Saturday, November 11, 2017

Email from Wachtell Lipton

Deal Activism:  Lessons from the EQT Proxy Contest

          “Deal Activism,” in which activists invest to oppose announced deals, has become an increasingly frequent component of the activist playbook.  While efforts by the target company’s shareholders to oppose a deal to secure a higher bid have received the most media attention, activists have also run campaigns against acquirors to block transactions outright, to extract concessions or to generate pressure against a board.  This occurs most frequently in strategic, stock-for-stock transactions where votes are needed on both sides.
          The recent proxy contest over EQT Corporation’s strategic merger with Rice Energy demonstrates that these fights can be fought and won.   EQT is one of the largest natural gas producers in the United States, and has viewed its vertical integration of production and midstream as a source of competitive strength.  At the same time, EQT has taken steps over the last five years to unlock the embedded value of its midstream businesses, including creating two listed midstream MLPs.  However, a “sum-of-the-parts” valuation issue then arose, which EQT had announced would be addressed in 2018.  The opportunity to acquire Rice Energy, which has a compelling adjacent geography to EQT’s existing acreage, became available in 2017 – but activists complained that the transaction should be precluded until the valuation issue was resolved.   After a highly visible contest for nearly four months, shareholders voted today to authorize the deal.  The EQT proxy contest provides a number of valuable lessons on how companies can successfully navigate this type of activist assault.
          Broad engagement with shareholders before and during the deal.  EQT has a long history of dialogue with shareholders that it was able to draw upon in articulating and persuading shareholders of the benefits of the merger.  It goes without saying that it is harder to get support from shareholders if the first time the company reaches out to them is when a proxy card is needed.  Post-announcement, EQT engaged broadly and intensively with shareholders – the Lead Independent Director and CEO personally called on significant shareholders and proxy advisory firms, and the Board closely monitored and heard shareholder feedback.  Particularly in the fog of war and the never-ending rumor mills that are attendant to activist-led proxy fights, these efforts make all the difference in building credibility for the board and management and enabling them to hear what long-term shareholders want. 
          Keep on message.  In all deals, but especially those subject to activist challenge, a strong rollout, and staying on message throughout the process, is critical.  In the course of an activist assault it is often difficult not to be distracted by the wide variety of criticisms the activists may raise, and the wide variety of “experts” whose presentations often oversimplify the many complicated and subtle judgments involved.   In this often chaotic context, it is critical to maintain focus on the benefits of the deal and the credibility of the board and management.  EQT introduced the transaction with a detailed investor presentation and conference call.  In the face of a barrage of disparagement by activists, much of it ad hominem, EQT maintained its composure and continued to focus the market on the deal.  EQT’s Board also wisely made real, public commitments to underscore the strength of  its focus on the interests of shareholders and its  intention to address valuation issues.  The ISS and Glass-Lewis recommendations are still important, and the Lead Independent Director and CEO personally and effectively presenting to those firms were key factors in EQT’s success in obtaining their recommendations.  The merger’s opponents also made presentations, but ultimately failed to persuade the proxy advisory firms, and then withdrew the challenge shortly following the advisory firms’ recommendations in favor of the deal.
          Settlement has its place, but is not always necessary or desirable.  The temptation to short-circuit the disruption and distraction of a proxy fight with a settlement is understandable and, in some circumstances, appropriate.  Activists sometimes will publicize some of their settlement demands to generate support from other investors or to appear reasonable and build pressure for their platform.  However, accommodating the demands of the activist may not always be what the board considers to be in the best interests of all shareholders, and companies must carefully and deliberately make this determination.  In some cases, the optimal approach may be to sort out which ideas resonate broadly and proactively take actions with wide support to demonstrate responsiveness to investor concerns without acceding to the activists’ more parochial demands.  EQT’s Board, for instance, made important, unilateral public commitments to do what it believed was right for all shareholders and not just the activists – including commitments to address valuation promptly following completion of the merger, to add two new directors with midstream experience and to move the 2018 board nomination window to provide accountability for its announcement concerning the valuation issue.  Actions like this may not result in immediate peace, but can strengthen the case to institutional shareholders and proxy advisory firms that the board is open minded and doing what is best for all shareholders on a longer-term basis.
          Focus on the long-term investor and the value-creation strategy.  Deals are more likely to be successfully received in the face of an activist challenge when companies can contextualize them within a longer-term plan to create value.  Companies should articulate the strategy to institutional investors in advance of a deal so that when a deal opportunity becomes actionable there is support.   In EQT’s case, activists highlighted the near-term gain that might be obtained by scuttling the merger and focusing on the valuation issues instead, and wanted assurance that the Rice merger would not detract from EQT’s commitment to address this discount.  EQT was able to argue that the merger would create value and the company could address valuation issues after the merger from a stronger position, so that longer-term shareholders could get the benefit of both steps.  EQT’s long record of executing value-enhancing transactions, consistent strategy of building geographic concentration and willingness to add directors and to address valuation following closing were no doubt reassuring to long-term investors.  While the facts and circumstances of each deal are unique, shareholders generally can be persuaded that the opportunity to complete an accretive strategic transaction is worth pursuing when it complements a well-articulated long-term plan to create value. 

Sunday, August 2, 2015

Embedding a Tweet

The idea here concerns blockchain use cases. I could write up something about it quickly.

Friday, May 15, 2015

Quick Course: 140 Years of Panic and Policy

I originally wrote the following three years ago, for the financial blog AllAboutAlpha. The 140 years reference then worked well enough if one was dating from the publication of Bagehot's work. Next year, on May 2016, the financial world will mark an even 150 years since the Overend Gurney crisis itself.

In London, in May 1866, a banking panic began at 65 Lombard Street, the address of a discount bank, Overend Gurney. Overend (an ominous-sounding name for a financial institution to begin with!) had only just transformed itself from a partnership to a joint-stock company, making its books public in the process.

At the time of the panic, Overend had been pursuing litigation for the recovery of a £60,000 debt. On May 9, a court held against it. The public discovered that the firm would have to write off that debt, and this datum proved the catalyst for a run.  On the afternoon of May 10, Overend suspended payments.

This panic spread on May 11 to other banks and to the stock market. Further, it was not limited to London: spreading to Bristol, Derby, and the other great cities of Britain. But this particular panic, not especially unique out of all of history’s bank panics, is remembered not only for its city of origin but for its street address, and is remembered because it was the Overend Gurney crisis that stimulated Walter Bagehot to write a classic on finance, a book called simply Lombard Street: A Description of the Money Market (1873).

Stiff Upper Lip

In the Appendices to this book you may find the minutes of a meeting of the proprietors of the Bank of England that September, by which time matters had settled down a bit. At this meeting, the bank’s Governor, Launcelot Holland, addressed the proprietors thus: “[That] the banking establishments generally of London met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. This house exerted itself to the utmost – and exerted itself most successfully – to meet the crisis. We did not flinch from our post.”

You have to love that attitude. That’s why the Victorians ran the world.  They never ‘flinched.’
In the text proper, one of Bagehot’s key points is that the banking world in his day was reaching a threshold, beyond which it would become impossible for families to manage banks. They would become “very rotten” as control passed from one generation to the next, because of the enormous amount of detail work modern banking requires, the need for professional management.

“We have had as yet in London, happily, no example of this [a great private bank becoming ‘very rotten’]; indeed, we have hardly as yet had the opportunity. Till now private banks have been small; small as we now reckon banks.” Small enough to fail, one might fairly add.

But that dynamic, the superiority of professional over amateurs as managers, is what led to the Overend crisis by pressing the firm to change its own status. “The richest partners had least concern in the management; and when they found that incredible losses were ruining them, they stopped the concern and turned it into a company.”

A Continuing Conversation

That is a profound historical point, made no less so by the fact that it wasn’t yet ‘history;’ when Bagehot made it. Indeed, it provokes thoughts of the work of Alfred Chandler, and other institutional economists, to whom the development of professional managements, and the ‘scale and scope’ professionals can deploy, is still a crucial consideration in understanding contemporary capitalism.
Even more provocative, though, are Bagehot’s policy ideas. How should a central bank, a lender of last resort, respond to a banking crisis? Should it lower interest rates to near zero in the hope that liquidity will drown systemic sorrows?

Bagehot argues for a contrary approach. The interest rates for loans made to desperate borrowers should be high. “This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early….”

Nonetheless, though the interest rate should include a punishment as a check on what in our day is called ‘moral hazard,’ still such crisis loans should be made, if solid collateral exists for them, “wherever the security is good” as Bagehot says.

In terms of the crisis of 2008, one can make a case that Bagehot would have supported TARP in its original significance (where it was supposed to involve purchase of the assets of the troubled entities). He would likely see this as lending where the “security is good.” But I doubt one can make the case on Bagehotian terms for the actual implementation of TARP as a TERP, that is, through the purchase of equities.

At any rate, as we look forward in contemplation of crises yet unborn, Bagehot continues to have a voice in contemporary discussions. As well he should.

Tuesday, April 23, 2013

A Bad Case of Magical Thinking

A FB friend shared something from an outfit called "Americans Against the Tea Party."

It was something that was written/prepared in response to the disaster at the fertilizer plant in Texas recently. But there is always something. I have to presume that this post is aimed at a federal initiative to improve safety inspectors, that it isn't aimed at the state government in Texas. After all, the state government can't print money, and may be limited by scruples against running deficits and borrowing money from the Chinese.

But I'm going to ignore a lot here in order to sharpen my focus. I'll ignore federal/state questions, philosophical taxation-as-theft arguments, arguments about the folly of printing money, etc. Sometimes you have to pick your targets. My target at the moment is a certain magical two-goals-at-once thinking that goes with many such appeals.

Here is a bit of what the FB "share" said,' "Don't support deregulation. Hiring inspectors in numbers enough to make a difference would put a small dent in unemployment. And we'd be safer...."

Wow. Those are presented as two separate arguments, and the first one is a prelude to the second: put a dent in unemployment and be safer.

How much of a dent in unemployment is desired from the creation of new safety inspector positions?

However many inspectors you deem the right number, "enough to make a difference" in safety, ask yourself: why not twice that many? Why not three times? Wouldn't that make twice as big a dent? Three times as big a dent? I suspect the phrase  "enough to make a difference" is meant to indicate some level of modesty in the plan. Not too many, just enough for a specific purpose. or even only enough to make a "dent" in a specific purpose.

But if you -- and I address the actual author of this silliness -- if you really believe that hiring inspectors is an unmitigated good thing, why be modest about it? Why not abolish unemployment overnight by declaring every unemployed adult an inspector of fertilizer plants so you can start sending out the checks?

Because you sense a practicality issue with that?  Ah ... we're getting somewhere then.

There is always a tension between two different reasons for doing X, when it comes to the specifics of X. If you want to hire more safety inspectors for a certain industrial process because (a) you want to make that process more safe and (b) you want to put a dent in unemployment, there will come times when those goals pull in opposite directions. What if a heavily automated process turns out to be the best way of making the process safer? Are we supposed to favor a labor-intensive process anyway, because of our high-employment goal?

Here's a not-at-all-farfetched scenario: suppose the best way to make fertilizing plants safer involves the hiring of a small group of human inspectors, assisted by robots, and involves giving advice to the management of those plants that leads to the plants' themselves becoming more automated and less labor intensive than they are.

Suppose that after a month or two of such inspections and re-structuring, there is more unemployment than when we started, because the loss of jobs in the newly re-designed plants exceeds the initial "dent" made by hiring the inspectors. Yet (by hypothesis) the neighborhoods are all safer.

Good plan ... or bad plan?

There is a certain sort of social welfare policy that consists chiefly in refusing to ask one's self such questions. But among those who do ask those questions, safety-as-jobs-policy doesn't find may defenders. Safety for safety is one thing, jobs policy is another, and only a bad argument confuses the two.

Perhaps safety can be best served by a vigorous tort law system. If businesses see the bottom-line costs of safety lapses through an effective litigation system, those costs are internalized, and they'll hire the optimal number of inspectors themselves. But in no case should we think of that as a jobs policy: even then, they might well decide the best way to lower their liability costs is to automate, and should they not be free to make that call?

Thursday, April 4, 2013

A quote from Mises

"The expressions solvency and liquidity are not always used correctly when they are applied to the circumstances of a bank. They are sometimes regarded as synonymous; but orthodox opinion understands them to refer to two different states....A bank may be said to be solvent when its assets are so constituted that a liquidation would necessarily result at least in complete satisfaction of all its creditors. Liquidity [on the other hand] is that condition of the bank's assets which will enable it to meet all of its liabilities, not merely in full, but also in time, i.e. without being obliged to ask for anything in the nature of a moratorium from its creditors."

- The Theory of Money and Credit.

Tuesday, January 1, 2013

Happy New Year 2013

Okay, help me out here, informed readers.

The 112th Congress formally comes to an end on January 3, when the new session's members will be sworn in.

Whatever the Senate has done, if the House hasn't done likewise, won't count once the 112th session expires.

So ... the possibility of the big 'compromise' every one is talking about turns on a 2 day difference between two different deadlines.

We've already gone off the 'cliff.' The Bush tax cuts have expired, we are living in 2013 with the pre-Bush tax rates formally back in force.

So, the Senators, by acting on Dec. 31, before the cliff, were able -- and will always be able -- to describe their action as raising taxes on 'those fat cats' (relative to 2012 law).

But members of the House, by acting on the 1st or 2d of 2013, will be able to describe their actions as a tax cut, relative to the new/resurrected/Clinton-era rates, if they pass the same bill. So of course they haven't violated any pledge they may have signed not to raise taxes, because the tax increase took place automatically, not by their vote, and they will then have voted to lessen it slightly, i.e. to decrease taxes.

Is that it?

If it isn't brilliant, it is insane. I can't decide which.

Monday, April 30, 2012

Working on Caro Review

Robert Caro has been working on a multi-volume life of the 36th President, called The Years of Lyndon Johnson, for more than forty of his and our years now. The first volume of the set, The Path to Power, appeared in 1982, when Caro’s professional reputation as historian and biographer turned on his work on the New York parks-and-highways maven Robert Moses. Important as Moses was for that metro area: this was bigger game.
The Path to Power related the first thirty-three years of Johnson’s life, including his first election to the House of Representatives in 1937. In that period, Johnson was at least on the surface a devotee of the New Deal, and was in particular associated with rural electrification. But Caro sees all of Johnson’s devotions during the Roosevelt years through the lens of his protagonist's overweening ambition. In this 1982 volume, Caro stressed that a close tie to the REA gave Johnson an instrument, one that he could and did use to build his own political machine in Texas.

The second volume, Means of Ascent (1990), focused on Johnson’s elevation to the U.S. Senate in 1948. The key votes, in the Texas of that time, were those cast in the Democratic primary, since the defeat of the Republican was a mere formality. Johnson’s primary election opponent in 1948 was former Governor Coke Stevenson. Caro argues that Johnson’s defeat of Stevenson was blatant theft. Nonetheless, the Democratic state convention upheld Johnson’s victory, and he prevailed in the resulting litigation with some help from attorney Abe Fortas, a man he would in the fullness of time put on the U.S. Supreme Court.

TESTING:  DO I HAVE THE SAME TROUBLES here as with the other blog?  If not, one plausible hypothesis is that there is just too much in the other blog, and it may make sense to start from scratch.


The IRS Code permits the owner of mineral rights to account for the reduction of the available value as reserves are brought to the surface and exploited. This is not on its face a glaring “loophole;” it is closely analogous to the depreciation of the value of machinery.

Whatever the factual rate of depletion might be, the statutory (?) rate of depletion in the case of oil and gas is 15 percent of the gross income from the property, based on average daily production, up to the depletable quantity.   

The review in the form in which I sent it to Henry did not contain any material about Johnson's role in depletion allowance controversy.  Hey. This is neat.  I can type at will in this blog. So the problem must be overcrowding.


LBJ told Weisl that "your folks (his clients in the securities business, presumably) should take the hint that"this thing ... this assassin may ... have a lot more complications that you know about....It may lie deeper than you think."

The message clearly was that Wall Street should show its own faith in and solidarity with Johnson, because he was going to save the system from the shadowy forces represented by the assassin.