Summertime shake-up in the proxy business
The incestuous world of proxy solicitors is undergoing one of its regular paroxysms. As with the last two such occasions in 2003 and 2008, there’s big money chasing a potentially big payoff. Issuers who ride out the bumps can hope for an expanded range of services, priced more competitively.
The latest transformation shares some characteristics with the one that took place in 2003, when Computershare, the giant Australian transfer agent, bet on the post-Sarbanes-Oxley governance boom and bought Georgeson. It also has a lot in common with the upheaval in 2008 when the Riverside Company, a private equity group, backed Sage’s acquisition of DF King & Co in a transatlantic roll-up of several IR-related companies now under the moniker King Worldwide. Around the same time, Long Island’s wealthy Catacosinos family set up Laurel Hill Advisory Group with a core of former Georgeson veterans. At both DF King and Laurel Hill, backers expected rising demand as companies braced for a wave of shareholder activism.
Smacking of déjà vu, this summer’s shake-up featured an Australian transfer agent with global aspirations, private equity money and those same ex-Georgeson executives. The Link Group, having bought American Stock Transfer (AST) in 2008, scooped up the whole Laurel Hill proxy bunch, which had just left to set up Phoenix Advisory Partners. Almost at the same time, Alliance Advisors, a five-year-old proxy management firm, pushed into US corporate proxy solicitation with key talent from the Altman Group, which has backed out of the business.
Phoenix, Alliance and the coterie of established proxy solicitors expect a boost in business from the Dodd-Frank bill’s governance overhaul covering say on pay, proxy access and bonus clawbacks. They’re also betting on changes to NYSE Rule 452 forcing many companies to more assiduously court proxy voters. In tandem, the SEC’s review of proxy mechanics could blast open communication lines between companies and retail investors, particularly those elusive high-net-worth individuals. Then there’s the overdue bounce in global M&A, which will spawn lucrative transaction work for proxy firms.
Some have called this summer’s shuffle ‘chaos’. For others, it’s just a game of musical chairs. Phoenix president John Siemann, who led his entire crew of 14 from Laurel Hill into the arms of AST, insists the evisceration of his old employer was merely an orderly change in equity partners, with nearly all his old proxy clients signing on to Phoenix. Laurel Hill has begun patching the hole Siemann left with the hiring of Georgeson vets Sam Berrios and Wilton Davila, and has more new talent on the way.
There is further disorder in the industry, though it’s mostly kept quiet: the business boomlet from tricky director elections and compensation questions was expected for the 2010 proxy season, so last year some proxy firms invested heavily in new people and new services. But hardly anybody had a good spring this year, leaving parts of the industry mired in red ink.
‘It felt like Y2K,’ Berrios says of the proxy season anticlimax. ‘Some proxy solicitors advised issuers to prepare for the worst. They geared up, set huge budgets and made a lot of phone calls, but it turned out they didn’t need to.’ Berrios says he expects the storm to build in 2011 and 2012.
Sometimes bigger is better
David Drake, president of Georgeson, voices what many in the industry are shaking their heads over: there’s irony in Siemann and his gang winding up under a large Australian-controlled transfer agent when that’s exactly what they said they were fleeing when they left Computershare-owned Georgeson in 2008.
Siemann is unapologetic. ‘The trend is toward providers like AST or Computershare, which can offer a broad range of services and global reach,’ he says. He and his cohorts may have chafed under Computershare before they left to start Laurel Hill but, although it’s owned by AST, Phoenix has a separate budget and separate headquarters. ‘We have the freedom to be nimble but we benefit from the deep pockets and broad service spectrum of AST,’ Siemann says.
Besides having its focus spread across too many businesses, another qualm about a transfer agent parent is client conflict. Bruce Goldfarb says that was one of the key reasons why he founded Okapi Partners in 2008 after leaving Georgeson.
‘There were situations where I personally was unable to undertake an engagement because of a conflict,’ Goldfarb says. ‘I think there will continue to be significant demand for proxy solicitation firms that can provide strategic advice without regard for conflicts.’
Georgeson shrugs off any problems with client conflict and says the benefits of combining a transfer agent and a proxy solicitor have been proven. For example, when Georgeson is retained as the information agent on a tender offer, Computershare is often brought in as the depositary. ‘The seamless nature of the firms working together has benefited a lot of our clients on M&A deals,’ Drake concludes, citing Kraft’s acquisition of Cadbury as one example.
Another edge for chimeras like Computershare and AST is foreshadowed by the SEC’s ongoing review of proxy plumbing. If the commission goes all the way in eliminating the objecting beneficial owner/non-objecting beneficial owner distinction and opens up the business of identifying beneficial shareholders and distributing proxies, there would be vast scope for transfer agents and proxy businesses to work together. ‘It would be cost-effective for clients but also an attractive business opportunity for us,’ Drake says. ‘We would be very well positioned.’
Dialing for dollars
The proxy industry’s reshaping has already made competition more cutthroat compared with the early days of the industry. One disgruntled independent calculates that in real dollars, proxy services now cost 60 percent to 70 percent less than they did 30 years ago.
William Catacosinos, Laurel Hill’s founder and CEO, says industry consolidation is making proxy services into a commodity. ‘That’s not necessarily good for clients. We’re hearing that service is degrading,’ he laments. ‘If you’re going to do proxy, you need strong infrastructure to support it. Given that it has become a commodity, you have to build your customer base significantly to cover costs.’
The biggest firms, which also do mutual fund proxies, have call centers with upwards of 1,000 seats and huge computer systems to go along with them. Peter Harkins, president and CEO of DF King, says being part of King Worldwide has bolstered his firm’s IT infrastructure and enabled better use of other advanced technology, which is where corporate proxy solicitation is headed.
‘The shareholder ownership profiles of companies around the world are becoming more diversified and layered,’ he explains. ‘That means data – lots and lots of data, and million-dollar mainframes able to process it all. It’s a seven-figure capital expenditure budget just to play in the proxy space.’
Drake believes there will continue to be new offshoots and startups, but not always to clients’ benefit. ‘Anyone can hang up a shingle and start up a proxy firm,’ he says. ‘But companies have to make sure their annual meeting processes will be safe from disruption and their shareholder records protected, especially in a time of incredible change because of the Dodd-Frank bill, including proxy access. There should be a premium assigned to the stability of a proxy firm, its infrastructure and its depth.’
One entrepreneurial firm vowing not to be mown down by the big guns is Canada’s Kingsdale Shareholder Services, which sprang up in 2003. Having stared down Laurel Hill’s Canadian foray, Kingsdale is now also confronted with Phoenix and its parent AST’s acquisition of CIBC’s Canadian issuer services business. ‘I’m an independent guy with global aspirations, and there will always be room for an independent firm in the proxy space,’ says Kingsdale’s founder, Wes Hall. Having opened offices across Canada, Hall promises to expand around the globe within three to five years.
David Chase Lopes, yet another former Georgeson executive, was recently hired to lead M&A in the EMEA region for Australia’s Orient Capital. Orient, like AST, is owned by the Link Group, giving Siemann’s Phoenix an established sibling in international shareholder ID and proxy solicitation. ‘A global footprint is important because a lot of the advisers giving out the work are also global,’ Chase Lopes says. ‘We’re seeing larger and larger deals, and it can be hard to get through the door unless you have global reach.’
So while AST’s upstart Phoenix division, as well as Computershare’s Georgeson, King Worldwide’s DF King and all the independents like Okapi, MacKenzie Partners, Innisfree and Morrow & Co face tough sledding in the US because of the Dodd-Frank bill, their next challenge may be nothing short of world domination.