Board Risk ScoreTM

Proactively Monitor Activist Risk

Waheed Hassan, CFA Senior Managing Director - M&A/Proxy Contest Group 202-549-8399 (c) whassan@allianceadvisorsllc.com

Copyright © 2015 by Alliance Advisors, LLC. ALL RIGHTS RESERVED.

Alliance Advisors – A Trusted Advisor

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“The Board Risk Score has proved invaluable for keeping our Board informed about the activist threat environment. By offering real-time information on potential areas of attack, the BRS has helped us develop a more effective and customized state of preparedness and the ability to update our IR messaging accordingly. We highly recommend the BRS tool and Alliance team to anyone who is interested in proactively managing the activist risk. We found the BRS product to be a truly unique product and more powerful than other comparable offerings in the market. The team at Alliance has over a hundred years of combined experience in shareholder intelligence and has become a key provider to our Company in whom we have confidence.” – John Ellsworth, General Counsel and Corporate Secretary, ScanSource Inc. “We retained Alliance Advisors to assist us in the proposed merger with Fyffes. The Alliance team proved invaluable to these efforts, guiding both Chiquita and Fyffes through the ISS engagement process. Waheed and his team provided very accurate guidance and insight on ISS, which was instrumental in garnering ISS support for this contested transaction. We would highly recommend Alliance Advisors to anyone seeking any ISS engagement needs.” – Edward Lonergan, Former CEO, Chiquita Brands International

Company

Board Risk Score (identify key areas

of shareholder criticism based on

financial/share price performance)

Stock Surveillance (proactively monitor shareholder base to

identify creeping accumulation by activist/hostile

investors)

Proxy Solicitation (provide intelligence

on where shareholders custody

their shares. Key in early identification of

activist investors)

At risk companies need to monitor changes in ownership to proactively identify activist accumulation

Activist investors tend to hide their ownership behind different custodians

BRS coupled with surveillance and solicitation information ensures high level of activist preparedness

Our Holistic Approach to Measuring Activist Risk

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Step 1: Know Your Vulnerabilities (be your own activist)

Key Activist Agendas

Force sale or break-up of the company Oppose announced M&A or demand a better offer Potentially form groups with strategic acquirer E.g. Valeant/Allergan situation

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Maximize shareholder value via share buyback and special dividends

Target cash on corporate balance sheet E.g. Carl Icahn vs. Apple

Seek operational improvements, elimination of business lines and products, geographic expansions etc.

Requires extensive industry experience and expertise Focus is on underperformance of segments and/or poor capital

allocation strategy. E.g. Starboard vs. Darden and Carl Icahn vs. EBay.

Pursue improvements in governance profiles/polices (separation of Chairman/CEO roles, board declassification, management compensation, etc.)

E.g. David E. Stern/ Air T. and Marathon Partners vs. Shutterfly

M&A

BALANCE SHEET

OPERATIONAL

GOVERNANCE

ENGAGE

ACTIVATE

How Issuers Prepare for Activist Situation

Create the written record of good governance that can be cited Position the company for a potential dialogue with ISS, putting in

place the indications of “good governance” that can support a positive recommendation

Appoint the defense team including internal representatives from Legal, PR, IR, Gov’t Relations, Employee Communications and external legal, financial and communications advisors and proxy solicitors

Develop a regular cadence of communication with the Board of Directors

Create detailed plans for various scenarios and contingencies

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EVALUATE

Assess vulnerabilities and weaknesses Conduct investor vulnerability study including investor perception

study and analysis of shareholder base Identify legal defenses Keep informed about activists – different activists employ different

tactics; therefore, knowing who the activists are will help to inform our defense

“How do we know if we are the next target?” “How can we measure our level of risk?”

BRS is a quantitative scoring methodology that assesses the level of board’s vulnerability to activist investors.

It is an early-warning system which provides an objective and independent analysis of company’s performance – the same analysis used by most activist investors in identifying and targeting public companies.

Our goal is enable companies/boards to know if they appearing as potential targets on activist screens.

The model was developed by Waheed Hassan, CFA, along with along with two PhDs. Prior to

joining Alliance, Waheed managed the Proxy Contest research team at ISS, where he was involved in over 100 contested meetings including proxy fights at Target, Office Depot, and NRG Energy.

About Board Risk ScoreTM (BRS)

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Provides an objective methodology to determine the level of board vulnerability.

Identifies potential areas of activist attack. Components of the score offer insight on key areas of susceptibility such as share price performance, lack of sales growth, history of poor acquisitions, low ROIC, etc.

Enables tweaking of IR messaging in order to pre-empt potential activist arguments

Allows companies to track changes in their scores over time i.e. measure the impact of operating performance on level of riskiness.

Simple, concise and can be used for peer analysis to determine relative degree of activist risk within a given GICS group

Advantages of BRSTM

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BRS Model is Predictive and Accurate

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High Medium

Low

BRS ratings for companies that were targeted by activists between 2009-2014

Back-testing proves

predictability

Identified by BRS*

(45)

Missed by BRS

(1)

No. of Russell 3000 companies attacked by activists (board related only) during

1HFY15 (Jan-June)

98% accuracy

*BRS flagged these companies as ‘vulnerable’ on 31 Dec. 2014 – prior to activist involvement

Total Shareholder Return (TSR) is the most important component of activist campaigns. BRS incorporates time weighted 1-year, 3-year and 5-year TSR in computing the score.

Metrics Help Identify Type of Activist Campaign

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Balance Sheet/Capital

Allocation Activism

Leverage

Impact of Cash on Enterprise

Value

Acquisition and R&D spending

Operational Activism

Revenue Growth

Operating Margin

ROIC

Strategy-related Activism

Change in Analyst

Estimates

Earnings Surprise

BRS vs. ‘Traditional’ Activism Prep Strategy

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Traditional Activism prep. BRSTM

Monitoring of company’s financial metrics

• Limited • Only ‘snap-shot’ analysis of

historical performance

• Continuous • Monthly. Based on latest

share price and financial performance

Visibility • None after activist prep session is over

• High • Monthly. Updates ensure

ongoing visibility into performance

Peer benchmarking • Limited to prep session and the peers selected by advisors

• Allows customized peer performance benchmarking

• Flexibility in selecting peers

Potential conflict of interest • Varies. Transaction motivated • None • Subscription agreement

ensures no conflict

Activist perspective • Limited • Most advisors work

exclusively with issuers

• High • Activist representation

ensures unique insight

BRS accurately identified several key vulnerabilities prior to activist involvement

Case Study: Darden Restaurants, Inc.

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Activist focused on BRS-identified High Risk metrics in its proxy contest for board representation

Case Study: Abercrombie and Fitch Co.

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Step 2: Proactively Monitor Shareholder Base to Identify

Accumulation by Activist Investor(s)

An “Intelligent” Stock Surveillance Program

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Annual Shareholder Meeting

Investors cast their votes

Votes cast is matched to

reported ownership (13F and 13D filings)

Alliance Advisors has visibility on the custodian

where vote was cast (JP Morgan,

etc.)

Custodian data is then mapped to

each institutional investor

Alliance identified the following activists prior to

13D filing

Monitoring of institutional voting, allows accurate detection and identification of custodians used by activist investors, hedge funds and traditional institutional investors

+400 proxy solicitation campaigns helps build and maintain best-in-class institutional custodian database

Alliance uses its proprietary database of activist investors and their custodial banks to analyze weekly DTC listing to identify potential accumulation by activist investor(s).

‘Real-Time’ Analysis of Ownership Changes – 13F filings tend to be dated

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Close tracking of Top Institutional Investors helps mitigate potential element of surprise from an activist

Enhanced Visibility of Top Institutional Investors

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90% success rate in garnering favorable recommendation from ISS (both activist and issuers) in contested situations.

High success rate due to Alliance taking the lead in reviewing fight letters and preparing the ISS deck. Clients are coached extensively through multiple mock interviews prior to presenting to ISS and top institutional investors.

Only proxy solicitor that has the capability and experience to take ownership of ISS/investor deck in proxy contests. Waheed Hassan, CFA (Senior Managing Director at Alliance Advisors) formerly managed the Proxy Contest Team at ISS where he was involved in over 100 contested meetings.

Strong relationship with major institutional investors ensures access to key decision makers. – With +400 solicitation clients, Alliance team speaks with Vanguard, State Street, Fidelity,

BlackRock, Dimension Funds (DFA) and T.Rowe Price regularly throughout the year.

Our Competitive Advantage

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Our Experience*

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Issuer Representation (includes activist defense advisory)

Activist Representation (Target Companies)

MORGANS HOTEL GROUP

* Select activist situations only.