Seagate Technology’s Unusual Alliance with ValueAct Capital: Is There Method in Seagate’s Madness in Inviting an Activist Wolf into the Fold?

Last month, Seagate Technology plc, an $11 billion company in the data-storage business, announced a secondary block trade in which it facilitated the transfer of roughly 9.5 million ordinary shares, representing an approximate 4% stake in the company, from one of its existing investors to ValueAct Capital.

It’s not uncommon for publicly listed companies to facilitate such trades. Among other things, they allow for the orderly unwinding of potentially market-moving positions by major shareholders that plan to sell, helping to protect the stock price.

It is, however, exceedingly uncommon for a company to solicit a large investment by a well-known activist hedge fund and, in connection with that investment, to invite the activist to have an observer present at board meetings, as Seagate did. Historically, corporations have been hesitant to bring activists into the boardroom for fear of the disruption and conflict it might cause. But Seagate seems willing to take that risk, conceivably in the hope of preventing an even more disruptive future public conflict. The danger, of course, is that, like political theorist John Locke’s hypothetical lamb, Seagate is securing an “admirable peace” by “without resistance yield[ing] its throat to be torn by the imperious wolf”.

In fairness, ValueAct does have a reputation for practicing a kinder and gentler brand of activism, to which companies have shown some receptiveness in recent years. You may recall that it used a comparatively soft touch, quietly working behind the scenes with mutual fund shareholders while applying significant private pressure on the board and a small dose of public pressure, in order to secure a board seat with Microsoft Corp. in September 2013. At the time, ValueAct was a relatively small $12 billion hedge fund with a mere 0.8% stake in Microsoft, underlining the effectiveness of its less aggressive brand of activism. Not only was it able to parlay its modest shareholding into a boardroom presence but there was considerable speculation back then that the announcement by Steve Ballmer, days before the announcement of ValueAct’s board seat, that he would (within a year) be resigning his position as Microsoft CEO had ValueAct’s fingerprints all over it.

It appears, moreover, that ValueAct managed to impress some of the right people with the work it did on Microsoft’s board. Seagate Chairman and CEO Stephen Luczo briefly served on the Microsoft board with Mason Morfit, ValueAct’s president, after ValueAct acquired its board seat. And now Seagate has turned to ValueAct for help in its ongoing struggle to adapt to the rapid market shift from physical data-storage devices to cloud-based storage. Mr. Luczo explained the ostensibly odd alliance in the press release announcing the transaction:

“Seagate approached ValueAct to execute this transaction and become an investor in our company, given their commitment to and success in creating long-term value for the companies in which they invest. The Seagate Board and management team are looking forward to engaging with the ValueAct team as we leverage their experience and resources to further strengthen the company and create long-term investment appreciation for Seagate shareholders.”

There is no reason to doubt Seagate’s claim that it sees long-term strategic value in the relationship. ValueAct has a reputation for helping other technology companies, including Microsoft and Adobe Systems Inc., find their way through comparable difficult transitional periods.

But what Mr. Luczo didn’t mention is that the alliance offered a number of immediate tactical advantages to Seagate as well. ValueAct has traded in and out of the company’s stock for years. As public company directors have by now heard ad nauseam, early engagement with activists in an attempt to solicit and be in a position to respond to any concerns they may have can be crucial in avoiding public conflict later. Seagate has taken this logic one step further: where more naïve boards have historically made the mistake of stiff-arming activist investors, serving only to rile them up and increase the potential for public conflict, the Seagate board chose to get in front of any possible issue by proactively seeking investment from, and voluntarily opening its boardroom doors to, an activist shareholder that has been hovering over the company’s stock for some time.

Beyond the goodwill that was likely generated by this gesture of openness and transparency, there are other, less obvious but also valuable, benefits that Seagate stood to gain by giving ValueAct observer status at its board meetings. When ValueAct was offered a position on Microsoft’s board, it was required to enter into a cooperation agreement, which among other things prevented ValueAct from initiating a proxy contest, limited the stake it could build in the company and forbade ValueAct from making disparaging statements about the company or its directors and officers. Seagate has not publicly announced or filed a cooperation agreement with ValueAct, but it would be shocking if it hasn’t extracted these or other similar, protective covenants, including confidentiality and trading black-out covenants, in exchange for providing ValueAct with a presence in the boardroom.

Unlike what happened at Microsoft, ValueAct hasn’t taken an actual board seat this time, so any representative present at Seagate board meetings will not be subject to additional constraints arising from the fiduciary duty owed by directors to the corporation. That makes it all the more imperative, and therefore likely, that ValueAct’s future dealings with the company and its stock are contractually constrained. Far from yielding its throat without resistance to an activist wolf, it’s highly probable that Seagate has taken steps to muzzle ValueAct and blunt any possible attack as a condition to being invited into the fold.

It will be interesting to monitor the extent to which this sort of thing becomes a trend. In Canada, public company boards have demonstrated increasing savvy in avoiding public fights with activists. The number of public proxy battles has steadily declined in recent years, from a high of 27 in 2012, to only 10 in 2015 and 7 so far this year. Seagate’s bold alliance with ValueAct may provide an instructive example of how those numbers might be further reduced.