Carl Icahns bid to launch a proxy battle at Time Warner sets a number of important precedents for hedge fund activism. If he succeeds, Time Warner will be the biggest company ever to face a proxy contest for its board, launched by an activist with a stake of less than 3%. His attempt to change majority control on the board, possibly unwinding the Time Warner/AOL merger, the biggest in corporate history, is also dramatic. Yet his campaign has been given credence by the fact that one of the best advisory firms on Wall Street, Lazard, is working for him.
But Icahns battle is different to the campaigns of other hedge fund activists. With Time Warner, he cannot just rely on garnering the support of other hedge fund shareholders to build a critical mass of support but must convince the institutional investors that hold the majority of Time Warner stock of his case.
He says this is why he hired Lazard to work on an alternative plan for the company, which will form the basis of a proxy fight for the board.
I only have 3% of the stock and thats why we brought Lazard in, Icahn said, speaking at the New York Society of Security Analysts corporate credit conference at the end of November.
Hedge funds are very different to mutual funds as they are willing to take large positions and are very concerned with performance, because thats how they make money. They will vote for the activists, but you have to have someone with credibility to talk to all the index funds that own this stock. I think we can show some of these funds why our plan works.
To do this, he is banking on being able to persuade Institutional Shareholder Services and other organizations like it, which recommend how funds should vote in proxy battles, to support him.
Index funds often follow the recommendations of these organizations in proxy contests because they provide guidance on the basis of topical issues such as a companys corporate governance standards.
With the increased importance of ISS, if I can convince them and others like them how to vote, I think theres a very good chance we can win this, Icahn says.
Activist hedge funds attempting to align themselves with solicitation recommendation services is an interesting development. This is particularly so as, at a time when hedge fund activists are prepared to go head to head with corporations if they think their shares are undervalued, companies such as ISS could develop an unprecedented influence over the future of the most widely held stocks.
ISS could not be reached for comment, but Patrick Dooley, partner and co-head of mergers and acquisitions in New York for law firm Akin, Gump, Strauss, Hauer and Feld, says that while such firms could endorse the replacement of a couple of directors on a company board, its more doubtful whether they would support the change of the majority of board members, as Icahn is endorsing in the case of Time Warner.
Its an open question as to whether solicitation recommendation services would support change of a majority of the board. They could be somewhat reluctant because of the potential instability that could bring.
However, he says that he thinks hedge fund activists in general do have the potential to sway other institutional funds. Where the insurgent is a hedge fund or private equity fund, they often have some credibility because they are financial markets players and often come up with very specific proposals.
Icahn certainly had some very specific and often colourful objections to the current organization of Time Warner, ranging from the historical performance of its stock and the effectiveness of chairman and CEO Dick Parsons to the size of its staff cafeteria in the new Time Warner building in Columbus Circle in New York.
Whether Icahn and Lazard can come up with a compelling yet prudent plan for the future of Time Warner to appeal to index funds is still not clear.