Issue Date: September 30, 2013
Activist Shareholders Push Chemical Firms Into Major Changes
“The chemical industry is ripe for shareholder activism,” says Jeffry N. Quinn, who heads Quinpario Partners, an activist investor firm.
Quinpario and like-minded activist investors routinely scan a wide variety of companies to find those whose shares they believe are undervalued and could rise with financial or managerial engineering. Over the past year, these investors have come knocking at the doors of eight chemical firms, including bellwethers DuPont and Air Products & Chemicals.
Activists see opportunities in chemical companies, which they say are beset by lagging stock prices and failing growth strategies. So they buy enough stock to push for seats on the boards and urge executives to sell or restructure businesses. And if current managers don’t play ball, the activists foment a fight to kick incumbents out. Damien J. Park, managing director of advisory firm Hedge Fund Solutions, calls activists “investors with a stick” because of the significant positions they often take in firms they target.
“The chemical industry is a cyclical and complicated beast with lots of moving parts,” Quinn explains. That sort of complexity makes companies ripe for the picking when executives are slow to react to sluggish growth or rising costs in any part of their business.
Quinn knows whereof he speaks. A lawyer promoted to chief executive officer of chemical maker Solutia in 2004 when it was in bankruptcy, he nursed the firm back to health and then sold it in 2012 to Eastman Chemical for $4.7 billion. More recently through Quinpario, whose partners are all former Solutia executives, he has pushed for change at Ferro and Zoltek.
At Ferro, a specialty chemical maker, Quinn and allies at FrontFour Capital Group successfully pushed for the sale of a solar paste business and positions on the company’s board. Since May, Quinn has been a Ferro board member and part of a committee seeking ways to bolster the firm’s value. Ferro’s shares are up about 80% since the tussle became public in January.
At carbon fiber maker Zoltek, Quinn called off efforts to replace the firm’s board after it agreed to hire J.P. Morgan Securities to explore “strategic alternatives to maximize shareholder value.” Zoltek’s shares are up more than 50% since Quinn revealed his firm had a 10% stake in the business.
So convinced is Quinn that the chemical industry offers opportunities for shareholder activism that he raised $173 million in August in an initial public offering of Quinpario Acquisition Corp. The new firm’s sole purpose is to acquire specialty chemical or performance materials businesses.
The $173 million could be leveraged to acquire businesses worth $300 million to $1 billion, Quinn says. “We’re not looking to buy cheap. We’re looking for opportunities now. They are out there.”
Quinn isn’t the only investor who over the past year has made waves in the chemical industry. Trian Fund Management’s Nelson Peltz has targeted DuPont, and Pershing Square Capital Management’s William A. Ackman has gone after the industrial gases firm Air Products. Peltz and Ackman have backing from institutions and deep-pocketed individuals who want higher returns than they can get from bonds and bank deposits.
So activist investors target companies that appear undervalued compared with their peers. They are often active in sectors with a lot of merger and acquisition activity, says Hedge Fund Solutions’ Park, who has worked both for activists and the companies they target.
Today’s activists differ from the takeover artists of the 1980s, Park notes. Those corporate raiders, fueled by the availability of junk bond financing, sought to buy and carve up whole companies into small pieces. In the chemical industry, Samuel J. Heyman and his fight in the early 1980s to take over roofing maker GAF comes to mind.
Activists now are a little more diplomatic, Park points out. No longer the barbarians at the gate, they tend to buy 5 to 10% of a firm’s shares and then push for change.
That money acts like “a down payment on a house,” Park says. The fund managers then try to leverage their stock position to improve returns to shareholders. They might start with “friendly” discussions with management but could quickly move to downright hostile battles to place their own directors on corporate boards in an effort to push an agenda for change.
Activist investors typically start with behind-the-scenes discussions with target firms, notes Marc Weingarten, a partner at law firm Schulte Roth & Zabel and an adviser to many hedge fund managers. In this way an activist can push an agenda without ever going public, he says, and companies may be more inclined to adopt activists’ proposals when the discussions are private.
That appears to be the case with Peltz, who recently bought at least $300 million in DuPont shares, according to government filings. News in July that Trian was amassing a stake in DuPont came just weeks before DuPont’s announcement that it would divest its $7.2 billion performance chemicals business and focus on seeds, biomaterials, and advanced materials.
Peltz’s implied scrutiny of its executives probably did not make DuPont happy. By mid-August, the firm changed its bylaws to make it more difficult to nominate new directors. DuPont also adopted a severance package giving top managers, including CEO Ellen J. Kullman, large payments in case of a change in control at the firm.
Perhaps Peltz’s reputation had preceded him. At PepsiCo, in which Peltz owns a more than $1 billion stake, he is encouraging a spin-off of the beverage business so the firm can focus on snacks. He has also targeted conglomerate Ingersoll Rand, where not long ago he secured a board position and successfully pushed to break up the firm.
Peltz may have pushed DuPont to move up plans it was considering for the performance chemicals business, suggests John Roberts, a stock analyst with investment bank UBS. Activists such as Peltz often think the value of individual businesses at big, complex firms like DuPont is greater than their sum.
In Air Products’ case, a number of competitors, such as Praxair and Linde, have performed better recently, Roberts notes. So shareholder activists may reason that Air Products is due for a shake-up.
Pershing Square’s Ackman, who revealed in July that he had bought a nearly 10% stake in Air Products, has been a bit more open about his plans. In a government filing noting the investment, Ackman said Air Products “is an undervalued and attractive investment.”
He added that he intends to talk with Air Products leaders and shareholders about issues including “management, operations, business … strategic plans, and the future.”
At the time, Air Products said it “welcomes new investors and looks forward to engaging with Pershing Square to understand its views.” But days before that statement, the firm adopted a shareholder rights plan because of unusual activity in the trading of its shares. This “poison pill” makes the firm more expensive to acquire should anyone obtain more than a 10% stake.
Ackman has met with both success and failure in past investments. He waged a proxy battle at Canadian Pacific Railway, where he succeeded in installing a new CEO and directors and saw stock prices triple. But he recently lost at retailer J.C. Penney, where he and his choice for CEO were ousted.
Ackman’s lack of success at Penney shows that activist investors don’t always succeed. In some cases, activists create value mainly by waking up management, says Peter Young, who runs the investment banking company Young & Partners. In other cases, “activists don’t know how to create a business” and can lose.
But overall, activist investors do seem to improve target company health. A recent study by Harvard Law School professor Lucian Bebchuk available through the open-access repository Social Science Research Network (2013, DOI: 10.2139/ssrn.2291577) found that target companies improved operating performance in the five years following activist efforts. The study reviewed 2,000 activist shareholder “interventions” between 1994 and 2007.
Love them or hate them, activist investors ultimately have the same goal as company executives, Hedge Fund Solutions’ Park points out. “I never met with an investor or a corporate executive who didn’t want their stock to go up.”
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