Why old-school asset managers are copying the activists
Wellington’s intervention in Bristol-Myers M&A battle could prove a turning point
Once upon a time, big institutional shareholders would wait for an official vote to express their opinion on a deal, or a board appointment by a company in which they have invested billions of dollars. Not any more.
The decision by Wellington Management to speak out against Bristol-Myers Squibb’s $90bn takeover of rival drugmaker Celgene has shocked many on Wall Street. The intervention by the Boston-based firm, which manages about $1tn in assets, could kill one of the largest ever deals in the pharmaceuticals sector.
Many believe it could also herald a new dawn for stockpicking firms such as Wellington, which are under pressure to prove their worth in a world increasingly dominated by cheaper, passive investment strategies. BlackRock, Vanguard and State Street, the biggest beasts in passive investing, are the largest investors in about 90 per cent of companies in the S&P 500, according to Jan Fichtner at the University of Amsterdam.
“This is historic,” says Jim Woolery, head of the mergers and corporate governance practices at law firm King & Spalding. Wellington has made “a business decision that being more active, more vocal, will help them protect and grow their assets under management. The fundamental economics of asset management are driving it”.
It is a view echoed by Jim Rossman, the head of shareholder advisory at Lazard, the investment bank. “These guys are not just going to sit on the sidelines waiting to vote on an issue,” he says. “They want to be more involved in the conversation.”
Wellington is not the first stockpicking firm to emulate the activists muscling in publicly on an issue at a company in which they own shares. Neuberger Berman and Glenview Capital Management, for example, have launched proxy contests similar to those pursued by the likes of Carl Icahn or Bill Ackman of Pershing Square. But the salvo from Wellington on a high-profile, multibillion-dollar acquisition is the most striking yet.
It is one that could have serious fallout for the breed of activist hedge funds whose own business models are based on promises to shake up the strategy of the companies they target. Why would a pension fund hand over money to an expensive activist fund, if cheaper institutional investors such as Wellington begin to act more like them?
“A few years back the Wall Street establishment investors like Wellington had distaste for shareholder activism,” says Mr Woolery. “Long investors don’t need activist investors like Bill Ackman because they can do it themselves.”
Wellington, which owns about 8 per cent of Bristol-Myers, appears to be supported by some prominent activists. Starboard Value, a New York-based activist hedge fund that owns about 0.25 per cent of Bristol-Myers*, has also said it will vote against the Celgene deal.
Another large activist hedge fund, which did not want to be named, welcomed Wellington’s decision to speak out. “We love it when these guys come out; it makes us look good,” says a senior executive at the fund. But he admits that smaller activist funds, whose performance has been poor, could suffer from the trend.
Mr Rossman says that it is too early to tell whether other asset managers such as Fidelity and T Rowe Price will find their voices when the companies they own embark on major strategic moves, such as acquisitions. But there are risks in doing so — and the biggest is regulatory.
The Securities and Exchange Commission has in recent months made clear that it wants to make sure large asset managers are held accountable for the way they cast their votes, according to several people familiar with discussions.
Mr Woolery points out that Wellington sold its Celgene shares before Bristol-Myers announced its takeover plan, while many other investors — both stockpickers and passive holders — continue to hold the shares of both companies. It means that Wellington risks making a lower return on its Bristol-Myers holdings if the Celgene acquisition goes though and fails to add value.
When Wellington last week rebuffed the deal in a statement, it did not disclose that it had sold its shares in Celgene.
“That is material information for other investors evaluating Wellington’s actions,” says Mr Woolery. Wellington declined to comment.
If the economics of the asset management industry provide the likes of Wellington with the motivation to speak out on company’s strategy in a way that passive investors cannot, doing so carries dangers. It risks damaging a respected investor’s reputation by being drawn into a public and potentially ugly battle. Even so, most Wall Street analysts are convinced that the benefits will outstrip the costs.
“For major institutions, while it is not common historically, there are few risks in speaking out against a deal,” says Rich Grossman, a partner at New York law firm Skadden Arps, which defends companies against activist campaigns.
“Companies, of course, should listen to them and explain the rationale of their deals.”