The Activism Angle

While activist investors such as Carl Icahn, Bill Ackman and Elliott Management often steal headlines for their outspoken comments and aggressive campaigns against public companies, the details of how investment bankers defend their corporate clients from activists are less often told. Bankers, along with other key advisors such as law and public relations firms, play a critical role in negotiating with activists and working closely alongside management and board members behind the scenes.

No activism campaign is the same but typically, the activist begins by accumulating shares in the public company. In earlier days, the activist would simply buy common shares in the market but due to the advent of items such as the 13D filing and the 'poison pill', these investors often use derivatives positions to build a synthetic ownership in their target. Typically they engage with management and/or the board privately by sending a letter with their demands of changes with their target.

However, when these demands are ignored by their target, an activist may take their campaign public such as in the recent case of Elliott Management's campaign against oil refiner Phillips 66. Elliott's criticism and demands of Phillips 66 are listed in this public presentation. After a laundry list of critiques, Elliott suggests key changes including the sale of non-core assets to fund stock buybacks and its own slate of board directors.

As part of its defense, Phillips 66 would have immediately hired advisors to counter Elliott on the public and investor relations front. And while the advisors' names do not always come to light in these situations, the press has reported that Phillips 66 has hired Goldman Sachs as its financial advisor and Wachtell as its legal advisor on the situation.

So how do investment banks assist their corporate clients in these situations? There are many aspects but key areas include: advising the board on how to handle the activists' tactics (something they are well equipped to do from being involved in many situations); helping management and the board create an alternative narrative around the company's strategy and financial performance/plan; planning investor engagement to build support against the activist; helping a board arrive at a negotiated settlement with an activist; and finally, assisting their client in a proxy contest with an activist (where each side nominates its own slate of directors and attempts to take control of the board). In the case of Phillips 66, they likely played a leading role in crafting the company's responses to Elliott.

From a fee perspective, these engagements differ from typical M&A assignments. The financial advisor generally receives a retainer or other upfront fee (closer in size to legal fees) with increasing amounts if the situation reaches key milestones such as a proxy fight. However, while the fees are lower than a buyside or a sellside, banks are happy to take these mandates for two key reasons: 1) the leading bankers get significantly more CEO and board exposure than in most other transactions, 2) the defense engagement letter may lock in follow-on business including the sale of the target company, which is, of course, the most lucrative assignment!