Takeover Defense and Hostile M&A at CoreLogic (CLGX): Gamesmanship, Special Meetings, and Poison Pills

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An interesting proxy contest is happening at CoreLogic (NYSE: CLGX).

Housing is one of the few bright spots of the Covid economy with interest rates hovering around ~3% for 30-year loans. CoreLogic is positioned to take advantage of those low rates because its revenue is tied to mortgage origination volumes, so with origination especially high right now[1], CLGX is hovering around 52-week highs. It is one of the few companies that actually has a V-shaped recovery[2], so with acquirers looking for targets, its no wonder that a bidder should come knocking at its door. What is a twist is that the offer turned hostile, since hostile offers compose only ~10-15% of public M&A.    

Who are the acquirers? Senator Investment Group, an occasional shareholder activist[3], and Cannae Holdings, a diversified holding company. They teamed up to make an unsolicited offer to Corelogic on June 26 at $65.00 per share. At the time of the offer they held 10% of the outstanding common of Corelogic[4]. The offer came in the form of a public bear hug letter to the board, which was filed with their initial 13D a few days later.  

After a company receives a hostile offer it typically does one of two things. It can enter into negotiations with the offerer, or it can adopt a poison pill, thereby eliminating the ability of an acquirer to acquire economic and actual ownership of the company, without first engaging with the board. Now these two things aren’t mutually exclusive, you can also adopt a pill and enter into negotiations. But by adopting a poison pill, the target sends a message to the acquirer that this will now be hostile, and that sends a message to the market. Most would-be serial acquirers don’t like to be associated with hostility (see Blackstone, KKR, Apollo, etc.)

The hostile acquirer then has a decision to make after the poison pill is adopted. If it’s a strategic, it might drop the bid deciding that the perception of being hostile is not worth the price[5]. If it’s a financial buyer it might not – although reputation is important (see above). If it chooses not to drop the bid, it can either try to raise the purchase price and appeal to shareholders to put pressure on the board (the friendly way to do a hostile act[6]), or it can try to dismantle the poison pill by launching a proxy contest for board seats (the hostile way to do a hostile act[7]). But if the acquirer tries to dismantle the pill, the acquirer would have to win at least a majority of the board seats in order to vote on a resolution to redeem the pill. That’s not necessarily an easy thing. A proxy contest takes time, money, and timing and takes the hostility to another level.  That last part, timing, is where the cleverness of CoreLogic’s defense comes into play.

With respect to timing, CoreLogic’s 2021 annual meeting probably wouldn’t have been held until late April 2021, meaning that an offerors hands (on June 26) would be tied for almost a year. Time kills deals, so that’s a non-starter. For one, there are alternative investments to be had and for two, if you want to capture more of housing’s incredible upside (they already had a 15% stake) that is hard to live with.

So, what do the acquirers look to do in this instance when timing is not on their side?  Well, they looked at the Company’s bylaws and saw that there was a way to bypass timing – by calling a special meeting. Essentially, the Company’s takeover defenses were vulnerable from the start since the bylaws allow10% holders (the acquirers had that in common stock) to call a special meeting to remove the board and replace them with their own.

Why didn’t the Company just amend their bylaws to increase the threshold to call a special meeting? Well, because CoreLogic had a much more elegant and clever solution. They adopted a poison pill, and issued a minor number of shares to dilute the acquirers’ stake from 10% to 9.999%, just below the pill’s 10% threshold[8]. If CoreLogic hadn’t issued those shares, the acquirers would have retained the ability to call a special meeting, without first having to do a solicitation to get the 10% threshold to actually call the special meeting![9] Why is that the case? Because bringing another shareholder into the group (or buying the additional shares) would trigger the 10% threshold, while soliciting another shareholder to call a special meeting would be specifically excluded from triggering the pill.

So, what did that action ultimately do? It bought the target some time by forcing the acquirers to file solicitation documents with the SEC and it forced the acquirer to spend more money to prepare those filings. Sometimes buying time does nothing for you. In this case, timing was important because mortgages were on the upswing (in June/July). As someone looking at this from the outside, I can only speculate that the timing was also important for the target to reach out to their shareholders and shore up their narrative. Something like “stay the course, upside from here on out”. And in hindsight that appears to be good advice as shares are now trading at $69.20.

Of course, the acquirers are also holding a great hand. They already hold a 15% stake (the extra 5% is economic interests in the form of swaps) with their cost basis way below the current trading price[10] and the stock price has jumped. How much is due to the offer, and how much is due to CoreLogic and housing is difficult to parse, but either way it is looking good right now. Remember, the point of shareholder activism is to see a pop in price, so winning or losing a proxy contest doesn’t really matter. That is just a means to an end.

So in the end, we may be asking ourselves whether this is shareholder activism creating the perception of M&A to create a pricing pop, or real hostile M&A. Either way, we have an interesting shareholder meeting coming up and it will be interesting to see who ISS and Glass Lewis side with (who are themselves under more pressure and scrutiny).

[1] When I say right now, I mean around this time. The battle originally started in late June.

[2] With respect to stock price, $50.37 on March 6 and $51.79 on June 22.

[3] Quentin Koffey, formerly of D.E. Shaw, and Elliott Management. History includes investments at Lowes and Bunge.

[4] Why does the letter say 15%? Because 5% is in the form of economic interest and not common stock.

[5] That’s not always true. See Kraft Foods’ acquisition of Cadbury that forced the UK to overhaul its legal framework.

[6] Like offering your hand after knocking an opponent down.

[7] Like kicking an opponent after knocking said opponent down.

[8] There’s a 20% exemption for passive investors which doesn’t apply to the acquirers.

[9] This is interesting because in a lot of pills there will often be a grandfathered person who will be allowed to maintain ownership even if their ownership is above the threshold, so long as they don’t add one share above that amount.  

[10] The disclosure is a little unusual, usually its broken out by common and derivatives, here they just aggregated the purchase price.