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Back to the Future: The New Corporate Raiders

A rise in shareholder activism poses questions for companies with lagging share performance.

Fortnightly Magazine - September 2006

of the past year is illustrative:

• In April of last year, KMG Corp. agreed to a $4 billion share repurchase program and separation of some of its business units after an investor group led by Carl Icahn tried to take control of KMG’s board. Last month, KMG agreed to be acquired by Anadarko Petroleum for $70.50/share. Considering that KMG shares were trading at around $30 when Icahn & Co. got involved, shareholders didn’t fare too badly.

• Houston Exploration also was recently targeted by one of its shareholders, Jana Partners. Some speculate this was more of an attempt to “stir the pot” than a serious offer, which points out a “be careful what you wish for” risk.

• A few months ago, Sandell Asset Management, a New York hedge fund, informed SUG that it had acquired just under 10 percent of SUG’s outstanding shares and sent a letter to its board suggesting a number of strategic actions to realize value in the company’s assets not reflected in the stock price, including formation of an MLP to house qualified assets, a sale of the remaining gas utilities, and an increase in the cash dividend. Failing that, Sandell suggests that SUG put itself up for sale, although no actions have been taken by the company with respect to Sandell’s suggestions.

• Recently, Mirant Corp. bowed to pressure from two large shareholders, aptly named Pirate Capital and Omega Advisors, and announced a 43 million share buyback via a Dutch tender. The share repurchase is expected to consume approximately $1.25 billion in cash— a sharp reversal of course for Mirant, which only recently had backed down from a spurned hostile takeover bid for rival generator NRG.

• Duquesne Capital, another New York hedge fund, pressured Exelon earlier this year to walk away from its planned acquisition of New Jersey-based PSEG as the breakup fee provision of the merger agreement lapsed in June; Exelon was not so persuaded.

Clearly, the shareholder returns from these actions run the gamut, and the recently announced initiatives cannot yet be judged. At the same time, there has been a lot of mergers-and-acquisition activity in energy, both upstream and down. Chesapeake, ConocoPhillips, and Anadarko all have announced big acquisitions, and deals are coming left and right in utility- land, with Duquesne Light Holdings, Cascade Natural Gas, and Peoples Energy all having agreed to be acquired within the past few months. And, of course, there are persistent rumors that other energy companies likely are takeover targets.

Rethinking the Hybrid Structure

We continue to believe that companies with diverse holdings should reconsider a combined structure. Duke Energy’s recently announced plans to separate its electricity and natural-gas pipeline businesses recognizes that the “convergence” model of the 1990s did not pan out, and further acknowledges that the individual businesses likely are worth more as stand-alone enterprises.

The rising risk profile and increased price volatility associated with the commodity side of the energy business augurs for a further separation of the unregulated commodity-centric and regulated utility businesses. Owning gas exploration and production in a utility structure