Ready for battle: proxy solicitation firms
There is an old saying in both journalism and politics: ‘It’s not what you know and it’s not who you know. It’s what you know about who you know that really matters.’ This saying applies equally well to corporations during annual meeting and proxy season. Fifteen years ago, no one really talked about shareholder relations as much as we do now and the proxy voting business was a very different beast indeed. But several years of significant regulatory changes have dramatically changed the governance landscape and greatly emboldened the activist shareholder community. Not even the most ardent activist could have realistically envisaged the level of shareholder rights and access that exists today.
With more companies coming under the spotlight of activist investors and facing contested votes for board of director positions, the importance of reliable and creative proxy solicitation services has increased.
Two new proxy solicitation firms hit the scene in February, just in time for the 2008 proxy season: Laurel Hill Advisory Group and Okapi Partners. They joined well-established players including Georgeson, DF King, MacKenzie Partners, Innisfree M&A, the Altman Group, Morrow & Co and BNY Mellon Shareowner Services. Around the same time, Sage Holdings, a new IR firm backed by private equity firm the Riverside Company, bought DF King and M:Communications, a UK-based financial communications shop.
With so many proxy solicitation firms already, the question is whether there is capacity in the market for new entrants. The consensus, at least among proxy solicitors, is a definite ‘yes’.
New kids on the block
Mark Harnett, president and co-founder of MacKenzie Partners, says there’s demand because many small and mid-cap companies facing shareholder activists are engaging proxy solicitors for the first time. The increase in demand will be partially absorbed by the established firms but, with two new players on the scene, companies now have greater choice when selecting a solicitor.
This will present benefits, as competition usually does, but it also makes choosing the right firm more complicated. ‘Competition is healthy,’ says David Drake, president of Georgeson.
Bruce Goldfarb, president and CEO of Okapi Partners, agrees. ‘Companies want to feel they are getting the attention they deserve all the time,’ he points out. ‘With more players in the market, this is more likely to be achievable.’
Paul Schulman, executive managing director of the Altman Group, says ‘the addition of new vendors into the solicitation space is a clear sign the field is doing well. The [new firms] are entering at a good time and will fall into some clients to begin with. The two new firms have made a big splash in the media, which is to be expected. They have picked up a few clients but because they got up and running with the proxy season almost under way, many corporations already had their proxy relationships in place.’
Harnett says the new firms have people with existing relationships and will bring some clients with them. ‘Having said that, and having been involved in starting a proxy solicitation business in the early 1990s, I can say that clients are surprisingly loyal to companies rather than individuals,’ he adds.
It’s all part of the natural cycle of the industry, with proxy solicitors entering or leaving the market every few years, Harnett says. ‘This is nothing new,’ he explains. ‘For a new company, there is a transition. Some clients will come from existing relationships, but it takes a number of years to develop a track record and build a good reputation.’
The cycle now seems to be in a boom. DF King, for one, had record operating results in 2007 and expects no less for 2008. President and CEO Peter Harkins says the firm had been exploring strategic options for more than a year before closing the deal with Sage in February. ‘We considered many alternatives, ranging from the continuation of a stand-alone strategy to an outright sale of King to a strategic acquirer,’ he says.
What role will the new players take, and what segment of the market are they targeting? ‘My sense is that the new firms will be competing for basic annual meeting services,’ says Drake. ‘At least, that’s what we’ve seen so far based on proxy disclosures.’
Laurel Hill insists it is not just taking up excess capacity in annual meeting services. ‘Our model is to be an ongoing, year-round adviser to companies,’ comments Tom Kies, a partner at Laurel Hill. ‘We believe that in the current environment the best results are achieved through educating clients on governance and shareholder issues throughout the year, not just for the 60-90-day period around the annual meeting and proxy season.’
Another partner at Laurel Hill, John Siemann, further explains the new firm’s strategy: ‘We are looking at many of the large-cap firms that we believe want a different type of service, but we are also working with the small to mid-cap companies that are witnessing more shareholder activism and taking their first steps into the proxy solicitation area.’ The Laurel Hill proxy team has already been involved in over 40 solicitations including Goodrich, the Southern Company, Waste Management and Baker Hughes.
Overall, it seems new vendors and a little competition provide corporations with greater choice and the opportunity to match services to their specific needs. For the proxy firms, this situation helps to clarify their mission and refine services.
Choosing a solicitor
While more choice is a good thing, it makes picking a solicitor much more complicated. Drake says companies should carefully research the backgrounds of new proxy firms and ask probing questions: ‘Who are the key advisers and what direct experience do they have in the areas that concern your company, like the threat of a proxy fight or a controversial merger vote? Companies should carefully check client references to ensure a new entrant’s resume is valid.’
The size of the solicitation firm, says Goldfarb, is not necessarily an indicator of performance. ‘Execution is often more important than the number of employees,’ he asserts. ‘Making a lot of calls to investors is one thing, but you have to have the ability to get investors to take action and vote in a particular fashion.’
There will likely be many more proxy fights, shareholder resolutions and tough M&A situations during 2008 and beyond. There have already been more contested situations this year than in all of 2004. What will the future bring for proxy solicitors? Drake predicts that ‘the recent expansion will likely be followed fairly quickly by consolidation.’ Kies thinks companies should think about succession planning at their proxy solicitor. ‘There are a few people who have built these firms up, and the relationships and expertise are centered around a handful of people,’ he notes. ‘What happens if those people leave or retire?’
All these factors highlight the need for companies to regularly and carefully consider their specific situation and the solicitation needs that arise from it. If the spate of deals in the proxy solicitation business is any indicator, there are rough times to come.
The personalities that inhabit proxy solicitation firms are often as fiercely competitive as the firms themselves, with resumes spanning the length and breadth of the industry. Laurel Hill partner Tom Kies’ career has ranged from Morrow & Co to Manufacturer’s Hanover Trust (whose proxy group is now part of BNY Mellon), Shareholder Communications Corp and Georgeson. His colleague John Siemann was COO of the infamous Carter Organization, founded Beacon Hill Partners and worked at Corporate Investor Communications, which was acquired by Georgeson in 2000.
Laurel Hill also has Glenn Keeling, previously president and chief executive of Georgeson Canada; Jon Einsidler, a former hedge fund manager and Georgeson executive; and Tom Cronin, a veteran of DF King, Kissel-Blake and Georgeson.
Behind the new proxy firm is the private equity fund run by William Catacosinos and his sons, Jamie and Billy. Formerly CEO of Long Island Lighting Company (LILCO), Catacosinos senior created Laurel Hill Capital Partners in 1998 to acquire TNP Enterprises in the first ever leveraged buyout of a US electric utility. He has known Kies for two decades, ever since he used DF King to defend against a hostile bid for another company he founded, Applied Digital Data Systems.
Having been CEO of four different companies and a director at numerous others, Catacosinos is said to take far more interest in his new proxy firm than a typical private equity backer would. His sons are also taking an active role, with Jamie handling marketing and Billy, who previously worked at DF King and set up the IR department at LILCO, getting involved with strategy.
The buyout boom of the 1980s and the merger boom of the 1990s both triggered proxy industry shake-ups. In February 2008, after years of relative quiet, there were three announcements: Laurel Hill Advisory Group was launched, Okapi Partners opened its doors, and Sage Holdings bought DF King (along with the UK’s M:Communications). Why now?
1. Shareholder activism
Fights for board seats, opposed mergers and other activist shake-ups are expected to beat last year’s records, despite predictions that a lousy market would derail them. ‘A lot of companies in the small to mid-cap space will be employing the services of a proxy adviser or solicitor for the first time,’ says Okapi’s Bruce Goldfarb. ‘This is due to activist attention shifting down the market-cap spectrum and a changing regulatory environment for smaller players.’
2. Regulatory changes
‘If and when the elimination of the broker discretionary vote for the election of directors happens, it will have a profound impact on smaller companies,’ says Paul Schulman at the Altman Group. ‘These companies are starting to realize this and are seriously moving to understand their investor base and the impact the new rules might have on quorum requirements.’
3. Globalization of markets
Peter Harkins of DF King, which is already the number one proxy solicitor in Europe, says King’s acquisition by deep-pocketed Sage ‘puts us much closer to where we see the market going for firms in our industry, particularly the internationalization of that market.’ He vows to keep King growing in Europe while seeking a stronger toehold in Asia.