Despite a proliferation in activist investing, one thing that's unlikely to repeat in 2015 is a version of Valeant Pharmaceuticals International Inc.'s (VRX) $60 billion-plus hostile takeover attempt for Allergan Inc. (AGN) , said Gregg Feinstein, head of M&A at Houlihan Lokey.
Feinstein spoke as part of a panel discussing the investment strategy during The Deal Economy Event at the Nasdaq Exchange on Thursday.
Feinstein said he had made two predictions when Bill Ackman said he was backing Valeant in its bid — first, the Pershing Square Capital Management LP founder would make money, and second, the target would do anything rather than sell to the Canadian pharmaceutical roll-up platform.
Indeed, in the face of the Pershing-Valeant assault, Allergan did sell — to Actavis plc (ACT) , for $66 billion — giving the hedge fund a potential unrealized gain of about $2.7 billion.
"If Valeant's goal was to own the company, they would have been significantly better off not having Ackman as a partner," the banker said. "It became a lightning rod."
Glenn Welling, founder of activist fund Engaged Capital LLC, said he thought the industry would see more private equity firms coming in as partners with activists to help "get assets moved to a place where they can be acquired." Private equity firms, "can't be aggressive in the public markets, and I think you will see some of that happen," he said.
There's another trend for PE firms though, that Welling, as an investor, has some misgivings about: companies bringing financial sponsors in as "white knights," to buy up significant minority stakes and act as a blocking force to the hedge funds.
Indeed, at Engaged's campaign at fertilizer company Rentech Inc. (RTK) , Blackstone Group LP came in and took a 17% stake, a move that the activist said he initially welcomed. "But the biggest issue we had," Welling said, "was that the sense of urgency that the PE firm and ability to be very tough inside the boardroom wasn't there. They can't do it for reputational reasons."
Blackstone's stake accumulation essentially forced Engaged to settle, rather than going all the way to a full-out proxy campaign. Though Welling said having that kind of backing can still be positive, a different time line is involved. "We continue to get phone calls from investors," he said. "It's taking that much longer."
James Mitarotonda, CEO of Barington Capital, said his attitude toward PE investors in potential activist targets was, "to have directors as substantial part owners — it should benefit all shareholders." Still, he noted, "PE firms are good at buying the whole company outright, using leverage as well — they don't really have the experience in public companies."
In the financial services sector, Richard Lashley, co-founder of PL Capital LLC, said to look for shareholder activism to move out of the small, community bank arena and into the larger regional banks — lenders like Dallas-based Comerica Inc. (CMA) , BB&T Corp., of Winston-Salem, N.C., or Cleveland's KeyCorp (KEY) .
While the small banks need to and are consolidating, their larger rivals face obstacles, both regulatory and political, Lashley said. However, after the next presidential cycle, "When stress tests are done, when Basel is settled, and Congress will realize [the banks] have too much capital," expect more M&A in the banking sector, he said.