What happens when shareholders want more

The Wall Street Journal did an interesting piece on Wednesday about what happens when friendly deals get pushback from shareholders looking for more money. While those on Wall Street and in the boardroom might think they know best about a company’s value, increasingly shareholders aren’t just blinding agreeing to their terms.

The Journal reported:

“It used to be that you’d pop the champagne corks upon a deal announcement. Now you white-knuckle it through the shareholder vote,” said Chris Young, who heads the so-called contested-situations practice for Credit Suisse Group AG, which focuses on activist investors.

Mr. Young has a name for situations where it is the shareholders, not the buyers or sellers, who are unhappy: the “contested-friendly deal.”

Investors’ stronger pushback on mergers and acquisitions is the latest manifestation of the broader rise of shareholder activism, in which investors typically agitate for changes to increase share prices through moves ranging from operational tweaks to selling the entire company. Recent post-merger-agreement skirmishes with investors have involved both longtime shareholders and shareholders who snapped up a stock after a deal was struck and then pushed for a better price.

The rise of activism around deals adds another risk factor for chief executives and boards when weighing whether to sign a deal, and it could mean companies shy away from deals or take additional steps—such as more thoroughly seeking a wider swath of buyers—to help ensure the deal gets done.

For shareholders, the trend could mean bigger payouts when companies are sold but also may mean fewer deals get struck.

And no one knows shareholder activism better than Carl Icahn, who just won’t give up on pushing Dell for a higher price. Here’s the Wednesday update from the New York Times:

Michael S. Dell has succeeded in changing the voting rules for his proposed takeover of the computer maker that bears his name, bringing him much closer to victory. But his chief nemesis, the billionaire Carl C. Icahn, isn’t giving up.

The question is whether the latest moves by the activist investor shore up his assault as the odds stack against him.

On Monday, Mr. Icahn disclosed that he bought an additional four million shares in Dell late last week, raising his stake to roughly 9 percent.

Mr. Icahn has also filed suit in Delaware’s Court of Chancery, seeking to prevent Dell’s board from altering the rules of the proposed leveraged buyout. The lawsuit was filed a day before the special committee agreed to relax the voting standards, letting Mr. Dell and his partner, the investment firm Silver Lake, win by simply garnering a majority of shares voted at the meeting instead of all independent shares.

In exchange, Mr. Dell and Silver Lake effectively raised the price of their bid to $13.88 a share, through both a new offer of $13.75 and a promise to pay a special dividend of 13 cents a share.

By buying the additional shares, Mr. Icahn has cemented himself as Dell’s biggest outside investor with an 8.9 percent stake, surpassed only by the company’s eponymous founder and his 15.7 percent stake. He still has a major ally in Southeastern Asset Management, which owns about 4 percent.

But the Dell special committee’s move greatly diminished Mr. Icahn’s power to block the deal. The old voting standard counted shares not voted as no votes, creating a near-insurmountable barrier given Mr. Icahn and Southeastern’s combined stake. Even though the buyers were slightly ahead in terms of shares actually voted, the more than 300 million shares that were not cast were enough to block the deal.

By keeping the standard to just the shares that were voted, the new rules drastically alter that calculus. So, too, has the newly raised bid, which drew in reluctant big shareholders like Franklin Mutual Advisers and the hedge fund Pentwater Capital.

AOL, once part of the worst attempted corporation combination in history, will now turn to its shareholders for approval of a deal, according to Bloomberg:

AOL Inc. (AOL) agreed to buy the video-advertising startup Adap.tv for $405 million, marking its biggest acquisition since Chief Executive Officer Tim Armstrong led the spinoff of the company from Time Warner Inc. (TWX) in 2009.

AOL announced the cash-and-stock deal as it posted second-quarter profit that beat analysts’ estimates, lifted by gains in advertising sales. The stock rose 1.4 percent to $36.69 at the close in New York. The shares have gained 24 percent this year, outpacing the 21 percent gain of the Standard & Poor’s Midcap 400 Index.

The acquisition reflects a different strategy than AOL’s $315 million purchase in 2011 of the Huffington Post, which was part of Armstrong’s effort to transform the once struggling dial-up provider into an advertising-based publisher. Adap.tv, in contrast, will help AOL grab the ad dollars spent on television as Internet video draws more viewers, he said.

What is interesting is thinking about the value being created. After years of rubber stamping whatever management asked, shareholders are now seeing they have power to demand fair prices. Increasing the prices for deals is one thing, but the awakening of those investing in companies is something great to see. The Wall Street Journal pointed out that fewer deals may get done. I’m not sure that’s such a bad thing.