Activist investors are gearing up for what promises to be a busy year in the middle market. More than ever, small-stake sales are sparking big discussions inside boardrooms, making hedge funds such as Starboard Value and Elliott Management notable names, especially within the middle market. That means “mid caps are still the sweet spot of activism,” says Bob Profusek, head of M&A at Jones Day.
In February Starboard successfully influenced Staples Inc. (Nasdaq: SPLS) to take over retail rival Office Depot (Nasdaq: ODP). Had Staples not agree to the deal, Starboard promised a proxy battle for representation on the board. “This merger makes too much sense to ignore,” a shareholder letter states.
A similar sentiment was shared by Elliott Management. The firm has successfully pushed a number of companies to sell, and in January it pursued Informatica, a data integration specialist. The activist investment firm bought an 8 percent stake in Informatica, a specialist in data integration services.
In December, Nelson Peltz’s Trian Fund Management grabbed a seat on the board of directors at Bank of New York Mellon Corp (NYSE: BK). The move came after Trian acquired a 2.6 percent stake, lending credence to reports that a spin-off of BNY Mellon assets is in the works.
And if 2014 is any indication of how 2015 will look, shareholder activism is expected to take up a larger chunk of U.S. deals. According to law firm Freshfields Bruckhaus Deringer, new activist investments in listed U.S. companies increased by 61 percent to 624 in 2014. That’s up from 388 in 2013.
What activists do is slowly buy up the 5 percent 13D disclosure threshold without moving the price and then buy aggressively in the ten-day window before the 13D has to be filed, often showing up at 9.9 percent at the time of first public announcement, Profusek explains.
“Before much time goes by, 20 to 30 percent of the company can wind up in hot hands, limiting the company’s options,” he adds.
“Activists will focus increasingly on middle-market companies,” says Barry Brooks of Paul Hastings LLP. “There’s no reason why a company in the middle market couldn’t make improvements, whether it’s making a takeover, getting taken over, being split up or through refinancing.”