CHICAGO & NEW YORK--The surge in, and influence of, activist activity on corporate decision-making is underscored by the recent Dow Chemical/DuPont proposed merger, according to Fitch Ratings.
Last year, Trian Fund Management, with Nelson Peltz at the helm, encouraged a DuPont split in order to further enhance shareholder value, despite the fact that DuPont was already returning more cash than it had in the past to shareholders. After DuPont rejected Trian's proposal, Trian led an unsuccessful proxy vote to gain seats on the board.
Nevertheless, according to media reports, Nelson Peltz was intimately involved in discussions around the proposed chemicals merger. Fitch believes the pending merger illustrates the potential influence activist investors can have on corporate decisions. While Trian lost the proxy vote, it may have achieved what it wanted as it has an approximate 2.8% ownership in DuPont.
Dow is also no stranger to activist investors. In January 2014, Third Point, which currently has an approximate 2% ownership in Dow, called for a strategic review of Dow's business. Dow subsequently tripled a share buyback plan to $9.5 billion and increased its dividend by 15% after better earnings, stating the action had long been considered given balance sheet progress.
The company rejected Third Point's request to split petrochemicals from specialty chemicals, stating a business separation would not result in productivity or capital allocation improvements, but awarded board seats to Third Point's nominees and entered into a one-year standstill agreement with the activist that is set to expire prior to Dow's 2016 annual meeting. The Dow board's unanimous approval of the proposed transaction also reflects the influence wielded by activists on corporate decisions.
The influence of activist investors continues to aid in the shaping of corporate decisions as the number of campaigns against nonfinancial US corporates tripled since 2010 to roughly 250 campaigns in 2014 and is on pace to match this level through early December. Moreover, US assets dedicated to activist strategies have grown at a 25% compound annual growth rate over this period to over $300 billion.
Uncertainty is being engendered by the significant number of activist representatives on company boards and standstill agreements expiring in the future. Actions driven by short-term thinking are generally negative for corporate credit, as management teams may not make appropriate investments to sustain the business for the longer term to adapt their business models to evolving customer behavior or the competitive landscape. We anticipate activist activity will stay elevated, given the increase in assets dedicated to activist strategies and a desire for higher returns.
On Dec. 11, Fitch placed the ratings of Dow on Rating Watch Positive and the ratings of DuPont on Rating Watch Negative following the announcement of the proposed merger of equals. The merger is to be a share-based transaction expected to close in the second half of 2016 and is subject to regulatory and shareholder approval. Subsequent to the merger, the company is to be split into three separate public companies that are expected to be capitalized as investment grade.
For more information on this topic, please see our special report titled, "Activist Investors: Fall 2015," which is available on our website at www.fitchratings.com
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Activist Activities: Fall 2015 (Nonfinancial U.S. Corporate Campaign Case Studies and Profiles of Notable Activists)