How to spot potential merger by reading activist investor’s settlement agreement [ Settlement agreement research series #1 ]
In order to avoid a costly proxy fight, the company enters into a “settlement agreement” with the activist. Typically, these agreements are filled with legal terms and buried inside the SEC filings. If you pay close attention to the settlement terms, you may discover few interesting scenarios.
Today, we will review the first interesting scenario – Activist nominees joining strategic alternative committee
With so many funds pushing for sale or to explore strategic alternatives, there is one specific “situation” which increases the odds of success. Some companies agree to put the “activist representatives” in a committee which oversees “strategic alternatives”. In my opinion, this situation stands out from the remaining list of companies targeted by activists. To be clear, this clause in a settlement agreement does not promise the outcome, but only increases the probability of such outcome.
Xyratex Ltd – Baker Street agreement
In April 2013, Xyratex entered into an investor agreement with Baker Street. Under the terms of the agreement, the company agreed to add two candidates of Baker Street to the Board and to form a strategic committee to explore strategic alternatives. Moreover, Baker Street’s representative would join the strategic committee. In December 2013, the company entered into a merger agreement with Seagate Technology International.
Latest example: Starboard – Yahoo agreement
In April 2016, Yahoo entered into settlement agreement (SEC filing) with Starboard Value Fund. In the agreement, the company agreed to add starboard nominees to the strategic review committee and the company agreed that the Board, in its sole discretion, may elect to pursue a plan to separate the company into two publicly traded companies through a spin off transaction. Within three months, Verizon agreed to acquire Yahoo’s core business for $4.83 billion.
Not all agreement results in ‘sale of company’ or ‘spin off’. Various factors like “attitude” (read resistance) of incumbent Board/management, insider ownership and current industry dynamics affect the outcome of the activist’s agenda.
In the year 2008, Wynnefield entered into a settlement agreement with Crowncraft. The company agreed to add one nominee of Wynnefield to the strategic review committee. In 2010, Wynnefield once again launched a proxy fight and argued that the company failed to update shareholders about the outcome of strategic alternatives. The company argued back saying that the strategic review committee finally approved the strategic growth plan executed by the management.
Nevertheless, the company’s stock price increased by 1.7X from the date of entering into settlement agreement.
On May 26, 2016, Engaged Capital entered into a settlement agreement with the Magnachip Semiconductor Corp. and pursuant to it, the company agreed to appoint two candidates of Engaged Capital to the committee which examines strategic alternatives.
The next time you hear news that an activist has entered into a settlement, read the settlement terms.
If you need a list of such agreement clause, kindly contact me (if you are an accredited investor).