to a lack of predictability coming from Washington. M&A activity in the U.S. during the first two months of this year was the slowest in more than two decades, with only 1,172 deals worth $226.8 billion through Friday, according to data compiled by Dealogic. That was down by about a third from the same time last year by both volume and size and the slowest open by volume since 2003. Jennifer Muller, managing director and co-head of investment bank Houlihan Lokey’s board advisory and opinions practice, said that a few months ago, consensus estimates pegged M&A deal volume in 2025 at $3.5 trillion versus $3 trillion last year. "Given the rocky start, that may be harder to achieve. And in this case, when I say may, I actually mean will," Muller said during a panel. Potential sellers have become increasingly nervous, especially as the VIX CBOE Volatility Index, known as Wall Street's fear gauge, reached 24.41 on Thursday, which is considered elevated. Muller still sees deal opportunities in certain sectors like technology, energy, and financials. Other speakers at the conference said the current situation, where the main U.S. S&P stock index drifted into negative territory for the year, feels more like a pause versus a severe drop off in activity. Lawyers said they remained busy in laying the groundwork for mergers and said companies were still interested in hiving off units that no longer fit and that there was plenty of money available to finance dealmaking. Private equity firms and demands from activist investors are expected to provide a good dose of fuel for dealmaking at a time more corporations are bracing for costly and noisy fights with shareholders who are pushing for changes.

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3/6/2025

Former ISS Executive Cristiano Guerra Gives a Proxy Prognosis

Bloomberg (03/06/25) Tse, Crystal

Cristiano Guerra recently left Institutional Shareholder Services after more than a decade at the influential proxy adviser to join Strategic Governance Advisors, a consultancy backed by FGS Global. In an interview with Bloomberg, Guerra discussed how a seemingly obscure SEC rule change may have a big impact on relations between companies and their investors. In short, passive investors like BlackRock are required to use a 13G filing to disclose their holdings. But if they mention certain issues regarding the company’s board, they will have to switch to a 13D filing used by activist investors. "Companies and activists going to ISS will find a lot of consistency in the team that’s in place," said Guerra. "As a whole, the team has a very solid tenure. Particularly in the last few years, having spent so much time critiquing the succession plans of various companies, the least I could do is to make sure my own succession plan was well thought out." When asked what the SEC’s new dos and don’ts for 13G filers mean for company engagement, Guerra said "I'm still trying to understand the purpose of this. I don't know who really benefits: Investors are now handcuffed by how they can engage with companies. How are they able to cast a fully informed vote unless they can engage? Companies also stand to lose a lot. They lose that open line of communication with their investors that allows them to counter arguments that are proposed by activists, or to present their story in a way that promotes dialogue and inspires trust. The rule simply handicaps the ability to have a robust line of communication." He added that "a lot of people may be jumping to the conclusion that this is the end of engagement. I wouldn't have the knee jerk reaction that this would do that. Institutional investors will at first be very cautious not to be perceived as guiding the conversation one way or another. But some of these institutional investors have built out teams with a dozen or more analysts, whose job is to engage and understand what companies are really trying to do; to assume that they'll just throw up their hands and get rid of this infrastructure seems unlikely." Guerra noted that the new rules put the onus on companies to present their story to investors in a much more proactive manner, with a clear narrative to address any questions that investors may have. What it curbs is the ability for investors to guide the discussion. It doesn't prohibit them from asking follow-up questions, but makes them leery to set the agenda and lay out what the priorities should be. He pointed out that "during my 15-year tenure at ISS, we went through five different owners, from private equity firms to publicly traded companies, to now a German company. During that entire time, not once was I ever pressured to recommend a certain way. There's simply no influence from external forces. The owners have always respected the integrity of the research process. At the end of the day, ISS and Glass Lewis exist because investors want them to exist." Guerra cites a slight uptick in activism in the past year, "though there was still a bit of 'wait and see' in regard to possible changes by the new administration, as many people likely expected more sudden changes in terms of the regulatory regime. There's a pent-up appetite for activism, as a lot of funds are trying to deploy capital. These days, the path for activism is so clearly laid out that there's no longer a barrier to entry. Before, you used to see only activists like Icahn, Ackman, etcetera, targeting major companies; now you see funds that we've never heard of running pretty significant fights."

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3/5/2025

Why UK and European Corporates are Building Investor Relations Capabilities in the U.S.

IR-Impact.com (03/05/25) Yasar, Oskar

In an increasingly interconnected global economy, many UK and mainland European corporates are strategically expanding their investor relations capabilities beyond their home market. In the UK, a growing trend among FTSE-listed companies is the establishment of dedicated IR teams in the US, reflecting a shift in how UK firms engage with global capital markets. This move is driven by several key factors, including access to a broader investor base, the unique structure of the U.S. capital markets, and the evolving expectations of international investors. The U.S. equity market is the largest and most liquid in the world, with institutional investors managing trillions of dollars in assets. Many UK corporates recognize the opportunity to attract new sources of capital by enhancing their presence in the U.S. Establishing an IR team in the US enables companies to build deeper relationships with American institutional investors, hedge funds, and pension funds, which may not be actively covered by London-based IR functions. The structure and operational dynamics of U.S. capital markets differ significantly from those in the UK and Europe. In the U.S., investor engagement tends to be more proactive, with companies expected to provide regular guidance, host investor days and maintain continuous dialogue with shareholders. The presence of a local IR team allows foreign corporates to adapt to these expectations seamlessly. Moreover, the US market has a larger proportion of activist investors who play an influential role in corporate governance and strategy. Establishing an on-the-ground IR team helps UK and European companies pre-emptively manage activist concerns, shape shareholder narratives and ensure alignment with evolving governance expectations.

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3/5/2025

Saudi Aramco Exploring Initial Bid for BP's Castrol Unit, Source Says

Reuters (03/05/25)

Saudi Aramco (2222) is in the early stages of considering a potential bid for BP Plc's (BP) lubricant business Castrol, according to a person with knowledge of the matter. BP has been exploring all options around its Castrol business, including a possible sale, as part of a strategic review. The business would be expected to be worth around $6 billion to $8 billion, Ashley Kelty, an analyst at Panmure Liberum, said in a note last week. News of Saudi Aramco's interest comes a day after the Saudi oil giant reported a drop in its annual profit and signaled it will slash its dividend payouts by nearly a third this year. BP said last week it was reviewing its lubricants business, Castrol, and targeting $20 billion in divestments by 2027. The divestment program is a key part of CEO Murray Auchincloss' strategy revamp to slash spending on renewables and increase BP's focus on oil and gas production to enhance earnings. BP, which has underperformed peers like Shell (SHEL) and Exxon (XOM), has come under increasing pressure to change strategy after news that Elliott Investment Management has built a 5% stake in the company. According to Elliott, BP would benefit from selling its Castrol lubricants and its network of service stations to unlock value and boost share buybacks. Aramco reportedly has not made a final decision on the structure of a potential bid for Castrol or whether it will proceed as deliberations are still in the early stage.

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3/4/2025

Southwest Airlines Promised to Take Care of Employees — Until It Couldn’t

Wall Street Journal (03/04/25) Sider, Alison; Cutter, Chip

Victoria Slavic started her seven-year career at Southwest Airlines (LUV) the way many hires do — parading down a red carpet at its Dallas headquarters to cheers from pompom-waving co-workers.  The technology manager’s job ended last month as she sat at home in front of her laptop. An executive delivered her termination notice on a scripted video call in listen-only mode. It lasted about seven minutes. For more than five decades, Southwest staffers — who call themselves Cohearts — didn’t have to worry about losing their jobs in tough times. The company touted its ability to avoid mass layoffs during new-hire orientations. That practice changed in February, when the airline cut about 1,750 jobs, or 15% of its corporate workforce, to rein in fast-rising costs. The layoffs are a watershed moment for an airline that credited its irreverent, we-are-family culture with much of its success. Having a “fun-luving” attitude — a nod to Southwest’s LUV stock symbol, its Dallas Love Field base and its early, love-themed marketing — is a workplace mantra. Top bosses long prided themselves on knowing the names of workers’ children and often send handwritten notes to mark life events and birthdays. Every Halloween, executives don elaborate costumes and departments transform workspaces into haunted houses and other attractions for thousands of staffers and families. Many spend months practicing for an accompanying sketch show. Southwest is making other changes once considered unthinkable. It is jettisoning hallmark policies such as open seating and its egalitarian cabins to chase higher revenue. The need to evolve has become urgent, as a business model that once upended the industry has fallen behind rivals. Last year Southwest faced down Elliott Investment Management, which tried to oust the airline’s top leaders and accused them of being insular and clinging to outdated strategies. A truce left Chief Executive Bob Jordan in charge but gave Elliott’s chosen directors several board seats and significant sway. Jordan is now under pressure to improve financial results. He outlined a plan to cut $500 million in costs by 2027. Hiring and promotions were put on ice. The festive rallies held for employees around the country have been scrubbed. The airline’s board now wants deeper and faster cost-cutting, according to people familiar with the matter, and the airline has said it is working to accelerate and exceed its target. Still, employees believed the airline’s commitment to avoid layoffs was sacrosanct. That belief was instilled by the company’s chain-smoking, Wild Turkey-drinking co-founder Herb Kelleher, who stepped down as chairman in 2008 and died in 2019.

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3/4/2025

Activist Pleads to ‘Bust Open’ Directors Club after Mounting Backlash to ASX Principles

The Australian (03/04/25) Korporaal, Glenda

Australia’s boards need to promote millennials and find directors from the Western suburbs of Sydney and Melbourne, according to Tanarra Capital founder John Wylie, who led a backlash against the ASX’s proposed corporate governance remake. “There’s a bit of a directors club in Australia,” Wylie told a business conference in Sydney on Tuesday. “I would like to see a busting open of the doors of the directors club to a broader range of people, so the diversity discussion becomes a broader one. Where are the people from the western suburbs... Where are the younger people on the boards of listed companies?” He said the average age of most directors of Australian public companies was over 50. “They are not digital natives,” he said. “Taking a broader view of diversity would be a good thing.” Wylie last month opposed a new set of corporate governance principles promoted by the ASX, which underscore the expectations around diversity and independence in boardrooms. He went as far as saying the market operator’s corporate governance council should be dismantled for trying to mandate prescriptive rules around the reporting of sexuality and disability. The activist investor also hit out at the increasing regulation of listed companies, warning that the number of companies listed on the ASX would continue to shrink unless the current “paternalistic approach” was cut back. “We need to get out of this paternalistic mindset around public companies,” he said. “There is a structural issue going on in capital markets where we are seeing the rise of private capital. There is $4 trillion in our superannuation system which is going to be $7 trillion. But on the ASX there are now fewer listed companies than there were 10 years ago. The listed market is going to continue to shrink. It’s bad thing for investors. We’ve got to try to get the ASX rules back to what is going to drive value for companies. With these prescriptive rules, there is a mindset of compliance in Australian boardrooms. Many of the boards of companies we talk to are just fed up with the compliance burden.” Wylie said the ASX itself needed to take back control over the development of its corporate governance principles. He said the ASX had set up a corporate governance council around 2002 in the wake of the collapse of HIH Insurance that was a “well-intentioned attempt” to improve the governance around listed companies. But he said the ASX Corporate Governance Council had since grown to a group that now had 19 different organizations around the table. “There are quite a lot of disparate agendas around the table,” he said. The proposed draft for the latest set of corporate governance guidelines was more than 63 pages. “By contrast, if you look at a company like Berkshire Hathaway, its governance principles amount to four pages,” he noted. “It has managed to be a pretty successful company over a very long period of time.” He said it was important for the economy to have a thriving listed stockmarket. “We would like to see a few simple principles in terms of allowing companies to determine their own corporate governance,” he said. The Tanarra investor said many company founders tended to be “misfits and nonconformists and people who don’t fit in nice boxes.” But he pointed out that the Magnificent Seven companies leading the US stockmarket which had produced “incredible value” for investors, were all founder-led companies. “The ASX needs to encourage founders,” he said. “That is not to excuse every particular thing which happens in every company, but we need to encourage founder-led companies on the ASX. We also need to have a greater ownership culture on Australian boards generally with non executive directors also owning more shares in companies.”

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3/3/2025

BlackRock’s ‘Woke’ Era Is Over

Wall Street Journal (03/03/25) Pitcher, Jack

When BlackRock (BLK) joined a U.N.-sponsored climate coalition in March 2021, sustainability groups were thrilled. Having the world’s largest investment firm on board instantly lent credibility to the Net Zero Asset Managers, an initiative committed to support the goal of net-zero greenhouse gas emissions by 2050. Dozens of major investment managers followed BlackRock’s lead. “BlackRock is proud to put its name behind this initiative,” Chief Executive Larry Fink said at the time. Nearly four years later, Fink was distancing himself. NZAM got a phone call on Jan. 9: BlackRock was out. Within days, the coalition was teetering. BlackRock’s departure from the coalition and its reversal this week on several diversity, equity and inclusion policies are the latest examples of the company’s retreat from advocating for issues related to environmental, social and corporate-governance factors. It has been gradually walking back its ESG initiatives for years after conservatives criticized the movement as being “woke” and legal risks grew. BlackRock’s recent actions show the reversal is almost complete, though the fallout might not be. The company has been able to maintain strong results throughout the controversy, reporting record inflows last year. Crucially, BlackRock has remained out of the crosshairs of President Trump, who has a personal relationship with Fink. Trump has publicly commended Fink for managing his money well in the past, and Fink and other BlackRock executives still have the Trump team’s ear on economic issues, according to people familiar with the matter. Fink, one of the loudest voices on Wall Street, had spoken out about the risks of climate change for the better part of a decade. Few think he was being disingenuous when he warned that “climate risk is investment risk” in 2020. But his $11.6 trillion firm, which was eager to discuss how it could lead on environmental and social issues just a few years ago, has largely abandoned such rhetoric after a series of congressional inquiries and red-state lawsuits. “This is hardball politics at its best, or worst, however you want to think about it,” said Mindy Lubber, CEO of sustainability nonprofit Ceres and one of the leaders of NZAM. The campaign against ESG began in earnest in 2022, with coordinated efforts backed by oil-and-gas lobbyists and Leonard Leo, a longtime leader of the Federalist Society. Anti-ESG groups made BlackRock, and Fink, the poster child for what they call “woke capitalism.” “This woke capitalism thing, two years ago, nobody had heard the term,” said Lubber. “I still can’t really tell you what it means, but it’s been very effective. One would be foolish not to say that.” Red states have passed dozens of anti-ESG laws. More than a dozen state attorneys general have targeted BlackRock over its ESG practices, and the Republican-led House of Representatives has subjected large asset managers to hearings and subpoenas. BlackRock’s recent withdrawal from the climate coalition came one day before a deadline for it to respond to the latest House probe. It demanded information from more than 60 U.S.-based asset managers regarding their involvement in NZAM, which the House Judiciary Committee calls a “woke ESG cartel.” BlackRock, and many legal observers, say the claims on which the state laws and lawsuits are centered are baseless. The company settled an ESG suit with the state of Tennessee in January without admitting wrongdoing or paying any money. Regardless of the claims’ merit, the anti-ESG movement has won major concessions as BlackRock works to distance itself from controversy. Its membership in climate groups was often cited as evidence in state lawsuits. The company’s PR efforts and public statements have changed markedly as well. Executives now rarely mention ESG issues, a favorite talking point just a few years ago. Recent communications have focused on BlackRock’s role as the largest steward of Americans’ retirement assets and how it can play a role in helping people save and spend their nest eggs. BlackRock’s ESG fund launches have ground to a halt. It hasn’t launched an ESG exchange-traded fund in the U.S. since the first quarter of 2024, after launching 30 over the previous five years, according to Morningstar. The company took further steps to distance it from the movement last week, removing all mentions of DEI—which was previously declared a corporate priority—from its latest annual report. On Friday, BlackRock told employees it was ending aspirational workforce representation goals and would no longer require managers to interview a diverse slate of candidates for open positions, according to an internal memo viewed by The Wall Street Journal. “Significant changes to the U.S. legal and policy environment” related to DEI prompted the changes, the memo said. Meanwhile, BlackRock disclosed that it had renegotiated and removed sustainability-linked pricing metrics from a $4.4 billion credit facility it struck in 2021. It ended provisions that linked lending costs to whether it met targets for women in senior leadership and Black and Latino employees in the workforce. The credit facility had been oft-mentioned by political enemies accusing the asset manager of being woke. When it comes to proxy voting on behalf of its fund investors, BlackRock supported 4% of environmental and social shareholder resolutions in 2024, down from 40% in 2021, according to responsible investment charity ShareAction. BlackRock’s business just posted a banner year, and executives appear to have concluded that sticking the company’s neck out on controversy isn’t worth it. “ESG was conflated with being woke,” said Michael Littenberg, global head of the ESG practice at law firm Ropes & Gray. “Many managers have gotten smarter about addressing the backlash.”

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3/3/2025

Southwest Airlines Stock Catches a Downgrade. This One Thing ‘Can’t Be Ignored.’

Barron's (03/03/25) Keown, Callum

Southwest Airlines (LUV) stock has failed to get off the ground this year despite the low-cost carrier’s turnaround plan. J.P. Morgan analysts don’t think that’s going to change soon as they downgraded the stock Monday. The stock fell 0.5% to $30.91 in early trading Monday. Analysts led by Jamie Baker said Southwest’s “valuation premium can’t be ignored,” in a note Monday. “There’s simply no other airline equity in our coverage universe that comes anywhere close.” The stock currently trades at 13 times forecast 2026 earnings—in comparison Delta Air Lines (DAL) trades at 7 times 2026 EPS, American Airlines (AAL) and United Airlines (UAL) at 6.3, according to FactSet data. Other low-cost carriers are also cheaper— Alaska Air (ALK) has a forward P/E ratio of 9, while Frontier Group’s (ULCC) is 6.8. Southwest stock has fallen 7.6% in 2025, through Friday’s close, underperforming the U.S. Global JETS exchange-traded fund’s 3.6% fall. Southwest is undergoing an ambitious turnaround plan under the watchful eye of investor Elliott Management. The airline reached a truce with the hedge fund in October, agreeing to appoint five of Elliott’s nominees to the board. Southwest unveiled a strategy in September to cut back on less profitable routes and reduce costs amid pressure from Elliott. The hedge fund holds a 9% stake in Southwest but an agreement struck last month allows it to hold a maximum 19.9% stake, up from a previous limit of 14.9%. Baker said he remains convinced that Southwest’s best margin days “lie in the past. “While we’re all for well-managed turnarounds, the ask at Southwest is herculean in nature, in our view,” he said. “Aside from Elliott, we’re hard-pressed to understand who the incremental buyer may be.” Wall Street tends to agree — just 20% of analysts covering the stock rate it as a Buy, while 48% have Hold ratings and 32% have Sell or Underweight ratings.

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