T AT&T Inc

By Corrie Driebusch 

A new playbook is emerging in the world of shareholder activism, one that calls for quick peace treaties enabling investors and the companies they target to sidestep costly, protracted battles.

In the past few weeks, AT&T Inc. and Emerson Electric Co. managed to quickly end high-profile activist challenges -- at least temporarily -- by agreeing to make modest changes. The hedge funds besieging them pledged nothing in return.

People involved in the deals insist they are not "settlements," the formal arrangements that typically end activist campaigns and impose strict measures on both parties. Such agreements often enable activists to name one or more board directors while preventing them from agitating publicly or waging a proxy fight -- and trading in the stock.

The new setups are more like nonbinding handshake agreements, and in the case of AT&T and Emerson merely entitle the activist to recommend or advise on board changes. Emerson has drawn an investment from D.E. Shaw Group, a hedge-fund firm with an activist component that praised a new board member the industrial conglomerate appointed earlier this month.

Elliott Management Corp., AT&T's pursuer, has also reached non-settlement agreements with Marathon Petroleum Corp. and German software giant SAP SE in recent months. The hedge-fund firm, one of the most prolific and aggressive activists, plans to use them as a template in future campaigns, according to a person familiar with the matter.

Activists take stakes in companies and push them to make operational or financial changes to boost their stocks, and have become a major force shaping the agendas of companies in the U.S. and Europe.

But both the investors and the companies they target have reason to cry uncle in the broader war they have been waging the past several years.

Drawn-out activist campaigns can be expensive and time-consuming, engendering resentment among executives and board members. In 2017, Procter & Gamble Co. engaged in a protracted proxy fight with Trian Fund Management LP. The battle cost at least $60 million, making it one of the most expensive in history, and ultimately ended with the consumer-products giant appointing Trian's Nelson Peltz to its board.

Companies are increasingly attuned to the risk that an activist will land on their shareholder register, upend their strategy and undermine their standing with other investors. They frequently employ so-called defense advisers to game out their response should they find themselves in an activist's crosshairs, and the proliferation of informal truces is a sign they are growing more sophisticated in dealing with the challenge.

Activists, for their part, are grappling with subpar returns and eager for the increased flexibility and opportunity to tout a quick victory that the new arrangements afford. An activist hedge fund index tracked by HFR posted a return of 12% through the end of October, compared with a return of more than 23% for the S&P 500.

The recent surge in non-settlements fits with a broader narrative in which Elliott and some of its rivals have worked to soften their images as they seek to be viewed more as partners than antagonists.

"There's been a shift toward engagement for some of the larger activists, " said Lawrence Elbaum, co-head of law firm Vinson & Elkins LLP's shareholder-activism practice. "These funds want to be looked at as sophisticated investors that reluctantly turn to the activism playbook."

The new approach carries risks. A formal settlement is a legal commitment and without one there is no guarantee one of the parties won't go back on its promises. Investors with long track records who are well known to board members, executives and advisers are more likely to be trusted with a nonbinding agreement than newer, smaller players, these officials say.

And those changes companies do make may be less consequential than the ones activists have ushered in over recent years -- to the benefit of U.S. corporations, many executives acknowledge.

In early September, Elliott sent a pointed 23-page letter to AT&T, challenging its longtime Chief Executive Randall Stephenson's acquisition strategy, saying the telecommunications giant has suffered from "operational and execution issues" over the past decade and encouraging it to shed assets. It was one of the biggest activist campaigns in history, given AT&T's market value of nearly $300 billion.

AT&T reached a resolution with Elliott just seven weeks later, on the eve of an event to unveil new details of its much-anticipated HBO Max video-streaming service. The company promised to "refresh" its board by replacing retiring directors in the next year and a half. It also outlined a three-year capital-allocation plan that calls for higher dividends and more share buybacks, and pledged to actively review its portfolio and not make any large acquisitions in the near future.

Much of that the Dallas company already planned to do. Elliott said it approved of the plan and had worked closely with AT&T to develop it.

Write to Corrie Driebusch at corrie.driebusch@wsj.com

(END) Dow Jones Newswires

November 17, 2019 10:47 ET (15:47 GMT)

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