Angels Playing Devil’s Advocate

Jim Rossman is managing director of the corporate preparedness group at Lazard, the M&A advisory and asset management giant. A former M&A lawyer at Cleary Gottlieb Steen & Hamilton, Rossman talked with Global Finance about how to fend off hostile takeovers—mainly in the US, but also in Europe and emerging markets.

Global Finance: Do you advise corporate boards on how to become activist-proof?

Jim Rossman: Yes. Activists, particularly the more aggressive ones, use the element of surprise to throw you off balance. Sometimes they’re hoping you’ll say something that’s very revealing or stake a position that they can react to.

GF: Can you give us an example?

Rossman: Carl Icahn called the CEO of eBay on a Friday and said, “Let’s have a gentleman’s agreement. We won’t go public with this unless we give each other a 24-hour notice.” By Sunday morning, Icahn was on a TV show talking about his great new technology idea. He didn’t name eBay, but we were like, “You idiot. No one ever makes a deal [like that] with Carl Icahn. That’s insane.”

GF: How can a company prepare itself for such an attack?

Rossman: You should have a team of advisers whom you have selected in advance. If the activist calls at 4:30 on a Thursday, you want to have that team convened by 5:30. You can’t run a beauty contest and find a team. Because by 6:30 you are calling the chairman of the board, saying, “Oh my God, Carl Icahn just called. He’s not too happy. He thinks the board is lazy and complacent—and he wants to be on the board. He wants to know our answer by Monday. And he told us ‘By the way, I bought 9% of your company, and I’ve talked to your other shareholders. Together we represent about 30%. You’re dead already. Just do what I tell you.’”

GF: That’s a lot of information to absorb at once.

Rossman: Yes. So the first element of preparedness is having the team ready. The second key element is simulating a white-paper attack. After the activists say the shareholders hate you and they want a board seat, they say, “Oh, by the way, I wrote this little paper about you. I’m going to show it to the chairman of your board now, and I’m going to give it to the press tomorrow.”

GF: How do you prepare in advance for a white-paper attack?

Rossman: As a company, you should do your own self-evaluation. It’s easy to say, “Oh, break up AIG into three pieces.” But it’s pretty hard to make the intellectual case. We offer that service. We think about the events that might change a company and why it’s underperforming its peers. Then we write the rebuttal, which is really key.

GF: Do you always argue against the activists?

Rossman: No. We might say, “You’re right. This dynamic is really hurting us. However, we don’t think we should just break the company in two. Instead, we’ve got this plan.”

GF: Are activists taking advantage of low stock prices?

Rossman: There were 165 activist attacks a year for the last two straight years, and there were 44 CEO changes last year due to activist shareholder engagement. But the bear market is going to force a lot of activists to be better at their job. Some of them got pretty badly bruised last year. The current market is more volatile. We’ll see how this year goes.