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Report Identifies Companies Vulnerable to Activist Takeovers

Wednesday, April 10, 2013 - 12:01
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Looking for a juicy takeover candidate?

A new report suggests you might find one at Fifth Third Bancorp, the utility holding company Ameren or ConAgra Foods. Those are among the big companies most vulnerable to takeover based on an analysis of stock holdings at institutional investors and other major shareholders

The vulnerable companies make the list because any activist shareholder that acquires a 14 percent stake would have a high likelihood of winning a takeover battle, according to a report released Wednesday by Rotary Gallop, a research and consulting firm that helps companies and investors quantify the odds in proxy fights.

On the flip side, some companies have very dominant shareholders, making it difficult for any potential activist investor to start a takeover battle. Among those are Hormel Foods, Reynolds American, Wal-Mart Stores and Campbell Soup. The report also names companies where existing big shareholders would be the dominant voice in any takeover vote, including AutoNation, Morgan Stanley, BlackRock and Kellogg.

In essence, control over a company’s fortunes boils down to more than just how many shares each investor owns. A relatively small shareholder could wield outsize influence if other shareholders are even smaller. Or an investor with significant stock holdings could prove to be a runt among giants.

“Even though you’ve got maybe just 10 percent of the ownership, your vote still decides the outcome over 80 percent of the time” at some companies, said Travis Dirks, a former research physicist who co-founded Rotary Gallop and now serves as its chief executive.

To prepare the report, Rotary Gallop analyzed share ownership at 459 of the companies in the Standard & Poor’s 500-stock index — essentially all those without multiple share classes. It then used December 2012 share ownership data from FactSet Research to model millions of hypothetical up-or-down votes, determining which shareholders could most often tip the outcome one way or the other.

To analyze vulnerability to activist investors and takeover efforts, Rotary Gallop modeled the likelihood that a hypothetical activist shareholder — with a stake of up to 14 percent — could expect to swing the outcome of the vote.

In another analysis, Rotary Gallop considered the how often major existing shareholders, or whales, were able to dictate the outcome of the vote. Whales are less significant at many of the same companies that are resistant to takeover efforts.

Rotary Gallop also analyzed how often insiders at each company — including executives and directors — were likely to swing shareholder votes. Companies with powerful insiders largely mirror those that are safest from sharks and whales — explaining much of that protection, Mr. Dirks said. (Other protection comes from sheer size: Because Rotary Gallop capped investment by a hypothetical activist investor at $2 billion, very large companies like Wal-Mart and Apple are less vulnerable to takeovers.)

The report doesn’t evaluate whether it’s a good idea to try to take over any particular company, or whether a takeover at any given company would be financially attractive.

The influence of major shareholders sometimes seems obvious, particularly when they hold a stake approaching 50 percent of shares outstanding. But effective control can be less obvious, Mr. Dirks said.

At Caterpillar, for example, State Street owns about 10.9 percent of shares outstanding — but decides any given shareholder vote about 82 percent of the time, Mr. Dirks said. PNC Bank owns 21 percent of BlackRock’s shares, but determines the outcome of a vote about 71 percent of the time.

The calculations were straightforward, but complex, Mr. Dirks said.

“You could sit down and do it yourself for a very small company,” he said. “The difficulty is that the number of permutations you have to deal with are two to the number of shareholders — it just blows up very fast.”

Dell — which faces competing bids from management, Carl C. Icahn and the Blackstone Group — has some 900 shareholders that have publicly disclosed their ownership stakes, so the potential vote possibilities would number 10 followed by 271 zeros, Mr. Dirks said.

By comparison, the atoms in the known universe are believed to number about 10 followed by 80 zeros.

Most vulnerable to existing big shareholders

Republic Services
LyondellBasell Industries
Morgan Stanley
Kellogg Company
Lockheed Martin
VF Corporation
J.C. Penney
Nasdaq-OMX Group

Least vulnerable to existing big shareholders

Hormel Foods
Titanium Metals
Campbell Soup Company
Bank of America
General Electric
Intel Corporation

Most vulnerable to activist investors

Wisconsin Energy
Fifth Third Bancorp
Ameren Corporation
Regions Financial Corporation
ConAgra Foods
Consolidated Edison
Tyco International
ADT Corporation
Pepco Holdings

Least vulnerable to activist investors
Hormel Foods
Reynolds American
Titanium Metals
Campbell Soup Company
Franklin Resources
Oracle Corporation