DEALTALK-Companies, investors eye amicable divorce in share buybacks

Thu Dec 12, 2013 12:18pm EST

By Soyoung Kim and Olivia Oran

NEW YORK Dec 12 (Reuters) - As a growing number of activist investors scour corporate America for their next campaigns, some are parting ways with their old targets and topping up their war chests with handsome payouts.

This year, six well-known U.S. companies, including Take-Two Interactive Software Inc, Yahoo Inc and General Growth Properties Inc, agreed to buy back shares held by activist investors who push for change at corporations they believe to be subpar. That is up from only one such deal in 2012, according to data by FactSet Research.

The increase comes as activist campaigns become a regular feature in the U.S. corporate scene. Even before activists arrive at their doorsteps, more companies are ramping up share repurchases to use record cash on their balance sheets and appease investors clamoring for returns.

Among the most prominent of the exits, billionaire Carl Icahn last month said he would sell his shares in Take-Two back to the videogame maker for more than $200 million, compelling the resignation of three directors he had been allowed to appoint.

It was the second such agreement Icahn negotiated in as many months. WebMD Health Corp agreed to buy out his $177.3 million stake in October, two years after he disclosed his ownership of the stock, which he claimed was undervalued.

Such negotiated exits may often serve as a win-win for activist investors and target companies alike, said Alan Klein, a corporate partner at law firm Simpson Thacher & Bartlett LLP.

"It solves the liquidity desires of an activist by selling their shares, where they think they've made as much of an impact as they were going to make," he said. "It facilitates a company accelerating their share buyback program by enabling them to buy a big chunk of shares at one time."

Perhaps just as attractive to at least some of the companies, the move allows them to part ways with a less-than-comfortable presence on their boards.

Along with Take-Two, WebMD and Yahoo, home security company ADT Corp, U.S. shopping mall operator General Growth Properties and business intelligence company Onvia Inc agreed to buy back stakes from activist investors this year.

To be sure, companies typically spend significant time to determine what they consider a fair price for repurchasing shares to avoid giving the impression they are going overboard on what they are willing to pay activists to depart, advisers said.

Still, in all six of this year's repurchases, the companies agreed to buy the shares at or slightly above the closing prices of the last trading sessions - more than what the investors would have received if they were to unload a big block of stock on the open market.

These secondary sales are typically done at some discount to market prices.

In November, one of Icahn's former associates, Keith Meister, took a $450 million payout from ADT by selling a big chunk of his shares. As part of the deal, Meister, who runs investment firm Corvex Management LP, resigned from ADT's board.

In September, General Growth said it had spent $567 million in share repurchases, with most coming from Bill Ackman's Pershing Square Capital Management LP hedge fund. Ackman first took a stake in 2008 and helped turn around the company.

Yahoo reached an agreement in July with Dan Loeb to buy 40 million shares from his Third Point LLC, or about two-thirds of the hedge fund's stake. Loeb, who was instrumental in naming former Google Inc executive Marissa Mayer as Yahoo's chief executive officer, left the board after the share buyback.

In April, Onvia said it had repurchased 1.2 million shares from Symphony Technology Group. Last year, Onvia rejected the private equity fund's unsolicited buyout offer.

The shares involved in those deals sometimes traded below the agreed-upon repurchase prices in the weeks after the announcement, indicating that some investors received a full price for selling back their stakes.

Take-Two Interactive stock is trading at around $16.40, compared with Icahn's selling price of $16.93 on Nov. 26, while ADT hovers around $39.40, below Meister's $44 selling price on Nov. 25. On the other hand, WebMD has risen to around $37.40, above Icahn's selling price of $32.08 on Oct. 21.

But for the most part, all shareholders, not just activists, tend to support repurchases because reducing the amount of outstanding stock leads to higher earnings per share, analysts said.

Representatives for the activists either declined to comment or did not immediately respond to requests for comment.

NO MORE KICKING AND SCREAMING

Some say the tactics activists are now taking to sell back their shares represent a departure from the so-called greenmail of the 1980s, when boards paid hostile investors to exit their companies.

Back then, investors made large purchases of a company's stock to threaten a takeover, eventually forcing the target to buy the shares back at a substantial premium to market prices.

The current practice is different, said Kenneth Squire, president of activist research firm 13D Monitor, because the repurchases are done at market prices, not at a premium, and could be called "golden exit" rather than "greenmail."

If the selling investor has stayed for a long time and contributed to changes that benefited the company, the sale would not harm his or her reputation as a champion of all shareholders, he said.

Loeb made a handsome profit for himself and his investors from his successful two-year crusade to increase Yahoo's value. He sold two-thirds of his 60 million shares back to Yahoo at $29.11 apiece and relinquished three seats on the board in July, roughly two years after he started buying the stock at the $13 per share range. The shares now trade near $40.

"It's amazing what a board will do to get an activist out even in a situation where they may have created a lot of value," Squire said. "They just don't want activists on their boards."

David Shine, co-head of the mergers and acquisitions group at law firm Fried Frank, said activists had evolved from the days of the greenmailing.

"Now it's as if the activists have grown from adolescents to adults," Shine said. "Previously, they would publicly yell and scream until they got what they wanted. Now they gain leverage first through board seats and then seek what they want in a more subtle way."

Still, lawyers and bankers say that negotiating an exit may remain tricky for activists, many of whom have created a perception that they are taking on the burden and expense of a campaign for the benefit of all shareholders.

Given what happened to some stocks, "it's not exactly greenmail, but ... certainly it doesn't look like the remaining shareholders are all that happier," said a banker who requested anonymity because he was not authorized to speak with the media.

"Activists are getting a better price than they could otherwise get out of a position," he said. "If it becomes a regular trend, if too many start to do it, it could hurt their reputation."

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