April 6, 2020

Companies Wield Poison Pill Takeover Defenses as Volatility Rises

by Tajinder Dhillon.

The impact of the COVID-19 pandemic has seen many share prices plummet this year.  Extreme volatility has provided an opportunity for activist investors to take a large stake in a company or increase an existing position by purchasing shares at a steep discount.  Activists are a niche group of investors who have a strong view on a company and seek to unlock value by implementing change. This can involve management restructuring and changes to the board of directors. Activist hedge funds have outperformed their peers over the last decade, achieving an annualized return of 4.95%, in comparison to 0.22% for global hedge funds.

Companies use poison pills as a takeover defense tool. They make it more difficult and expensive for an acquirer to gain control of a company. Each poison pill has its own terms and conditions but is often triggered when a shareholder accumulates 15% of shares outstanding.  Using the Screener and Excel add-in apps by Refinitiv Eikon, we find that 14 poison pills have been issued so far this year by U.S. companies with a market capitalization greater than $300 million. This is a sharp increase compared to 2019, when 15 poison pills were issued.  Exhibit 1 highlights poison pills issued in March, including companies from the energy, airlines, and transportation services industry who have been hit hardest.

Exhibit 1: Poison Pills Issued by U.S. companies with a Market Value > $300m in 2020

Portfolio managers and analysts who are interested in seeing if a company they hold has issued a poison pill may head to the “Latest Poison Pills” page found under ESG (Environmental, Social, and Governance).  Using Occidental Petroleum (OXY.N) as an example, we can see a poison pill was issued on March 13, 2020.  To view the largest shareholders of OXY.N, we can head to the “Ownership Summary” page.  Exhibit 2 highlights Icahn Associates Corporation, an activist investor, as the second-largest shareholder of OXY.N, owning 9.90% of share outstanding.

Exhibit 2: Ownership Summary for Occidental Petroleum

Source: Refinitiv Eikon

Staying on the Ownership Summary page above, we also observe that Icahn Associates Corporation purchased an additional 66.06 million shares of OXY.N as per the latest filing.  To see the details of this transaction, we can view the Investor Portfolio Report page (Exhibit 3) to see the individual buying and selling behavior of the investor.  For U.S. companies, the filings data is provided by the U.S. Securities Exchange Commission and a 13D filing was issued on March 25, 2020 which details the transaction.

Exhibit 3: Investor Portfolio Report for Icahn Associates

Source: Refinitiv Eikon

Predicting future poison pills

The example above highlights how ownership data can be used to potentially explain the motive behind a poison pill. In some situations, an active company-shareholder battle is well covered in the news. However, for investors it would be more beneficial to determine if a company is likely to issue a poison pill in the future. Admittedly, this will be very difficult to predict as every company will have its own strategy and reason for issuing a pill.

However, there are two approaches that could help investors gain better insight. The first approach is to view the largest holdings of well-known activist investors. In the U.S., prominent activist investors include Icahn Associates Corporation, Pershing Square Capital Management, Elliott Management Corporation, and Starboard Value LP.  It is plausible to assume that a company that has a large activist shareholder will face more pressure to defend itself.  Exhibit 4 highlights the Top 10 holdings for each of the investors mentioned above.

Exhibit 4: Top 10 Holdings for Various Activist Investors

Source: Refinitiv Eikon

A second approach is to utilize the StarMine SmartHoldings Model (SH), which predicts forward changes in institutional buying and selling by determining which factors are currently favored by institutional investors and which stocks are becoming more or less desirable in the current environment. Twenty-five fixed factors across volume, price momentum, profitability, value, growth, analyst revisions and leverage are utilized and ranked from most popular to least.

A company with a low SH score indicates that it is not aligned with current market preferences. As a result, companies that are consistently out of favor among institutional investors could provide an opportunity for activist investors if they believe they can unlock hidden value or find better ways to run the company.

Exhibit 5 highlights the aggregate SH scores for the S&P 1500 index. It’s no surprise that energy companies are most out of favor with institutional investors, while automobiles are also facing a challenging outlook.

Exhibit 5: Aggregate StarMine SmartHoldings Score for S&P 1500 Index

Source: Refinitiv Eikon

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