White Tale, the investment vehicle of Keith Meister and the New York fund 40 North, acquired as much as 20 percent of Swiss chemicals giant Clariant and got a few other shareholders to protest its acquisition of Huntsman. Clariant gained 11 percent between the day White Tale disclosed its plans in early July and the merger’s collapse on Oct. 26. Clariant has gained about 5 percent since then.
In 36 percent of targeted deals, activist arbitrageurs were able to successfully block the deals, the research found. (Comparatively, deals signed without activist intervention closed about 91 percent of the time). In about 17 percent of the cases, activists were able to get better terms for the acquirers in the deal. Those that lowered their offer premiums did so by 4 percentage points on average, the research showed.
Of the 70 unique investors that the researchers studied, Jana Partners tended to be the most frequent user of this strategy. The firm last year opposed a $6.7 billion cash-and-stock tie up between EQT Corp. and Rice Energy. Ultimately, shareholders voted overwhelmingly to approve the deal, though.
The study found that activist arbitrageurs tend to target deals that are not well-perceived by investors — those that have steeper declines once the transaction is announced. The targeted deals are likely to be those that use stock as currency and those with acquirers that have a track record of poor returns on their invested capital.
Just the mere disclosure of Icahn’s Cigna plan was likely a boon for him even though he did not successfully break up the deal. By the time he abandoned his quest less than two weeks later, Cigna had gained 3.7 percent. But activists on the other side, notably Glenview Capital, supported the deal and helped boost shares of Express Scripts.
Sometimes, the strategy becomes Plan B when an activist is caught by surprise after an inopportune deal is announced.
“What happens is an activist is already in the buyer and building a stake and then they get flat-footed when their target announces a deal,” said Kai Liekefett, who leads Sidley Austin’s shareholder activism practice. “The company the activist is targeting is now buying another company and their stock price goes down.”
Activist arbitrage is an offshoot of another popular strategy known colloquially as “Bumpitrage.” This happens after a deal is announced that requires a shareholder vote. An activist will come out and threaten a proxy contest to urge shareholders not to vote for the deal unless the buyer agrees to a bump up the price.
“Once a buyer has invested the time and money into buying a company, they’re not going to chicken out of the last couple dollars,” Liekefett said. “The buyers always want to salvage the deal.”
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