Besieged boards need updated defender-in-chief
By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Americaâs corporate boards could use a Martin Lipton 2.0. Over a long career, the New York lawyer has become synonymous on Wall Street with takeover defense. But with shareholder activism ascendant and often on target, his contrarian screeds sound increasingly dated. This weekâs M&A confab in New Orleans could put them further to the test.
Strident views are nothing new for the 81-year-old granddaddy of the poison pill. In a 1988 memo, for instance, Lipton warned that the nation was âblindly rushing to the precipiceâ on a wave of hostile acquisitions. Today, he bemoans activist hedge funds âpreying on American corporationsâ through âextortion.â
The Wachtell, Lipton, Rosen & Katz founding partnerâs tone hasnât changed, but the M&A world has. Gone are junk bond-fueled hostile bids – think the 1980s, RJR Nabisco and âBarbarians at the Gate.â Todayâs activists more typically acquire small stakes in companies. They often work with institutional investors to negotiate for changes in strategy and in the boardroom.
Evidence is also mounting that activism benefits shareholders. A recent study published by Cornell University, for instance, found that companies are typically more productive and profitable two years after hedge funds push them on reforms.
Anecdotally, consider campaigns like hedge fund TPG-Axonâs recent maneuvers at SandRidge Energy. Efforts to tighten strategic discipline and rein in a spendthrift chief executive can only benefit the companyâs owners over the long term. Even Greenlight Capital founder David Einhornâs dig at Apple, although flawed, aimed at the right target – the giant technology groupâs huge cash balance – and exposed shortcomings in the companyâs processes.
Knee-jerk resistance and more obstacles to takeovers and shareholder activism, Lipton-style, no longer seem adequate responses. They can make company managers look shifty and occasionally protect indefensible practices. Calling todayâs relatively polite activism âextortionâ could also undermine what should be debates about the best interests of a company and its owners.
Lipton insists that, even if activistsâ tactics have changed, their objectives still come âat the expense of long-term value.â He has a point – at least in some cases – and itâs one that his partner, David Katz, will get a chance to defend before his colleagues on a panel in New Orleans.
But as the current season of annual meetings shows, shareholdersâ voices are only growing louder. Simply trying to shout them down is beginning to seem more like entertainment than useful advice.