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Investors take steps to foil activist ploy

Date: Friday, August 15, 2008
Author: Julie MacIntosh, Financial Times

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Investors who have grown frustrated with one of shareholder activism's classic moneymaking ploys - buying stock in a company and then calling publicly for it to be sold at a premium - are starting to take matters into their own hands.

Harbinger Capital and Pershing Square Capital, the activist hedge funds, have hired bankers or attorneys to find buyers for companies they have invested in, often without shareholder or management's consent.

Harbinger used Moelis & Co, the boutique merger advisory firm, to drum up bid interest in Cleveland-Cliffs, the iron ore miner, earlier in the year, and is using the same strategy in regard to AK Steel, the US steel producer, say people familiar with the matter.

Pershing Square recently announced in a regulatory filing it hired advisers in connection with its purchase of a stake in Longs Drug Stores. Pershing saw Longs as a takeover target for CVS Caremark or Walgreens, and used attorneys to gauge whether a deal with either company would present antitrust risks.

Pershing Square had not yet hired bankers in Longs' case, but Bill Ackman, the Pershing founder, has done so at times. He currently has bankers evaluating Target, the retailer, and used Blackstone to pin a value on the Wendy's fast food chain.

The most common modus operandi of activist shareholders when trying to spark a takeover tends to be a public letter to a company's board of directors calling for a sale. But some funds are working more often to mitigate risk by stirring a sale process directly.

"It is fascinating when a hedge fund is having someone on its behalf go out to beat the bushes to find perspective buyers," one merger adviser said. "You've got an activist who is taking more extraordinary steps than usual," the adviser said, "rather than just annoying management and the board."

Hedge funds do not need a company's blessing to fan out into the market in search of takeover suitors willing to pay a high enough price. Bankers can also help activists establish clout in suggesting other courses of action, such as restructurings or share buy-backs.

"Banks take on a degree of reputational risk, particularly when they're advising a hedge fund," one investor said. "Very often, it can create a stronger impression if you can get a top five investment bank to agree with you."

It is not clear that an age has dawned in which shareholders can ostensibly "sell" a company without management's participation, however. The strategy is not always successful.

The biggest hurdles for hedge funds may be reputational. If a company is not convinced it should sell, suitors might not want to irk its board by participating in a hedge fund-run process - a concern that deterred some companies that looked at Cleveland-Cliffs.

Hedge fund attempts to rouse takeover bids can also be limited by a lack of access to confidential information, which the target would have to agree to provide.

Harbinger's attempt to solicit suitors for Cleveland-Cliffs, in which it is the biggest stakeholder, has so far been a bust. Cleveland-Cliffs instead announced a deal to buy Alpha Natural Resources, the coal miner, that Harbinger now opposes.

The jury is still out on AK Steel, in which Harbinger owned a 13 per cent stake according to recent filings. Speculation the company could be a takeover target resumed last month, helping drive up its share price.

But there was no formal sale process under way at AK Steel at that time, merger advisers said. Harbinger did not return calls and AK Steel declined to comment.