Media Center

11/18/2024

U.S. Shareholder Proposals: A Decade in Motion

Harvard Law School Forum on Corporate Governance (11/18/24) Mishra, Subodh

Shareholder proposals, often seen as a bellwether of investor sentiment and preferences, have gone through a significant shift over the past decade. The number of proposals on environmental and social topics exploded, surpassing the governance and compensation topics that had dominated the discourse in mid-2010s. In recent years, discussions related to ESG risks have become highly politicized, including attempts to politicize the shareholder proposal process. However, investors show little to no interest in proposals that advocate a political viewpoint without demonstrable economic relevance. ISS-Corporate reviewed the data of shareholder proposals submitted at U.S. companies from July 2014 to June 2024 and examined how shareholder proposals as well as corporate behavior and disclosures on sustainability and corporate governance have changed over the decade. E&S campaigns remain active: Environmental and social topics outnumbered governance and compensation requests over the past four years, with proposals focusing on climate change and human capital management driving the surge in proposals. The percentage of withdrawn proposals has dropped compared with previous years, indicating that proponents and issuers are finding less common ground through engagement. Support levels fell sharply from the peak in 2020-2022 and then stabilized in 2023 and 2024. Anti-ESG campaigns grow in numbers but lack support: Proposals countering environmental and social initiatives make up approximately 11% of the total submitted in 2024, but support levels remain in low single digits. These politicized campaigns have failed to make the case for the economic impact related to the requests. Large-cap firms, which are predominantly the targets of shareholder campaigns, have made great strides in their disclosures and practices in recent years. As proposals seek more ambitious action at these firms, it becomes more difficult to gain broader investor support, partially explaining the drop in overall support levels. Shareholder proposals related to governance and compensation topics represented the largest portion of proposals up until the mid-2010s, but their volume decreased over the past ten years. Over the decade, many governance-related issues were either resolved or became less prominent, though persistently large volume indicates that governance and compensation remained important, but with fewer new or unresolved issues emerging. The number of governance and compensation proposals slightly rebounded in 2024, indicating renewed concerns about executive compensation and corporate governance issues, possibly triggered by evolving market conditions or shifts in corporate behavior post-pandemic. The percentage of withdrawn proposals increased in the 2010s, compared with previous decades, demonstrating greater traction by campaigns focusing on environmental and social issues. In 2021, withdrawals reached a record 49% of all submitted environmental and social proposals, corresponding with record support levels and overall momentum towards greater transparency and commitments in relation to sustainability management. Since 2021, the percentage of withdrawn proposals has steadily declined, reaching 31% of submitted proposals in the year through June 2024. The lower rate of withdrawals of environmental and social proposals suggests companies and proponents are finding less common ground. That may be an outcome of companies making significant efforts to improve sustainability disclosures and management programs over the past five years, while proponents’ requests increasingly push the envelope for more robust disclosure criteria or action plans.

Read the article

11/18/2024

KKR and Bain’s $4 Billion Takeover Battle Set to Open Up M&A in Japan

Financial Times (11/18/24) Keohane, David; Lewis, Leo

A clash between KKR & Co. (KKR) and Bain Capital over a $4 billion buyout of Fuji Soft (9749) has entered a new phase of confrontation, creating what bankers and activist funds believe will become a template for corporate takeovers in Japan. On Friday evening, KKR said it would offer ¥9,451 a share for Fuji Soft — beating Bain’s competing offer by ¥1 and putting it in pole position to gain control of the Japanese software company. Fuji Soft’s board responded by saying it rejected Bain’s offer while approving KKR’s proposal, which was made with the backing of two activist shareholders collectively holding about 33% of the company. People close to the situation said that while KKR’s move appeared decisive, the fight had evolved into what one called “a straight bidding war” where both private equity funds would have a maximum they would pay, and the coming weeks would establish where those limits lay. It is the latest, and perhaps most significant, step in a competition that has demonstrated the potential for heated clashes over the ownership of Japanese companies in a mergers and acquisitions market that has traditionally produced only modest activity. Bankers said it was also creating a new definition of a “hostile” approach. The progress of the battle, in which both activist and private equity funds have tested tactics never previously used in Japan, is being closely watched around the world as investment bankers eye hundreds of potential M&A deals that could be unleashed following the new template. “This is the most complicated piece of M&A in Japan,” said one banker involved in the deal. “The risk to everyone’s reputation is high.” Bankers and advisers said Fuji Soft was an ideal private equity target owing to a valuable real estate portfolio and the presence of two battle-hardened investors in the stock — 3D Investment Partners and Farallon Capital Management. It was 3D, the group’s largest shareholder, that proposed the company go private and solicited offers for its stake. KKR agreed a deal with 3D and then announced a tender offer in August, aimed at taking the company private at ¥8,800 a share. Those plans were thrown into disarray when Bain put out a non-binding proposal, shocking the market, before following up with a binding offer that was 7% higher than KKR’s. The offer also came with the backing of Fuji Soft founder and major shareholder, Hiroshi Nozawa. In a public letter Nozawa called Bain a “white knight” and lambasted the manner in which KKR put together its deal. The move by Bain pushed KKR to split its tender into two parts. The first involved 3D and Farallon agreeing to sell their stakes and KKR gaining more than a third of the company’s shares. That created a blocking position, which meant Bain could not hope to win enough shares to initiate a squeeze-out to take control and would face the prospect of deadlock even if it did gain a sizeable holding. Although 3D and Farallon tendered at the lower price in the first tender, KKR has said it will now pay them at the same, higher level, as other shareholders. The question now is if Bain gives in or pushes ahead with its tender offer — potentially raising its price again — going against the board’s direction but backed by Fuji Soft’s founder. That decision might be further complicated by the board’s directive that Bain should destroy confidential information obtained so far during the process. Prolonging the fight could risk the reputations of both companies by asking the market to adjudicate on which approach fits the criteria of “hostile” or unsolicited — one side has the founder in its corner, the other has full-board approval. “In this case, it’s hard to say definitively who is hostile. It is more art than science . . . and that means it’s a communications battle,” said one adviser on the deal. If KKR succeeds, then the fact it did so through a separate process with an activist that then won board approval sets a new precedent and invites copycat deals. “Even if Bain loses, it might not be too unhappy since everyone is looking at the way it was done as an opportunity,” said the adviser.

Read the article

11/15/2024

Commentary: The Fight for 7-Eleven Isn’t Just About Money

Wall Street Journal (11/15/24) Lee, Jinjoo

The fight is on for Japanese 7-Eleven owner Seven & i (3382): Its founding family, alongside other Japanese investors, have proposed what would be a risky and record-breaking buyout to counter a bid from Canada’s Alimentation Couche-Tard (ATD). The outcome depends not just on how much money each buyer group can raise, but also how much trust they have from their respective investors. Late Tuesday, reports emerged that Seven & i’s founding family, alongside existing investors and trading house Itochu, are considering a buyout of the company. The deal could be worth around 9 trillion yen, equivalent to $58 billion, according to Bloomberg. About a third of that would be financed by cash and equity from the investor group, with the other two-thirds ($38.7 billion) coming from loans by Japan’s three biggest banks, according to the report. Seven & i confirmed that it had received a take-private proposal, though it didn't comment on the offer price. Seven & i's shares jumped 12% on Wednesday, putting its enterprise value above the $58 billion take-private offer. If that offer is a serious number, it would represent a rather expensive effort to prevent Seven & i from falling into foreign hands. Canada's Couche-Tard, the second largest convenience store owner in the U.S. behind 7-Eleven, offered its second bid for the company last month. The Japanese take-private offer tops Couche-Tard's by about 23%. Still, the reported price tag isn't crazy relative to Seven & i's earnings. At $58 billion it would represent about nine times Seven & i's trailing-12-month earnings before interest, taxes, depreciation and amortization. Recall that Seven & i paid an almost 14 times multiple to buy Speedway a few years ago. Couche-Tard itself trades at about a 12 times multiple. The deal size, though, undoubtedly raises some eyebrows—particularly the debt component. The largest leveraged buyout financing since 2000 was for Energy Future Holdings and involved $24.5 billion of debt, according to Dealogic. This take-private would involve nearly $39 billion of debt. That is almost six times Seven & i's earnings before interest, taxes, depreciation and amortization. That could raise questions about whether Japanese banks could pull it off, though these banks do have a lot of firepower. Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho have combined assets that rival the size of the U.S.'s two largest banks—JPMorgan Chase and Bank of America—put together, according to data from S&P Global Market Intelligence. Perhaps one helpful offset is that borrowing is cheaper in Japan. The big question is whether Couche-Tard has what it takes to counter the take-private offer. Even with its last bid, the company would have had to raise equity in addition to debt to maintain a leverage ratio that wouldn't hurt its credit rating, according to Anthony Bonadio, equity analyst at Wells Fargo. Just matching the take-private offer would imply that Couche-Tard has to raise enough equity to fund about 30% of the deal, said Bonadio. Which side prevails will depend on a couple of things: One is antitrust scrutiny. In the U.S., the road ahead is likely a lot smoother after Donald Trump's victory. He is likely to replace the antitrust agency's head with someone more deal-friendly than Lina Khan. Despite being the two largest convenience-store players in the U.S., Seven & i and Couche-Tard together have just 12% of the local market. On the other hand, if Itochu continues being involved in the buyout consortium, it could face more antitrust scrutiny in Japan. Itochu owns Family Mart, the second-largest chain in Japan. Together, Family Mart and 7-Eleven owned 68% of convenience stores in Japan as of 2022, according to Seven & i's website. That leads to another consideration, which is how much synergy each buyer can expect to generate. That part is a little fuzzier to assess. Couche-Tard has no synergies to be gained from 7-Eleven Japan, which is where its biggest concentration of stores are. And cost savings might be harder to come by in the U.S. with an experienced and efficient operator like 7-Eleven. Of course, Japan's Family Mart has the opposite problem, with no presence in the United States. But another important factor is how much trust each company has from investors. Couche-Tard's investors have fared very well—with total shareholder returns exceeding 3,000% over the past 20 years. The company is a darling of Canadian equity markets and has the support of Canadian pension funds, noted Tyler Tebbs, chief executive of Tebbs Capital, an event-driven research firm whose clients include some Seven & i investors. That bodes well for Couche-Tard's ability to raise equity to support the deal. Seven & i's investors, on the other hand, aren't as trusting of the company's management, Tebbs said. The company has a poorer record of returns and hasn't been proactive about delivering value: It only decided to sell a noncore department-store business after pressure from activist investors, for example. That means if Couche-Tard doesn't increase its bid to Seven & i's liking, the management team will probably need to pull through with some kind of deal exceeding Couche-Tard's offer. If neither deal goes through, activist investors are likely to get involved again, according to Tebbs. Some kind of deal seems inevitable, and at a good price too. Whether Team Canada or Japan Inc. comes out on top, it is shaping up as a win-win for Seven & i investors.

Read the article

11/15/2024

A Honeywell Breakup Would Set Up Monster-Sized Deals

Bloomberg (11/15/24) Sutherland, Brooke

Breaking Honeywell International Inc. (HON) up would make the company simpler. It would also create opportunities for monster-sized deals. Elliott Investment Management this week disclosed a more-than $5 billion stake in Honeywell, one of the last remaining large industrial conglomerates, confirming an earlier Bloomberg News report. Elliott is pushing for Honeywell to carve out its aerospace arm into a standalone entity, echoing an idea that was initially floated by fellow activist investor Third Point LLC in 2017, which was ultimately dismissed by the company. Such a split would leave behind a still-jumbled mix of automation and energy businesses. But it would be less complicated than the sprawl of pressure gauges, cockpit controls, building management systems, warehouse robots, fuel processing technologies and bar code scanners that will remain after Honeywell follows through on its preexisting plan for a more token simplification. That agenda includes spinning off its advanced materials arm and selling its facemask unit. According to Elliott, Honeywell shares could be worth as much as 75% more over the next two years if the company breaks up in a more material way. It bases this on the valuations of peers and an assumption that a more focused company will be easier to manage and more appealing to investors. “The conglomerate structure that once suited Honeywell no longer does, and the time has come to embrace simplification,” Elliott partner Marc Steinberg and managing partner Jesse Cohn wrote in a letter to the company’s board. It’s not part of the activist investor’s math, but a Honeywell aerospace company and a (mostly) Honeywell automation company would also both be able to contemplate deals that would be impossible in the current conglomerate structure. The two mega-sized options that investors and analysts salivate over are a combination of Honeywell’s control systems businesses with Rockwell Automation Inc. (ROK)and an aerospace-focused reboot of its failed merger with General Electric Co. (GE), which now does business as GE Aerospace. Either scenario would create a juggernaut. But Rockwell is a $32 billion pure-play automation company, while GE Aerospace is now an almost-$200 billion jet-engine giant that’s been restored to its former glory. These aren’t the kinds of transactions that can be done with “an automation, aerospace and sustainability-focused technology company” — as Chief Executive Officer Vimal Kapur has described Honeywell. Honeywell has historically specialized in process automation, which focuses on products produced in batches, such as chemicals or oil derivatives, but it also sells warehouse robots and productivity tools such as bar code scanners. Rockwell’s traditional expertise is in discrete manufacturing, which deals with distinct, countable items such as appliances or cars on a factory assembly line, and hybrid automation, which involves a blending of the two approaches in the same environment for goods like bottles of laundry detergent or of shampoo. Rockwell and Honeywell's automation businesses would be an almost perfect fit — and a particularly interesting one with the threat of sky-high tariffs under a second Trump administration. Those levies would likely accelerate manufacturers’ efforts to bring factory work back to the U.S. Inevitably, such a reordering of global supply chains will require significant investments in automation to be cost effective. The central roadblock to transformational transactions is antitrust pushback. But bankers expect the incoming Trump administration to reverse President Joe Biden’s tougher stance on dealmaking and take a light touch on merger reviews.

Read the article

11/14/2024

Is America’s Last Big Industrial Conglomerate About to Break Up?

The Economist (11/14/24)

Vimal Kapur, the chief executive of Honeywell (HON), should have seen it coming. Industrial conglomerates like his have long been out of fashion. Between the beginning of June last year, when Kapur took over at Honeywell, and November 11th the firm’s shares had risen by just 16%, compared with 46% for industrial companies in America’s S&P 500 index. On November 12, Elliott Management announced it had taken a $5 billion stake in the company, probably its largest ever such position, and called for Honeywell to break itself up. Investors seemed pleased with the idea, sending Honeywell’s shares up by 4% on the day of the announcement. To his credit, Kapur has been busily making changes at Honeywell, which manufactures everything from masks to machinery. He has reoriented the group around three big themes—automation, the future of aviation and the energy transition — and made $10 billion-worth of acquisitions to bolster its businesses in those areas, with purchases including an industrial-software company, a radio-equipment manufacturer and a maker of liquefied-natural-gas equipment. At the same time, he has made plans to divest peripheral businesses such as a specialty-chemicals unit, raised the company’s dividend, and bought back shares from investors. All this, Kapur has claimed, is “accelerating value creation”. Yet it has not been enough to reverse the lackluster financial performance in recent years of America’s last big industrial conglomerate. Although Honeywell makes as healthy a profit margin from its automation and aerospace businesses as its peers, the company’s growth continues to be tepid. Excluding acquisitions, its revenue rose by 3% in the quarter to September, compared with the previous year, falling short of Kapur’s ambition of 4-7%. That continues a disappointing pattern. In a letter to Honeywell’s shareholders, Elliott pointed out that the company’s earnings per share grew at 3% between 2019 and 2024, among the slowest of its peer group. Its price-to-earnings ratio has also lagged. Elliott acknowledged Kapur’s efforts at simplification, but described these as “incremental”, arguing that they failed to resolve the underlying problem of Honeywell’s conglomerate structure, which makes the company too complex to manage. Instead, Elliott wants Honeywell to break itself into two separate companies focused on aerospace and automation. Its case is strengthened by the success of similar breakups in the past few years. In January last year the market capitalization of General Electric, a once mighty American conglomerate that has since split itself into three standalone businesses, was about $90 billion. Today those businesses have a combined value of around $325 billion. The breakups of Ingersoll Rand (IR) and United Technologies, both completed in 2020, delivered far more value for shareholders than analysts first expected, according to Melius, a research firm. In Elliott’s view, Honeywell’s breakup could result in share-price gains of as much as 75%, lifting its market value to more than $240 billion. The argument is compelling and the size of Elliott’s stake shows conviction. The question now is whether Kapur will listen. Elliott is not the first activist investor to call on Honeywell to break itself up. In 2017 Dan Loeb of Third Point tried to get the company to separate out its aerospace division. Honeywell’s boss at the time, Darius Adamczyk, rejected the recommendation, though he did sell off various smaller businesses, including Resideo, a maker of smart-home products. Kapur has yet to say whether he will heed the call for a breakup this time. With investors growing increasingly impatient, though, he may have little choice.

Read the article

11/14/2024

Analysis: The Magic and the Minefield of Confidence

The Economist (11/14/24)

Confidence is contagious. Someone declaring a position with ringing certainty is more likely to inspire than someone who hedges their bets. “We may fight them on the beaches; it depends a bit on the weather,” would have been a lot less persuasive. What is true of Churchill’s wartime oratory is true in less dramatic circumstances. A study by Matthias Brauer of the University of Mannheim and his co-authors analyzed language used in letters from activist investors; it found that more confident letters were associated with more successful activist campaigns. Confidence confers status. In a study published in 2012 by Cameron Anderson of the University of California, Berkeley and his co-authors, students on an MBA course were asked to take an online survey before they started classes. The questionnaire asked participants to say if they recognized certain names, events and works of art; unknown to them, the options included both genuine choices, such as Maximilien Robespierre and “Pygmalion”, and made-up ones like Bonnie Prince Lorenzo and “Windemere Wild”. Overconfident students who had picked more fictitious entries turned out to have the most influence on their classmates, according to end-of-term ratings. As much as confidence brings rewards, however, it also brings danger. Work by Ulrike Malmendier of the University of California, Berkeley and Geoffrey Tate of the University of Maryland has found that overconfident bosses are much more likely to undertake acquisitions (though they are more averse to external financing, believing that it undervalues their businesses). Their acquisitions are also more likely to destroy value. Another paper, by Guoli Chen of INSEAD and his co-authors, looked at the relationship between CEOs’ confidence and their earnings forecasts. The researchers found that bosses with inflated levels of self-belief were slower to adjust their forecasts when they proved inaccurate. “Put simply,” they conclude, “overconfident executives who make mistakes continue to be wrong for longer.” In an ideal world, confidence would be distributed evenly and in just the right quantities: an optimally confident person is someone secure enough to trust their own judgment and to accept that it is fallible. In practice, confidence is distributed unevenly and is also susceptible to feedback loops.

Read the article

11/14/2024

Breakingviews: Disney’s New Storybook Omits Dumbos in the Room

Reuters (11/14/24) Saba, Jennifer

Apropos of the company he runs, Bob Iger knows how to tell a tale of adventure. Walt Disney (DIS) boldly laid out a three-year forecast that details everything from broad earnings growth to profitability projections for its streaming TV services. Although the outlook helped add as much as 10% to its market value, there are some gaping holes in the story. The entertainment colossus on Thursday unveiled welcome progress in several areas. Disney+, Hulu, and ESPN+ together swung to a $321 million operating profit in the latest quarter from a $387 million loss a year earlier. Moreover, the number of subscribers to its main offerings grew 3%, to 174 million. This momentum gave Iger the confidence to provide, uncharacteristically, a litany of financial projections. Most notably, Disney pinpointed a 10% operating margin by September 2026 in the direct-to-consumer division that houses its streaming operations, after activist investor Nelson Peltz slammed the company for failing to outline such targets during his dissident campaign earlier this year. Other newly released plans include high single-digit earnings per share growth for next year, higher than the 4% analysts had penciled in, according to estimates compiled by LSEG. Iger’s rosy outlook belies significant trouble and upheaval across the industry. For example, operating income in Disney’s broadcast unit that contains the ABC, FXX, and Disney Channel networks plunged 38% to $500 million in the company’s fourth quarter ending on Sept. 28. Some rivals, meanwhile, are getting ready to pull the plug. Comcast (CMCSA) is considering plans to carve out a portfolio of channels that includes Bravo and MSNBC. The effect from other upcoming events also will be hard to gauge. NBC Universal is opening a massive new theme park in Orlando, intensifying competition with Disney. Consumers are also exhibiting streaming fatigue with so many choices and rising prices. Consolidation is inevitable. The fate of costly, and valuable, sports programming, too, is in a state of upheaval as Amazon and others increasingly muscle into ESPN’s domain. Perhaps the biggest Dumbo in the room, however, is that the Magic Kingdom’s newly fine-tuned vision runs beyond Iger’s scheduled departure in December 2026. He previously extended his tenure multiple times, before coming back out of retirement. Now, he’s trying to leave his imprint another way, glossing over that Disney’s tale will soon be someone else’s to tell.

Read the article

11/13/2024

Why Trump Could Bolster Shareholder Activism

New York Times (11/13/24) Sorkin, Andrew Ross; Mattu, Ravi; Warner, Bernhard

Shares in Honeywell (HON) rose more than 3.8% on Tuesday after Elliott Investment Management unveiled a more than $5 billion stake in the industrial conglomerate, one of its largest ever. Given the size of the position, Elliott most likely amassed it over weeks, if not months. But the nascent campaign is the latest sign of what Wall Street believes will be a major trend: Donald Trump’s election will probably clear the way for a resurgence of shareholder activism. A big reason: M.&A. is back in play. Given the Biden administration’s heightened opposition to many deals, activist investors have been limited in what they can push companies to do. Many recent campaigns — including Elliott’s efforts at Southwest Airlines (LUV) and Starbucks (SBUX) — have focused on smaller goals, such as C.E.O. changes and operational improvements. But the widespread belief that the second Trump administration will go easier on M.&A. means that activists will get a favored tool back. “For the last four years, while we had still a lot of activism pushing for M.&A. transactions, it was, to some degree, chilled by the current administration,” Kai Liekefett, a co-chair of the corporate defense practice at the law firm Sidley Austin, told DealBook. Elliott wants Honeywell to do a big deal: break itself up. In particular, the hedge fund has advised Honeywell to separate out its aerospace and automation businesses, following similar moves by United Technologies and General Electric. “The conglomerate structure that once suited Honeywell no longer does,” Elliott wrote in its letter to the company, adding that each business would do better as a more streamlined and focused company. That said, Elliott may be hoping for further M.&A. for each business. G.E. could be a natural buyer for the aerospace business, to combine its big jet engines with Honeywell’s small jet engines. And Rockwell Automation could be a logical acquirer for Honeywell’s automation business. Honeywell is keeping its options open. A spokeswoman, who said the company had first heard from Elliott on Tuesday, told DealBook that its board and management “appreciate the perspectives of all our shareholders.”

Read the article

11/13/2024

Vanguard Increases GameStop Position, Surpassing CEO Ryan Cohen’s Stake

Vanguard (11/13/24) Rogers, James

Vanguard Group Inc. has increased its position in GameStop Corp. (GME), according to a filing Wednesday with the Securities and Exchange Commission (SEC) — with the asset-management giant’s stake in the videogame retailer now surpassing that of GameStop Chief Executive Ryan Cohen’s RC Ventures. Vanguard, which was already GameStop’s top institutional investor, now has 37,108,031 shares, or an 8.7% stake, in the popular meme stock, according to the SEC filing. Vanguard’s previous position was 29,698,579 shares, or a 6.3% stake, per an August filing. Cohen’s RC Ventures has 36,847,842 shares, according to an SEC filing in June, representing a 8.6% stake in the company. “Any increased or decreased investment is merely a function of our index-fund structure and mandate to track the benchmark for a respective fund,” a Vanguard spokesperson told MarketWatch in a statement. “It is not any indication of vanguard providing perspective on the equity.” GameStop shares surged recently on no apparent news, before snapping a five-day winning streak on Tuesday. The stock ended Wednesday’s session down 1.4% and saw trading volume of 18.38 million shares, above its 65-day average of 8.78 million shares. The videogame retailer hasn’t issued a press release since Oct. 15, when it announced a collaboration with trading-card and autograph authenticator and grading service Collectors. Cohen, who endorsed Donald Trump in the presidential election, was named GameStop’s CEO in September 2023. Last December, GameStop’s board of directors approved a new investment policy permitting the company to invest in equity securities, among other investments. The board gave Cohen the authority to manage the investment portfolio.

Read the article