Demand for protection against U.S. equity selloff soars to record

Demand for protection against U.S. equity selloff soars to record

Fri, Jan 24 2014

By Angela Moon

NEW YORK (Reuters) – Demand for protection against a U.S. stock-market selloff soared on Friday as traders scooped up call options in CBOE Volatility index VIX , Wall Street’s favorite index of anxiety.

January call options – contracts betting on the rise of the underlying security – on the VIX this week rose to a record 8.4 million contracts at the Chicago Board Options Exchange (CBOE.O: QuoteProfileResearchStock Buzz) while the index itself jumped nearly 30 percent on Friday and about 44 percent for the week.

Since the VIX usually moves inversely to the performance of the S&P 500 stock index .SPX, traders often use the index to hedge against a market decline.

Reflecting the surge in demand for short-term protection, the spread between the VIX and three-month VIX futures briefly turned negative on Friday. Generally, due to the mean-reverting nature of the VIX, when the VIX is low, VIX futures trade at a premium.

“We haven’t had a correction for a while now, and while I think the market is overreacting a bit, concerns about China and other emerging market equities and currencies are weighing,” said Randy Frederick, managing director of active trading and derivatives at Charles Schwab in Austin, Texas.

“Looking at the implied volatility of VIX calls versus VIX puts, it’s relatively cheaper to buy VIX calls now so it’s a good time to buy (VIX calls) if you think it’s headed higher.”

Wall Street was closing out its worst week since June 2012, weighed by concerns about growth in China that fed a broad selloff across the globe, but particularly in emerging markets. The S&P 500 is down 2.3 percent so far this week.

Reflecting the recent bearish sentiment in equities, fund managers cut their net long positions in S&P 500 futures contracts in the week ended January 21 by 1,024 to 224,255, U.S. Commodity Futures Trading Commission data showed on Friday.

While the VIX is at its highest since October, it is still way below its 20-year average of 20.50.

Along with the spike in VIX, VIX-related exchange-traded products also jumped including the iPath S&P 500 VIX short-term futures exchange-traded note VXX (VXX.P: QuoteProfileResearchStock Buzz) and ProShares UltraPro Short Russell2000 exchange-traded fund UVXY (UVXY.P: QuoteProfileResearch,Stock Buzz), up 9.8 percent and 19.9 percent, respectively.

The iPath VIX ETN tracks activity in near-term futures contracts and is a way to bet on volatility without actually buying options. With more than 47 million shares traded Friday, it was the third-most active exchange-traded product on U.S. exchanges.


Earlier this week, a trader was reported to have paid 90 cents for 90,000 May expiration call options at the 23 strike on the VIX index. Considering that the index was below 13 at that time, the trader was betting the VIX to roughly double by May. On Friday, premiums on the May call options were centered around $1.10 per contract.

“While that’s a decent gain from its purchase price, we can’t help but feel as though traders are still assigning relatively low likelihood to a sustained rebound in volatility,” said Andrew Wilkinson, chief market analyst at Interactive Brokers in Greenwich, Connecticut.

“Maybe that is because in the last year the VIX index has only traded above a 20 reading on about five occasions. And so while the market may be running scared again today, option traders are not yet willing to throw in the towel on the bull market,” he said.

Other notable trade on the VIX for the day was a 33,000-lot of Feb 19 calls for 59 cents, according to WhatsTrading.comoptions strategist Frederic Ruffy. The most active options were the Feb 14 puts, Feb 22 calls, and Feb 16 calls.

As of the afternoon session on Friday, 460,000 calls traded, exceeding the recent average daily volume of 454,000 contracts, while 190,000 puts traded, compared to the daily average of 140,000 contracts.


U.S. pensions’ funding gap closes, driving corporate profits

U.S. pensions’ funding gap closes, driving corporate profits

Fri, Jan 24 2014

By David Randall

NEW YORK (Reuters) – Corporate America is rapidly healing one of the last wounds suffered in the 2008 financial crisis.

Large companies’ pension plans are reporting among their best returns on record in 2013, dramatically closing funding gaps that had opened up because of losses in the 2008-2009 stock market collapse, and as government bond yields sank.

All told, companies in the S&P 500 saw an aggregate improvement of more than $300 billion in their pension plans, a gain that brought assets to around 93 percent of expected obligations, according to International Strategy & Investment, a New York research firm. That is a robust recovery from 2008, when they hit an all-time low of only 70.5 percent.

For investors, the performance of corporate pension plans is a small but under-appreciated side effect of the bull market that has now lasted for nearly five years. It will free up corporate cash for dividends, stock buybacks, and new investments, while helping to drive earnings growth, which could give a further nudge up to stock prices, analysts say.

Some companies may also see upgrades to their bond ratings, lowering their future borrowing costs.

David Zion, an analyst at ISI who co-authored the report, estimates that the strong performance of pension plans will save companies in the S&P 500 a total of $26 billion in the current fiscal year, resulting in a 1.6 percent boost for the 2014 earnings per share of the index. Analysts tracked by Thomson Reuters currently expect earnings per share to rise 10.7 percent this year.

The benefits mostly accrue to older industrial companies, or those who were traditionally unionized, as some of their workers and many of their retirees tend to have the more generous defined-benefit plans that are directly funded by the companies. The newer technology and service companies, who tend to rely on 401K plans that are largely the responsibility of workers to fund, are mostly not affected.

Some companies reporting their fourth-quarter earnings in the past few days have already said their results are benefiting from reduced pension costs.

Business jet manufacturer Textron Inc, for instance, saw its shares jump to a five-year high Wednesday after its earnings beat analyst estimates. Along with a rebound in the business jet market, the company is riding the performance of its pension plan. In 2010, it contributed about $417 million to the plan as its funding ratio fell to 77 percent, while in 2014, it expects to contribute just $80 million – a decline of nearly 81 percent. And now its pension plan is funded at an estimated 101 percent level, according to ISI.

The same day, AT&T Inc said it expects to record a pre-tax gain of about $7.6 billion in the fourth quarter from its pensions and post-employment benefit plans. A day earlier, Verizon Communications Inc reported fourth-quarter 2013 earnings of $5.07 billion, $3.7 billion of which was due to increases in the value of its pension and other benefit plans.

“These kind of cost-savings over a three-to-four year span don’t happen often,” said Eugene Stone, chief investment strategist at PNC Asset Management, referring to the decline in pension costs at companies since the end of 2009. “This is going to provide a tailwind to earnings for 2014 that hasn’t been there lately,” he said.

The gains have largely come from the stock market. The S&P 500 soared 32.4 percent, including dividends, last year, and has

climbed nearly 170 percent since its low in 2009.

In addition, the so-called discount rate – which serves as a proxy for the interest rate a company could expect on a bond today to fund its future obligations – increased as the yield on the 10-year Treasury note rose off of historic lows in the second half of last year. A higher discount rate means that companies do not have to contribute as much to pension plans.


Gains in defined benefit plans had an impact on many S&P 500 companies in 2013, ISI analyst Zion said. Only 58 companies in the S&P 500 now have pensions that are less than 80 percent funded, compared with 197 a year ago, and some recorded pension gains that totaled more than 10 percent of their market caps.

United States Steel Corp, for instance, saw its pension assets rise more than $1 billion (not including the company’s contributions), an improvement that brought its pension plan to a 92 percent funded level. The gain was the equivalent of almost 31 percent of its market value at the end of 2012 of $3.4 billion. The Goodyear Tire and Rubber Co, Northrop Grumman Corp and Owens-Illinois Corp saw gains of 15 percent or more of their end-2012 market caps.

Because most Wall Street analysts typically focus more on a company’s ongoing business than its pension obligations, those cost savings could result in earnings surprises, Zion said.

US Steel, for example, should see a benefit of 74 cents in earnings per share directly from the improvement in its pension funding, a level that amounts to 65 percent of consensus estimates of $1.15 per share for 2013, Zion said. Alcoa Inc, meanwhile, should get a pension benefit of 16 cents per share, a level that equates to 40 percent of consensus estimates of 41 cents per share. It is unclear how much of the benefit has already been factored into those earnings estimates by analysts.


To be sure, few investors say they would invest in a company simply because its pension costs are falling.

For example, Matthew Kaufler, a co-manager of the $1 billion Federated Clover Value Fund, has held a position in Macy’s Inc for several years. He was pleased to see the department store chain announced on January 8 that it had decided to forgo a $150 million contribution to its pension plan in the fourth quarter because of better-than-expected returns.

The pension plan savings “was a positive but in the list of positives it was not at the top,” Kaufler said. “People fundamentally want Macy’s to sell lots of clothes and home goods. That’s what drives the business, not the pension plan performance.”

But higher funding levels do make these companies seem safer bets over the long run because it means their balance sheets look better, portfolio managers say.

“For so many of these companies, the magnitude of the downturn was so great that they were kicked in the shins,” said Scott Lawson, an analyst who works on the $178 million Westwood LargeCap Value Fund. “Now, with the plans back to their prior funding levels, it lowers the risk profile.”


Several companies are heading into 2014 with pensions plans that are in dramatically better shape than a year ago. Harley Davidson Inc, for example, saw a 36 percentage point gain, to 118 percent of obligations, in its funding levels over the past twelve months, according to ISI estimates.

Yet despite the gains in pension assets, companies may still face some risk in the long-term, analysts say. Any sudden reversal in the stock market is one concern. Workers living longer is another.

A 60-year old worker who retires today is expected to live 26.7 years longer on average, a 1.8-year improvement over previous lifespan estimates released by the Society of Actuaries in 2000. That nearly two year increase will result in a 6 percent increase in pension obligations, said Karin Franceries, an executive director at J.P. Morgan Asset Management.

In the past, companies often cited overfunding as a reason to terminate their pension plans. More recently, companies such as General Motors Co and Ford Motor Co, cut their pension risks by offloading their plans onto insurance companies, which then offer annuities to plan participants.

Now, though, many companies may find it more attractive to keep their own plans, said Zorast Wadia, a principal at actuarial consulting firm Milliman, which produces an annual study of pension funding. Insurance companies typically want plans to have a funding rate of 115 percent or more before they will take on their risks, Wadia said.

“A lot of these companies are going to find it’s cheaper to keep (it),” Wadia said, referring to the pension plans.

Equities now typically make up about 40 percent of plan assets, though some companies, such as Warren Buffett’s Berkshire Hathaway Inc, had as much as 72 percent of pension plan assets in stocks as recently as 2012.

“These plan sponsors are coming off the best year in their careers, and I expect many of them are going to be happy to take some risk off the table,” Wadia said.

It may be the final paradox of a 2013 market rally that few saw coming: stocks have helped pension plans so much that they decide to sell them and buy bonds instead.


Big gains for natural gas fuel big losses for hedge funds

Big gains for natural gas fuel big losses for hedge funds

Fri, Jan 24 2014

By Barani Krishnan and Jeanine Prezioso

(Reuters) – Natural gas was the biggest gainer among commodities last year but the hedge fund that has historically led gains in the space had its first losing year, and many others were down double-digits after being on the wrong side of the market.

U.S. gas prices gained more than 26 percent in 2013, the largest rally in eight years as brutally cold weather boosted gas demand. Prices rose, and toward the end of the year, the market saw wild swings in the spread between the March and April gas contracts.

Investors suspect that natural gas hedge funds lost heavily on spread trades of the March and April contracts, after miscalculating winter and spring gas demand and price action.

Prominent funds, from the $1 billion Velite Benchmark Capital in Houston to the smaller Sasco Energy Partners in Connecticut, finished the year down about 20 percent or more, according to industry sources and performance data obtained by Reuters.

“It was a tough year without doubt for most of us. The losses were pretty broad-based,” said Kyle Cooper, managing director of research at Cypress Energy Capital Management in Houston, a small $20 million hedge fund that lost 17 percent.

Hedge funds typically do not reveal their book, so it was hard to ascertain the price bets or size of the positions laid out by the gas funds, and the trades where they lost money.

It is also unclear how funds have fared in the first weeks of this year as natural gas futures prices have surged 20 percent so far this month.

Velite ended down 25 percent, according to two sources familiar with its numbers. It was the fund’s first loss since its launch in 2006, and was also the most high-profile loss among gas funds. Velite was founded by natural gas trader David Coolidge, 49, who became the top natural gas fund manager after ex-Enron wunderkind John Arnold retired two years ago.

Velite declined comment.

Big price swings are not unusual in natural gas, but the fluctuating March-April spread caught even the most experienced traders by surprise. The spread, known as the “widowmaker” for sharp losses it has caused in the past, gyrated wildly in a 20-cent range in December as forecasters predicted milder temperatures and then arctic-like chills.

In December, the gap between March and April 2014 gas moved from 4 cents on December 4 to 19 cents on December 12, as funds expected inventories to drain by the end of the winter heating season as Arctic chills swept across the United States.

It then contracted to as low as 9 cents five days later only to blow out to 30 cents on December 23, leaving ample room for winners and losers.


This year, the market has continued to surge, with front-month gas futures hitting above $5 per million British thermal units on Friday, a peak since June 2011, after some of the coldest temperatures in two decades. Next-day gas prices in New York City rose to a record above $100 per mmBtu on Tuesday.

“We’re still having incredible volatility now,” Cooper said. “This means we could have more big losses in January, and possibly some big winners if they got it right.” He declined to say how Cypress had performed for the month so far.

Of last year’s losers, Fairfield, Connecticut-based Sasco reported a 20-percent slide on a capital of $244 million, performance data obtained by Reuters showed.

Houston-based Skylar Capital, which opened with about $100 million at the end of 2012 and is run by former Arnold protégé Bill Perkins, lost about 25 percent, industry sources said.

Copperwood, also in Houston and run by ex-Enron veteran Greg Whalley, declined about 27 percent on a capital of $800 million, two market sources said.

All the funds declined comment.

Compared to them and Velite, the average commodity-energy fund on Chicago’s Hedge Fund Research rose 1.2 percent in 2013.


While the widowmaker was the likely cause of pain for some funds, others prospered by avoiding it.

e360 Power, an energy fund in Austin, Texas, which also trades electrical power, profited on its gas positions by focusing on market fundamentals and “trading around the ranges and the opportunities that were presented,” said James Shrewsbury, principal at the firm. The fund, which manages $170 million, rose 47 percent on the year.

The widowmaker attracts mainly fund managers, said Julian Rundle, chief investment officer at Dorset Asset Management, which allocates money to commodity managers.

Once a fund began losing money on the trade, it was hard for it to unwind without further losses, Rundle said.

“The key point was you had to really pay up to get out of that thing.”


Billionaire Eurnekian Targets Greek Airports Following Crisis

Billionaire Eurnekian Targets Greek Airports Following Crisis

Argentine billionaire Eduardo Eurnekian’s Corp. America holding company is bidding for all of Greece’s airports as the group looks to expand in Southern Europe and take advantage of discount prices after the crisis.

Corp. America’s airport operating unit is bidding for 21 Greek airports, Martin Eurnekian, head of the division and a nephew of Eduardo, said in an interview in Davos on Jan. 22. The group, which is acquiring a 23 percent stake in Pisa, Italy’s airport this week, is also trying to complete a plan to integrate Tuscany’s airports by adding Florence, he said.

“We’re going to be very aggressive on all fronts,” said Eurnekian, 35. “A lot of opportunities have opened up after the crisis.”

Greece, which sparked Europe’s sovereign woes in 2009 and required two bailouts, has seen its economy contract for 21 consecutive quarters. While Greece originally agreed to a goal of raising 50 billion euros ($68 billion) by 2015 through asset sales as part of austerity measures required by the EU and the International Monetary Fund, officials had to scale back their plans as transactions were delayed.

The country plans to sell stakes in two ports in February.

Corp. America, which operates 51 airports worldwide, with the majority in Argentina, is also preparing to bid for concessions in Cuzco, Peru, Barranquilla, Colombia, and the main international airport of Santiago later this year, Eurnekian said. The company, based in Buenos Aires, is renovating the Brasilia airport before the World Cup in June with plans to triple sales through retail by 2015 and make it the main domestic hub of Latin America’s largest economy.

Financing Sources

The Corp. America airport operator unit, which generates as much as $1.2 billion of revenue a year, doesn’t have any financing needs in the bond market for now, Eurnekian said. The company used proceeds from its $300 million bond sale in 2010 to renovate the Ezeiza airport in Buenos Aires and is receiving financing at low costs from Brazilian development bank BNDES, he said.

While the bid round for the Santiago airport would imply higher capital costs than more undeveloped markets, the company is working with a financial institution to look for a local partner and make a competitive bid, Eurnekian said. Chile will require as much as $800 million investment, he said.

A press official at the Chilean Public Works Ministry said no one was immediately available to comment on the bid round.

“Our mandate is to grow in the Americas and Europe with a focus on the Mediterranean,” he said. “We always invest in projects with the goal of maintaining managerial control.”

To contact the reporters on this story: Juan Pablo Spinetto in Davos, Switzerland at; Daniel Cancel in Buenos Aires at

What’s Behind the Emerging-Market Meltdown

What’s Behind the Emerging-Market Meltdown

Emerging-market economies had a brutal week. For years, during the crash and its aftermath, they did well as the advanced economies slumped. Recently, not so much. Many developing countries are seeing their currencies drop and their bonds and equities hammered. Just as the global recovery appeared to be strengthening, a fresh source of instability has presented itself.

The issue now is how to keep the turmoil from derailing the global expansion. In a way, this was not an unexpected development: The recession in the advanced economies caused central banks to push short-term interest rates to zero and buy assets to drive long-term rates down as well. Capital flowed to the developing world in search of better returns. As investors prepare for a resumption of normal monetary policy, demand for emerging-market assets is bound to fall. The question has always been whether this adjustment would be smooth or abrupt.

The problem is that two things are amplifying the adjustment of capital flows: first, the dependence of global capital markets on the dollar, and hence on the policies of the U.S. Federal Reserve; and second, policy mistakes in some of the most-watched developing economies. In the short term, there’s little to be done about the dollar’s destabilizing pre-eminence. But economic reform in some of the main emerging-market economies, desirable in its own right, would help calm nerves.

Paradoxically, the U.S. market crash of 2007 and 2008 entrenched the dollar’s global dominance. Investors sought safety, and U.S. government debt remains the world’s safest asset. Despite tremendous federal borrowing, U.S. debt was soon in short supply. The Fed’s quantitative easing took trillions out of the market, and emerging-market governments bought dollars as a cushion against bad news and to hold their currencies (and export prices) down.

As a result, the emerging markets are unduly sensitive to fluctuations — real or imagined — in U.S. monetary policy. The Fed has recently begun to pivot away from quantitative easing, signaling that the era of extraordinarily loose U.S. monetary policy will come to an end. This is making investors think twice about putting their money in developing countries.

The Fed has begun to taper QE too soon — inflation in the U.S. is still low, and the labor market is still slack. On the other hand, the reduction in the pace of asset purchases is gentle (some would say to a fault), and at some point winding down the Fed’s unorthodox measures was going to be necessary.

The remedy for undue global sensitivity to U.S. monetary policy isn’t a different approach by the Fed; rather, it’s burden-sharing. Eventually, other currencies, such as the euro and the renminbi, need to function alongside the dollar as reserve currencies. In the meantime, better U.S. fiscal policy – – less budget contraction now, when the economy needs stimulus, and more later — would also lighten the Fed’s load.

There’s also more emerging-market governments can do. They should recognize that this week’s financial-market turmoil was, to varying degrees, their own fault. Argentina, which felt the full force of the storm with collapsing bond and equity prices and a steeply devalued peso, is a textbook case of economic mismanagement. No mistake has been left unmade — including cooking the books about the true rate of inflation.

There’s news to concern investors in other and more important emerging markets, too. Growth in China has been expected to slow for years: It now appears to be happening, and the government’s ability to manage the necessary economic restructuring is in doubt. The world’s second-worst-performing currency lately is the Turkish lira: Political protests, corruption scandals and flailing leadership are calling the country’s economic prospects, and its place in Europe, into question. Russia is stumbling. So is Brazil.

We’ll have more to say about these emerging economies in the coming days as we look at the stress points of a post-QE world. For now, suffice to say, the best way for emerging-market governments to restore confidence would be to improve their policies. In this week’s financial turmoil, factors beyond their control were in play, but they aren’t innocent bystanders, and they aren’t powerless.

To contact the Bloomberg View editorial board:

China to Cut Dependence on Coal for Energy as Smog Chokes Cities; China’s coal use accounted for 65.7 percent of its total energy consumption in 2013

China to Cut Dependence on Coal for Energy as Smog Chokes Cities

China plans to cut its dependence on coal as the world’s biggest carbon emitter seeks to clear smog in cities from Beijing to Shanghai.

The nation is aiming to get less than 65 percent of its energy from coal this year, according to a government plan released today. Energy use per unit of gross domestic product will decline 3.9 percent from last year, compared with 2013’s target for a 3.7 percent decrease.

The plan may help President Xi Jinping’s drive to reduce pollution as environmental deterioration threatens public health and the economy. More than 600 million people were affected by a “globally unprecedented” outbreak of smog in China that started last January and spread across dozens of provinces, the Institute of Public & Environmental Affairs based in Beijing said Jan. 14.

“China previously targeted to cut coal consumption to below 65 percent in 2017,” Helen Lau, an analyst at UOB-Kay Hian Ltd. in Hong Kong, said by phone today. “Now they have officially pulled it earlier to 2014, which reflects that they want to speed up restructuring energy consumption and are determined to reduce air pollution.”

China’s coal use accounted for 65.7 percent of its total energy consumption in 2013, the 21st Century Herald newspaper reported Jan. 13, citing an official it didn’t name.

Coal Use

The country’s total energy consumption will rise 3.2 percent to 3.88 billion metric tons of coal equivalent, while output is expected to increase 4.3 percent to 3.54 billion tons, the government plan shows. Coal use will climb 1.6 percent to 3.8 billion tons, while production may gain 2.7 percent to 3.8 billion tons.

The government will encourage imports of high-quality, less-polluting coal and limit fuel with high sulfur and ash content, according to the National Energy Administration plan. Power consumption is expected to rise 7 percent to 5.72 trillion kilowatt hours.

China’s oil demand is forecast to rise 1.8 percent to 510 million tons, while crude output will climb 0.5 percent to 208 million tons. Natural gas demand will increase 14.5 percent to 193 billion cubic meters and production will reach 131 billion, up 12 percent, the NEA said.

To contact Bloomberg News staff for this story: Jing Yang in Shanghai at; Sarah Chen in Beijing at

As M&A business cools, banks warm to activist investors

As M&A business cools, banks warm to activist investors

Fri, Jan 24 2014

By Jessica ToonkelOlivia Oran and Soyoung Kim

NEW YORK (Reuters) – Corporate raiders, long scorned by Wall Street, are gaining new credibility as activist investors, to the point that some investment banks are eager to bestow on them a new title: valued customer.

Big Wall Street banks like Goldman Sachs (GS.N: QuoteProfileResearchStock Buzz) and Morgan Stanley (MS.N: QuoteProfileResearchStock Buzz) are still content to defend corporate America against investors like Carl Icahn and Dan Loeb, who take large stakes in companies with the hopes of effecting such changes as spinning off a division, cutting costs or ousting management.

Protecting the corporate castle is profitable work, part of nearly $70 billion in corporate fees generated by investment banks annually, and big banks fear upsetting their best clients.

Smaller investment banks, though, see a new source of revenue: Working with investors on one corporate campaign could help them win future assignments from another company, which may seek defensive services from banks familiar with the inner workings of activists.

Getting involved in a merger-and-acquisition transaction is also opportune if the target company ultimately pursues a sale of itself under investor pressure.

That’s a potentially attractive proposition for an industry still grappling with slow dealmaking activity in the wake of the financial crisis. U.S. M&A fees last year were still down 27 percent from 2007, at $15.9 billion, according to data from Thomson Reuters and Freedman & Co.

“I keep getting calls from people who want to be in this space. Bankers are trying to figure out ‘how can I charge for working with activists?'” said Steve Wolosky at Olshan Frome Wolosky LLP, a top lawyer for activist investors such as Starboard Value LP.

“Everyone is expecting the big banks to start doing this … the answer as to when is ‘follow the money,'” said a banker at a large firm that has discussed working with activists.

“It’s not that different from what happened with the private equity firms in the 1980s. No one wanted to work with the ‘barbarians’ until they realized it was very lucrative,” he added, asking not to be named because he was not authorized to speak with the media.

Boutique banks including Houlihan Lokey, Moelis & Co and Blackstone Group LP’s (BX.N: QuoteProfile,ResearchStock Buzz) advisory group have worked with investors such as Barington Capital, Starboard and Pershing Square Capital on their activist campaigns.

Evercore Partners Inc (EVR.N: QuoteProfileResearchStock Buzz) and Jefferies LLC are also keeping a close eye on the trend, several bankers said.

Activist investors have become more respectable in recent years after a series of campaigns that brought about changes seen as instrumental to companies’ success.

Loeb, for instance, made a handsome profit for himself and his investors from his two-year crusade to increase Yahoo Inc’s (YHOO.O: QuoteProfileResearchStock Buzz) value. The shares, which were around $13 before got involved, now trade near $40. He was also instrumental in naming former Google Inc (GOOG.O: QuoteProfileResearchStock Buzz) executive Marissa Mayer as Yahoo’s chief executive officer.

On Wednesday alone, Icahn urged e-commerce giant eBay (EBAY.O: QuoteProfileResearchStock Buzz) to spin off its PayPal arm and renewed an attack on Apple Inc (AAPL.O: QuoteProfileResearchStock Buzz) to return cash to shareholders. Loeb revealed a major stake in Dow Chemical Co (DOW.N: Quote,ProfileResearchStock Buzz) and urged the largest U.S. chemical maker to spin off its petrochemical unit.

The number of activist campaigns against U.S. corporations has increased 20 percent over the last few years, according to FactSet Shark Watch, from 198 in 2010 to 236 last year.

While large activist firms mostly have the team and reputation to take on a fight without outside aid, other activists hire Wall Street advisors to render campaigns more believable, to perform financial analysis and sometimes to find potential buyers for the target company.


For smaller or new activist investors, enlisting a bank helps to “show they are serious because they are paying the bank a significant fee to do the work and use their name,” said Gregg Feinstein, head of the M&A group at Houlihan Lokey.

Houlihan, which also defends companies against activist campaigns, represented its first activist publicly in 2011 when it assisted Orange Capital in its campaign against Australian REIT Charter Hall Office Management.

Orange succeeded in its push, which included the sale of its U.S. portfolio. Houlihan is now helping Barington Capital to persuade Darden Restaurants Inc (DRI.N: QuoteProfileResearchStock Buzz) to break up into two separate companies and to spin off its real estate.

Moelis advised Starboard Value during the hedge fund’s push for Smithfield Foods Inc to break itself up rather than sell to Shanghui International Holdings Ltd.

Blackstone will work with corporate clients as well as activists, including Pershing Square, the hedge fund founded by William Ackman. The bank helped Ackman when the billionaire invested in Canadian Pacific Railway Ltd (CP.TO: QuoteProfileResearchStock Buzz).

Some bankers work with activists because they are attracted by the opportunities to build relationships with investors, who often manage to secure board seats at major corporations.

“Many banks use the activist product as a means toward securing future mandates from a corporate client, including takeover defense or ultimately the sale of the company,” said Tom Stoddard, a senior managing director at Blackstone.

Banks working with activists generally charge a flat fee, a percentage of the gains the activist receives if the campaign is successful, and an additional fee if the activist publicly discloses the bank’s name, according to several people familiar with these arrangements.

The flat fees can range anywhere from $250,000 to $1 million, and the percentage of investor gains bankers earn can be anywhere from one to 5 percent, these sources said, asking not to be named because the information is not public.

It is hard to generalize fees because often caps and credits are associated with these structures, one of the sources added.

Banks fending off a high-profile attack can make from a few hundred thousand dollars to $2 million in monthly flat fees, on top of a success fee as high as $7 million to $8 million, according to one industry banker.

“People are willing to pay higher fees if you fight people like Carl Icahn than if you are fighting a new kid on the block,” the banker said.

Such fees are only a tiny fraction of what Wall Street banks generate from deals ranging from capital market transactions to mergers and acquisitions.

Computer maker Dell Inc’s $25 billion buyout by founder Michael Dell last year, for example, created $458 million worth of investment banking fees in 2013, according to Thomson Reuters data.

That reliance on corporations for revenue explains why it’s still rare that banks work with activists.

But as investors become more common in the boardroom and the amount of money activists make grows, more banks may change their view, said Lyle Ayes, managing director and head of shareholder activism practice at New York-based Evercore

(EVR.N: QuoteProfileResearchStock Buzz).

When Evercore brought on Ayes early last year, one of his first mandates was to help decide if the firm should represent activists.

In the end, Evercore decided against the idea. “It’s too close to home for too many of our important clients.” Still, he added: “Evercore asked the question before I arrived, they asked when I arrived and I suspect they will ask it again.”


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