M&A transactions and shareholders: Bristol-Myers case

Shareholders’ voting rights cannot be forgotten in M&A transactions. They are a key element for the achievement of the deals where quoted companies are involved. With this post, we want to highlight a current mismatch in price related to the uncertainty of the will and vote of shareholders involved in a recently announced M&A transaction.

Bristol-Myers Squibb (BMY) began this January 2019 announcing a massive $74 billion acquisition of Celgene (CELG). This makes it the third largest M&A transaction in pharma’s history after 1999 Pfizer/Warner-Lambert and 2000 Glaxo Wellcome/SmithKline Beecham.

If the cash-and-stock transaction closes, Celgene shareholders will receive one BMY share and $50 in cash for each Celgene share. Celgene shareholders will also be remunerated with one tradeable Contingent Value Right ("CVR") for each share of Celgene, which will entitle its holder to receive a one-time potential payment of $9 in cash upon FDA approval of all three of ozanimod (by December 31, 2020), liso-cel (JCAR017) (by December 31, 2020) and bb2121 (by March 31, 2021), in each case for a specified indication.

Based on the closing price on January 25, 2019, of $48,93 BMY per share, the cash and stock consideration to be received by Celgene shareholders at closing is valued at $98,93 per Celgene share and one CVR. Nevertheless, Celgene shares closed at this same day at $87.62. This represents an 11,4% disparity in price and it is mainly caused by the risk of deal-refusal by the shareholders of both or one of the companies.

Though the executives and board of directors of both companies have promoted and supported the transaction, the market is discounting the risk of shareholders’ opposition to go forward. Especially from the BMY side, as they are the ones paying the biggest part of the party.

A significant portion of the $74 billion acquisition value will be funded through a Bristol-Myers Squibb dilutive issuance of new shares to Celgene’s shareholders and the rest will be funded by new debt. When completed, Bristol-Myers Squibb shareholders are expected to own about 69% of the company, and Celgene shareholders are expected to own roughly 31%.

On top, BMY has already confirmed that is taking out a $33.5 billion bridge loan to help finance its purchase of Celgene. This loan, which will be underwritten by Morgan Stanley Senior Funding, Inc. and MUFG Bank Ltd., will rank as the seventh largest bridge facility on record according to Bloomberg.

Once completing the acquisition, Bristol-Myers Squibb will also have to include Celgene’s net debt (which stood at $18 billion at the end of the third quarter) on their new combined balance sheet. After combining this with Bristol-Myers Squibb’s current net cash position and the approximately $35 billion cash acquisition outlay, it leaves the new combined company’s net debt approximately at $48b according to company statements. This makes that net leverage after the deal will be 2.8 times debt to EBITDA and Moody’s and S&P put the company’s ratings on review for downgrade after the announcement.

The purpose behind this transaction is to create an innovative biopharma leader, to enhance leadership positions across the new combined portfolio and to benefit from operational and commercial synergies, according to BMY CEO. Nevertheless, the price divergence shows that investors remain cautious about the outcome of the voting process in each company general meeting.

In the end, shareholders will decide and fears will be either corroborated or vanished.

7 takeaways from the Unilever U-Turn

During these last months, we have followed up the battle for changing the governance and structure of Unilever. This case offers 7 takeaways for IR departments that we think are worth sharing.

The actions carried out by the Unilever board, some UK institutional investors, government lobbyists and the economic and conventional press have seasoned one of the stories that have captured great interest among the specialists in the corporate governance sector during this year.

Unilever is one of the world’s leading consumer goods companies. It was formed by the merge of operations of Dutch Margarine Unie and British soapmaker Lever Brothers in 1930. Since then, the Anglo-Dutch consumer goods group has operated as a dual-listed company. In this case, it consists of Unilever PLC, based and listed in London, and Unilever N.V., based in Rotterdam and listed in Amsterdam. The two companies operate as a single business, with a common board of directors, adopt the same accounting principles and pay dividends to their respective shareholders on an equalized basis. N.V. and PLC.

On 15 March 2018, the board of Unilever announced the intention to simplify the Unilever Group’s dual-parent structure under a new single holding company that should be based in Rotterdam. This process was termed as “Simplification”. The Extraordinary General Meetings to approve this change were planned for the 25 and 26 October 2018.

In Alembeeks Group, as proxy advisors, we analyzed the proposal and advised our clients to vote FOR as we agreed that the proposed structure improved some of the limiting and unequal conditions that are currently applicable to existing Unilever shareholders. We assessed also that the new simpler structure also unlocks certain constraints that might help the company attain a fair value and a greater flexibility to grow in the future.

Nevertheless, after a rebellion lead by main UK based asset managers – Columbia Threadneedle, Aviva Investors, M&G, L&G, and Schroders – the Unilever board decided to U-turn and withdrew the proposal.

In our opinion, Unilever major U-turn offers at least 7 takeaways for IR departments that can be applicable to other companies when thinking about voting major changes:

  1. A “good proposal” may have also detractors. There are several reasons for having opposition in a proposal that technically and according to all the corporate governance handbooks is a clear vote “FOR”. Shareholders base is not uniform, and shareholders' interests are not always aligned. Shareholders may have conflicts of interest in their different investment horizon approaches towards the company. Some proposals may look for a better long-term competitiveness but might imply a short-term setback that some shareholders are not willing to bear. In this Unilever case, the fact of falling from the FTSE 100 had been claimed as a major argument to vote against the proposal among detractors. The fact that the company was gaining flexibility to adapt to the market and improving its governance structure was not considered among those short-term oriented shareholders. Nevertheless, all shareholders have the right to vote according to their own views, which means that all may be right at the same time, voting for different options.
  2. A proposal should have no weak points at all. The weakest side of a proposal will be the most attacked and it will give a strong argument against it. In this Unilever case, it was the pending resolution of the Netherland’s government about the abolition of the dividend tax. It created fear not only among UK shareholders, but it also created rebuke among some Netherland stakeholders.
  3. The content of a proposal must be perfect, but also must be the timing. In this case, the proposal was planned during a period in which the Brexit tensions were in their zenith. It made that this issue fell in the scope of sensationalism. The UK press has found a gold mine with it, and it has been largely commented not only in the economic but also in the yellow press.
  4. Gaining the message battle. Most of the media was labeling the Unilever proposal as a matter of “Going Dutch”, “Leaving UK”, “Moving HQ from London to Rotterdam”, … Efforts must be made to explain the proposal clearly. Sometimes it is difficult to defend some complex arguments against simplistic ones. But this shouldn’t be an excuse. It also may happen that old stories like remuneration or unfinished problems came up and are mixed with the new proposal. In this sense, to face major changes the least unfinished problems, the better.
  5. Earlier shareholder engagement is key to endeavor major changes. By nature, shareholders are not prone to like changes. Engaging shareholders beforehand entails the same efforts than doing it after formally announcing the proposal. In the Unilever case, the board and the management should have paid more attention to this point, as this late withdrawal leave them in a weak stance for the next general meeting.
  6. Pay attention to the stakeholders. Stakeholders may have an indirect but important role in voting. This may come in a wide range of ways depending on the subject. In the case of Unilever, UK fund managers had a special strain from their clients and UK citizens to reveal against the proposal, especially as heated by the UK press. In some sense, this is a good thing, as it probably aligns fund managers vote with the will of their clients. Nevertheless, this ensures a non-robust voting policy.
  7. Beware of voting hurdles. In this case, Unilever needed a 75% majority of the UK votes but also a simple majority among all UK shareholder by number. On the one hand, institutional shareholders are more sensitive to fulfill their fiduciary responsibilities as regulators are pushing in this direction. On the other hand, retail investors are more conscious of their voting rights and their shareholder status than in preceding decades. The era of delegating the vote to the management is over.

In Alembeeks Group, as corporate governance consultants and proxy advisors, we follow up the Annual General Meetings of the listed companies in which our institutional clients invest in and provide them reports to vote in a well-informed manner. We also help listed companies improve their disclosure and corporate governance transparency.

Dual class structure: are we aligned?

The dual class structure is one of the topics that is repeatedly commented due to the Facebook, Alphabet (Google) and other tech companies' exposure in the media. But they are not the only ones.

We would like to share with our readers a recent article by Anita Anand, University of Toronto – Faculty of Law. We have found the article is very educational about the dual class share structures and its pros and cons.

In a typical public company, shareholders can elect the board, appoint auditors, and approve fundamental changes. Firms with dual class share (DCS) structures alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the corporation without providing them with the corresponding power to elect the board or exercise other fundamental voting rights.

This article fills a conspicuous gap in the scholarly literature by providing empirical data regarding the governance of DCS firms beyond the presence of sunrise and sunset provisions.

The summary data suggest that the governance of DCS firms is variable. A large proportion of DCS firms have no majority of the minority voting provisions and no independent chair. By contrast, almost half of the DCS firms have a sunset clause and a majority of independent directors. Finally, just under one-third of DCS firms have change of control provisions over and above existing law.

On the basis of this evidence, this article argues against complete private ordering in favor of limited reforms to protect shareholders in DCS firms including: mandatory sunset provisions, disclosure relating to shareholder votes, and buyout protections that would address weaknesses inherent in DCS firms.

We also share a short article published at Bloomberg, which we find relevant as displays a couple of charts about the evolution of this capital structure during the last decades. We hope you find this information useful.

Alembeeks Group is an independent proxy advisor. Institutional investors need a proxy advisor that can help them effectively and efficiently make informed voting decisions and record keep all their votes.

ESG Ratings - Another way to build up and show a portfolio

More and more asset managers are using ESG values to create universes where they can invest in a sustainable and financially efficient way. The inclusion of these factors has proven to be effective in mitigating risks derived from reputational aspects.

There are currently numerous ESG data providers, a summary of each of which is beyond the scope of this post, but some well-known third party ESG report and ratings providers include: Bloomberg ESG Data Service; Corporate Knights Global 100; DowJones Sustainability Index (DJSI); Institutional Shareholder Services; MSCI ESG Research; RepRisk; Sustainalytics Company ESG Reports; and Thomson Reuters ESG Research Data.

From Alembeeks Group we encourage the reading of the following research, published on Harvard Law School Forum, regarding the return on investment in ESG initiatives. It identifies and analyses five pillars of the business case for corporate sustainability:

  1. Corporate investment in ESG enhances market and accounting performance
  2. Corporate investment in ESG lowers the cost of capital
  3. Corporate investment in ESG is a means of engagement with key shareholders
  4. Corporate investment in ESG improves business reputation
  5. Corporate investment in ESG channeled to product innovation fosters new revenue growth


Find below an interactive chart showing the ESG scores of each of the companies in a given European Equity portfolio. These values are courtesy of Sustainalytics.

Note on Corporate Governance and Institutional Investors

Some months ago Observatorio de Divulgación Financiera (ODF), think tank linked to the Institut d’Estudis Financers (IEF) in Barcelona, proposed us to write a note on Corporate Governance and Institutional Investors.

The note come out this month. Find the link to the publication in Spanish.

More than 800 professionals of the economic and financial sector are subscribed to the ODF newsletter, which has also other interesting publications available.

From Alembeeks Group, we are always pleased to contribute to the promotion of corporate governance applications which foster a better context for the development of business activities and societies.

Why asset managers avoid shareholder engagement, so far

Shareholder engagement is still one of the greatest unknown for the fund industry. The substantial growth of assets managed by institutional investors during the last decades has also meant that this type of investors has become, as a group, the larger shareholders of main listed companies.

Several academics argue that it is the lack of incentives that leads institutional investors to passivity in relation to their role of shareholders in the corporate governance of quoted companies.

The nature of the asset management industry itself leads to a number of reasons that creates low incentives for fund managers to have a greater involvement in the corporate governance of companies or to carry out belligerent actions by voting against of the proposals promoted by the management. That is why, in case of not agreeing with the management of the management, the first option of the institutional investors is the divestment. In the slang of corporate governance, selling a company's shares for discrepancies with the management team is what is known as "voting with the feet."

Their first reason to vote with the feet is because carrying a belligerent activity with the management of a company involves dedicating resources that can benefit many other passive shareholders, thus causing scenarios of "rational apathy" (when private costs exceed to private profits) and the opportunist problem (when shareholders avoid incurring costs in expectation of other shareholders assuming that cost), especially since many asset portfolios are highly diversified by the number of invested companies.

Second reason, the costs of coordination between shareholders are higher when the shareholders are more diversified.

Third reason, belligerent actions may make it difficult for fund managers to gain access to managers, and they may have conflicts of interest in the case of managing pension funds of certain companies or be related to entities with which the companies can have another type of activity.

Fourth, fund managers are specialized in selecting the best investments instead of entering the day to day aspects of corporate governance of companies.

In order to correct this lack of commitment to corporate governance by institutional investors on 17 May 2017, Directive 2017/828 of the European Parliament and of the Council amending Directive 2007/36/ EC with regard to promoting the long-term involvement of shareholders. It proposes a series of measures to be carried out by shareholders, asset managers and intermediaries.

In the next post, I will write about these measures. In Alembeeks VotingLab we help institutional investors to improve their shareholder engagement and to vote in a coherent and informed way according to an ad-hoc voting policy for each manager.

Panelists in Barcelona reporting conference

We were invited to contribute as panelist in the conference on "How to communicate the true value of a company using financial and non-financial information" at the Col-legi d'Economistes the 22nd June, in Barcelona.

The conference was shared by the Managing Director of Caixa d'Enginers Gestió, one of the asset manager companies leading the SRI investment in Spain, and the Head of Investor Relations of Fluidra, a listed company developing sport, leisure and therapeutic applications for the sustainable use of water.

Alfi London Conference 2017

A representation of Alembeeks Group attended the 22nd and 23rd of May at the ALFI London 2017 conference held in Central Hall Westminster.

It was a great opportunity to find most of Luxembourgish service providers, a representation of UK investment managers and listen to top speakers.

Once again, ALFI organization created the perfect environment to match two countries, UK and Luxembourg, with a deep expertise in the asset management industry.

Five Tribes Of Institutional Investors

Since I started in the corporate governance advisory field to institutional investors, I have met fund managers, compliance officers and the many C-suites within asset management companies in Europe. All of them are totally distinct from one another, with their different investment strategies, different ties and different hobbies. Apparently, no special pattern could describe them as a group. None?

Not really. One paradigm I have been able to identify: to which tribe those institutional investors belonged to when it comes to their relationship with Corporate Governance.

In these days, most professionals in the sector tend to neglect that quoted companies are mainly in the hands of institutional investors. As shown in the chart provided by ProxyPulse, the institutional ownership represents more than 62% of the total ownership in those companies where they invest. However, when we speak about their responsibility as shareholders most of them tend to look the other way. Not always, though. To me, this is the moment when asset managers start to reveal their tribal features.

Indeed, as I like to say and inspired by Schumpeter, there are 5 tribes of institutional investors when it comes to corporate governance, each with its own interpretation of what being a shareholder is. The 5 tribes are following:

  • Governance Deniers,
  • Governance Soft-Tickers,
  • Governance Hard-Tickers,
  • Governance Ambassadors, and
  • Governance Sharks.

Governance Deniers, as the name unveils, deny everything. First, they deny their will of being shareholders. They are prone to being known as speculators and generally tend to manage small portfolios. They do not make special distinction between a company, a commodity or an index. For them, a company is just a means to get a gain for their funds. Just a price blinking in a screen, a candle in a chart. Moreover, they surprisingly deny the existence of a legislation when it comes to voting rights despite being regulated! Indeed, they are sure that they have no obligation at all and sleep soundly thinking that it is a responsibility of the custodian to manage “these things”. Fortunately, they are only a few.

The next tribe is an illustrated version of the previous one. Governance Soft-Tickers still consider companies only as an instrument to make their profit. But in this case, they know there are a set of rules for asset managers that mention something about the exercise of voting rights of the companies in which they are investing. For them, these matters are a mere tick in a check list of the auditor. Nevertheless, as the auditor has never asked them about it, they are not interested in corporate governance matters, so far.

Governance Hard-Tickers are generally old Soft-Tickers with either enthusiastic compliance officers or detail-oriented auditors. Most European asset managers place themselves in this group. Hard-tickers know their legislation well. They have prepared their Voting Policy and Voting Guidelines. They publish in their websites information to their investors with regard to the exercise of the voting rights, and vote in some of the main companies they hold their funds in. Of course, they do it just for the record, for the tick in the audit check list. Notwithstanding, in this case, they do comply with the current legislation.

The first tribe that feels comfortable with the shareholder status are the Governance Ambassadors. They know current legislation well and push for improving future legislation. In some cases, like Warren Buffet or Capital Group among others, they are extremely big players, and selling their position (or voting with the feet as known in the governance jargon) wouldn’t be possible, argue naysayers. In other cases, they are forced to invest in certain companies, which is the case of passive indexing managers like Vanguard or BlackRock. However, all of them understand that “the health of public companies and financial markets is critical to economic growth and a better financial future for workers, retirees and investors”, as they claim in the letter where they introduce their “Commonsense Corporate Governance Principles”. Another group of institutional investors within this Governance Ambassadors tribe is comprised of asset managers that have found a gold mine being active and sensitive to ESG, ISR and corporate governance issues because it has been a positive driver for their business in terms of investment strategy and brand positioning, like the Dutch Robeco. Governance ambassadors are in a privileged position. Their size grants them a more direct return in their efforts of acting as active shareholders; but some small and middle sized asset managers are also benefiting from their diligent ownership activity in a social context where investors a more demanding.

Finally, we find the Governance Sharks tribe of institutional Investors. Commonly known as activist hedge funds. They find themselves in their natural habitat when it comes to corporate governance aspects. Their large-size and low-diversified portfolios allow them to gain significant weight in their targeted companies. In this manner, they typically reach to appoint directors or mobilize other shareholders towards the goals they promote within the companies (check this interesting link). In some cases, they have left some skeletons in the way and this explains part of their bad reputation, but in other cases they have improved the results of mismanaged companies where sleepy shareholders didn’t act.

The corporate governance aspects are generally forgotten by institutional investors because the liquidity of the stocks where they invest in allows them to vote with the feet easily. Moreover, the costs of following the governance matters is thought to be too high for the benefits.

However, history has taught us a different lesson many times. The price of not caring about the governance of companies has allowed and encouraged fraud from managers, costing huge amounts of money to investment funds and investors. However hard we analyse the accounts and statements of a company, if the management is not aligned with the shareholders, these accounts could be utterly manipulated, like the Toshiba scandal in 2015, and all our efforts would make no sense.

That’s why, from an institutional investor point of view, caring about corporate governance is not a complement but an important pillar for the safety and growth of the asset management industry.



Alex Bardaji is Director at Alembeeks Group.

Alembeeks VotingLab it is the division within Alembeeks Group that helps institutional investors to participate and track their activity with regard to the voting rights of the companies they hold in portfolio.

Moreover, Alembeeks VotingLab analysts generate ad-hoc reports for each Shareholders' Meeting according to voting guidelines of each client. These reports are the perfect guide to face a Shareholders' Meeting with all the necessary information.

This research service and the consulting services of drafting the Voting Guidelines and Voting Policies are the perfect complements of the VotingCloud platform provided at Alembeeks.

The VotingCloud platform is the platform that allow institutional investors to keep track of their voting activity, one of the currently demands by the internal and external auditors.

Why Corporate Governance Is Important For Economic Growth?

With this post, we would like to share what some of the biggest names in American business published in 2016.

Warren Buffett, Jamie Dimon, and more signed on to a list of suggested changes for companies to adopt, titled "Commonsense Corporate Governance Principles." From Alembeeks, we encourage institutional investors to read the letter.

The group said that companies need to change the way they are managing their boards of directors, reporting earnings, and interacting with major investors.

"Our future depends on these companies being managed effectively for long-term prosperity, which is why the governance of American companies is so important to every American," the group wrote in the letter.

"This diverse group certainly holds varied opinions on corporate governance," they wrote. "But we share the view that constructive dialogue requires finding common ground — a starting point to foster the economic growth that benefits shareholders, employees and the economy as a whole."

Here's the full list of people signing on to the letter:

  • Warren Buffett, CEO of Berkshire Hathaway
  • Jamie Dimon, CEO of JPMorgan Chase
  • Larry Fink, CEO of BlackRock
  • Mary Barra, CEO of General Motors
  • Jeff Immelt, CEO of GE
  • Mary Erdoes, CEO of JPMorgan Asset Management
  • Tim Armour, CEO of Capital Group
  • Mark Machin, CEO of CPP Investment Board
  • Lowell McAdam, CEO of Verizon
  • Bill McNabb, CEO of Vanguard
  • Ronald O'Hanley, CEO of State Street Global Advisors
  • Brian Rogers, chairman and CIO of T. Rowe Price
  • Jeff Ubben, CEO of ValueAct Capital

While the group includes the head of a major bank, industrial leaders, and an activist investor, the letter says they all believe governance needs reform.

From Alembeeks Group, we fully support this dialogue and our Alembeeks VotingLab division helps asset managers to exercise their portfolios' voting rights and own fiduciary responsibilities according to the best practices.