Can't beat activists-Morgan Stanley banker
(Updates with Ackman and Taubman comments, background, details)
NEW ORLEANS, March 29 (Reuters) - The age of the activist hedge fund is here, and companies would do well to accept it.
Such were the sentiments of mergers and acquisition lawyers and some investment bankers from top Wall Street institutions who spoke before a packed Ritz-Carlton conference room here on Thursday.
Corporate boards besieged by activist hedge funds are better off inviting them in rather than fending them off, Morgan Stanley's (MS.N) vice chairman of investment banking said on Thursday.
"They are going to win no matter what you do," Morgan Stanley's Robert Kindler said, speaking at a Tulane Corporate Law Institute event here.
Activist hedge funds buy up shares of a public company and push for changes in management and business direction. They are criticized for being too focused on the short term and credited with shaking up tired management teams. Among the older names in the business are Carl Icahn and Nelson Peltz, with some newer names being William Ackman of Pershing Square and Robert Chapman of Chapman Capital.
Companies in the past few years have routinely resisted activist approaches, and in several cases ignored a fund's efforts to talk with management. But lawyers and bankers assembled here on Thursday said activist funds are growing, and companies are better off cooperating with them.
The presence of activists on a board creates some dysfunctionality, Kindler said. "But some good comes out of it. People should be focusing on balance sheet and mix of business."
The biggest mistake a board can make is by overreacting quickly and emotionally when an activist knocks on the door, he said.
Ketchup maker H.J. Heinz Co.'s (HNZ.N) fight with Peltz's Trian Group last year was an example of how not to treat an activist, Kindler noted. That battle was drawn out and ultimately led to Peltz's fund winning a slate of directors.
Historically, most corporate targets of activists are deserving of a fund's push for change, said Paul Taubman, managing director and head of global mergers & acquisitions at Morgan Stanley.
"Activists have been right more than they've been wrong," Taubman said during a panel.
But he pointed out that activist moves don't always drive strong stock returns, as exemplified by the modest rise in Time Warner Inc. (TWX.N) shares since Icahn's battle with the company. Steady communication with stake holders is important for managing an activist campaign, said George Bason, head of mergers & acquisitions at Davis Polk & Wardwell. "Major shareholders have the right to be talked to like everybody else."
Ongoing activist battles include Breeden Capital Managements' fight with restaurant company Applebees International Inc. APPB.O and Ackman's effort to break up financial services company Ceridian Corp. CEN.N. To read more about Breeden's thoughts on the sector please click on [nN29301180].
Ackman said on a panel that a company's relationship with an activist fund can become friendly once it has come on board, noting that Heinz's board, with two Trian directors, is like "one big happy family now."
Ackman said shareholders are also warming up to approaches by activists, making it easier for funds to get their changes through.
"I think you're going to see fewer proxy contests and a lot more settlements because shareholders vote their shares now," he said. As an activist fund manager, he would prefer to avoid nominating a board of directors by communicating openly with a company's management to resolve issues.
However, Morgan Stanley's Kindler said that once activists get a board to address changes at the company, they remain tough to please.
"If you announce a buyback or a spin off, it will make these guys happy for maybe 30 seconds."
((Reporting by Michael Flaherty, editing by Richard Chang; Reuters Messaging: christian.plumb.reuters.com@reuters.net; +1 646 223 6134)) Keywords: MORGANSTANLEY BOARDS
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