How Do You Get a Shareholder Activist to Publicly Reject an Offer That’s ~4x What They Paid? (Or Following a Third-Party Bear Hug Letter, 22NW Trips Over a Poison Pill at HBP)

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If you watch smaller cap activism, sometimes you see some pretty interesting things. The spotlight isn’t so bright[1], the investors aren’t so institutional, and sometimes the gloves come off. Huttig Building Products (HBP) is a $90 million[2] distributor of specialty building products[3] that had something pretty strange happen to it. 22NW is an activist that targets mostly micro-cap (<$250 million companies, >75% of the time) with a focus on industrials, and did something pretty strange at HBP.  

First a little bit of background. 99.9% of the time, poison pills don’t get triggered. They serve as a massive deterrent and that’s the point. A pill getting triggered is bad for the company, and bad for the acquiring person. But, sometimes weird things happen. In 2008, Selectica amended its NOL pill[4] to include a 4.99% trigger. A month later, Versata, a strategic competitor to Selectica, triggered the pill by acquiring more than 4.99% of Selectica. At that point the Selectica Board had a decision to make – the most important being whether to utilize the flip-in mechanism[5] of the pill, the exchange provision[6], or to back down completely. Ultimately, the Board decided to use the exchange provision in its pill (trading one right for one stock, instead of the flip-in) and diluted Versata down to approximately half of its holdings. Since the Selectica pill was triggered 12 years ago, the Versata move hasn’t been repeated because the incentives in that situation were unusual. Selectica was a tiny company and Versata, as a strategic competitor, had more to gain from disrupting Selectica’s business than it had to lose from its ~7% investment in Selectica[7].

Fast forward now to 2019. Like Selectica, HBP has a NOL pill[8] with a 4.99% trigger. And, like Selectica, HBP has a potential suitor (Mill Road) who is interested in acquiring HBP shares. Now, HBP can use and interpret the pill as it pleases, and in March 2019, HBP announced that it would classify Mill Road as an exempt person under the pill, allowing Mill Road to acquire up to 10% of the shares without triggering the pill[9]. In exchange, Mill Road agreed to various standstill provisions which would handcuff Mill Road from acquiring HBP or launching a proxy contest until January 2020.

Fast forward to August 6, 2020, months after the expiration of the Mill Road standstill. Mill Road sends a bear hug letter to HBP with an offer to acquire the entirety of HBP at $2.75/share (later revised to $4/share). Usually, following a leaked offer, the stock price of a company will shoot up to match the premium that the offer has to the unaffected stock price, with maybe a slight discount to account for the probability that a deal doesn’t get made.

Now, it gets interesting! What will often happen in an Activist M&A play, is that if an activist senses or knows that there’s a deal on the table and a chance to get a significant premium to its purchase price, it will seek to push the company’s board towards accepting the third party offer. But the exact opposite happened here.

On August 12, six days after the public announcement of the Mill Road offer, 22NW enters into an agreement with HBP because 22NW inadvertently triggered HBP’s pill by acquiring more than 4.99% of HBP!

Now, remember what I said earlier, neither 22NW nor HBP wants to trigger the pill. Fortunately, HBP’s pill (and almost all pills) give HBP’s board the ability to interpret the pill and determine whether a person is indeed an acquiring person[10].  But, still, this is a very rare event. So, HBP and 22NW come to an agreement to categorize 22NW as an exempt person under the pill, which also includes standstill provisions against 22NW[11] set to expire in August 2023.

With those standstill provisions in place, 22NW decides to go activist two months later in October and file a 13D. But, how do they go activist? They support the Company by issuing a letter to the Board stating that the unsolicited and revised offer by Mill Road for $4.00/share for the Company is too low and undervalues HBP’s growth potential! In other words, they are playing the opposite role of an activist by donning the armor of a white knight and therefore, the action is not in violation of the 22NW standstill.  

And, this is very interesting because $4.00/share is a lot more than 22NW paid for their shares!

Although, 22NW did not file a 13D immediately in August[12], the average cost basis for their HBP shares disclosed in their 13D filed in October is $1.14/share! That means that the Mill Road offer is almost 4x what 22NW paid… how does an activist not like that deal?

Now, the timing here is fortuitous[13] because apparently there’s a really important political election happening. But, down the road, I’m sure this will become a case study for poison pills and Activism M&A, even if it is likely another one off… I mean how many times are you going to get an activist to inadvertently trip over a pill that’s been around for three years and get leverage against an M&A deal you don’t like?

[1] “Sunlight is said to be the best of disinfectants.”

[2] Market cap.

[3] Corelogic, Aimco, now HBP… do activists love residential housing or what? Are they all staying at the same Airbnb?

[4] An NOL pill protects the company’s NOL asset. Compare this with the traditional poison pill which is intended to deter a hostile takeover. In addition, the trigger for a NOL is usually lower, and 4.99% is customary.

[5] Which would allow every Selectica shareholder except for the shareholder that broke the threshold to acquire more shares, thereby diluting the acquiring person down.

[6] This also has a dilutive effect, but much less than a flip-in, since one right is exchanged for one share.

[7] Selectica had a NOL asset valued at $150 million, an amount that exceeded its market cap.

[8] Adopted three years prior in 2016 and amended in 2019 to expire in 2022.

[9] https://www.sec.gov/Archives/edgar/data/1093082/000119312519078386/d722216dex994.htm

[10] “The Board shall have the exclusive power and authority to exercise all rights and powers specifically granted to the Board, including a determination to redeem or not redeem the Rights or to amend this Agreement and any determination as to whether the actions of any Person shall be such as to cause such Person to beneficially own Common Shares or to become an Acquiring Person.” 

[11] For clarity, the standstill provisions against Mill Road and the standstill provisions against 22NW are two separate agreements.

[12] Because they waited until October to file their initial 13D, they didn’t have to file their transaction history so we don’t know the dates that 22NW bought their shares. 22NW’s rationale is that the letter to the board it sent triggered the requirement to file a 13D and that there was no activist intent prior to that October date…

[13] See footnote 12.