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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former investment banker and author of “Power Failure: The Rise and Fall of an American Icon”
We’re right in the middle of proxy-fight season in corporate America, and I, for one, increasingly have no idea what the point of them is anymore. They are wildly expensive. They are extremely divisive. They go on for too long. And even if you win, the cost of victory is high.
After all, say you win two seats on a 12-member board of directors; you’ve angered everyone to get the seats, so what can you then actually get done? Precious little, if truth be told; you still only have a minority of the votes on the board, regardless of how many shares you own, or control. All in all, really, it’s kind of a waste of time and money.
Take, for instance, the latest battle being waged by two activist investors to get seats on the board of Disney. The hedge fund manager getting all the attention, of course, is Nelson Peltz, the octogenarian co-founder of Trian Fund Management. (The other is Blackwells Capital, which holds only a tiny stake in Disney).
This fight is Peltz’s second recent battle royal with Disney. A year ago he withdrew before the actual vote, declaring the proxy fight over after Disney announced a restructuring. This time, he’s back in a partnership with Ike Perlmutter, a large Disney shareholder and former Disney executive who holds 25.5mn shares in the company. Along with what Trian owns itself — 6.8mn shares — Peltz has in his pocket 32.3mn Disney shares. Unfortunately for him, though, that’s a mere 1.7 per cent of the company’s equity.
He’ll need to persuade Disney’s biggest shareholders to vote with him. It’s a long shot at this point, given that the stock is up more than 25 per cent in the past six months (and Peltz sold 8.2 per cent of his stake in Disney in the fourth quarter, not exactly a bullish move).
The Wall Street Journal recently reported that the Disney proxy fight could be the most expensive ever, potentially costing as much as $70mn for the parties involved. That sum would top the $60mn that the WSJ estimated Peltz and Procter & Gamble spent waging a proxy battle in 2017.
Peltz is not without wins, of course. He did gain a seat on the P&G board after a very close vote and recount. Peltz points out that during his three-year stint on the P&G board, the stock price more than doubled, to $160 a share, from around $70 a share. “That’s my track record,” he said recently on CNBC. “But besides the stock price, sales went up, market shares went up and margins went up, OK?”
Even when Peltz loses a proxy fight to secure board seats, as he did with DuPont, the chemical manufacturer, in 2015, he finds a way to claim victory. In the aftermath of the loss, he continued to push for change. Five months later, Dupont chief executive Ellen Kullman announced an early retirement. Her replacement Ed Breen then agreed a merger between Dow and DuPont and the subsequent break-up of that combined company into three pieces. “Everybody celebrated that,” Peltz said on CNBC.
At General Electric, though, he had more luck, getting his way without a proxy fight or even the threat of one. Former GE chief executive Jeff Immelt invited Peltz to buy stock in GE after Immelt announced his decision, in 2015, to get rid of GE Capital. Trian built a stake of $2.5bn and then started agitating for change. Immelt retired early in 2017 under pressure from Peltz and other shareholders. Peltz secured a board seat for his son-in-law, and then in October 2018 got Immelt’s successor John Flannery replaced by CEO Larry Culp.
Not surprisingly, Peltz told CNBC he was going to win the proxy fight with Disney. “We’re not going to lose, OK,” he said. “Let’s get that straight.” But even if Trian wins, will it have been worth it? After all, he’ll have only two board seats out of 12, sitting alongside other board members who he’s just criticised mercilessly.
And do the returns justify all the noise, effort and cost? For example, after nearly nine years owning a big stake in GE, and its various offshoots, a Trian spokesman tells me, the firm is only just now breaking even on its GE investment. During that time, the S&P 500 is up about 150 per cent. According to Centerview Partners, Trian’s three-year annualised returns up to September 30 were 3 per cent, trailing the equivalent of 10 per cent for the S&P 500. (The analysis showed that other big name activist investors also lagged behind the S&P 500 over the period.)
Maybe, in the end, it’s all about the show. “Some of these activists believe they have to do proxy fights when they don’t get their way because they have to prove they’re willing to do a proxy fight,” explains Rob Kindler, a longtime Wall Street M&A attorney and banker who is now at Paul Weiss. Isn’t it obvious by now that proxy fights have outlived their usefulness?
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