Activists Seek Short-Term Gain, Not Long-Term Value
From NYTimes DealBook, published August 26, 2013.
Activist investors are making waves in the stock market, but their game has changed. Instead of taking on sluggish, poorly managed businesses, they want to restructure many of the world’s most profitable, best-managed companies. Their targets — PepsiCo, Apple, Target, Whole Foods, Procter & Gamble, Kraft and Dell — represent the gold standard of corporate governance. These companies are run by highly engaged, professional leaders. So why are activists like Carl C. Icahn, William A. Ackman, Nelson Peltz and Ron Burkle taking aim at them?
While activists often cloak their demands in the language of long-term actions, their real goal is a short-term bump in the stock price. They lobby publicly for significant structural changes, hoping to drive up the share price and book quick profits. Then they bail out, leaving corporate management to clean up the mess. Far from shaping up these companies, the activists’ pressure for financial engineering only distracts management from focusing on long-term global competitiveness.
These activists have a keen sense of timing, buying up shares when the stock is down because of near-term events. There is nothing wrong with that. Warren E. Buffett does the same. The difference is that Mr. Buffett invests for the long term in companies like Coca-Cola, Wells Fargo and I.B.M. He says his ideal holding period is “forever,” and he leaves management alone to focus on results.
A relevant example is Mr. Peltz’s demands to restructure PepsiCo. After forcing the spinoff of Kraft’s North American business into a company called Mondelez, Mr. Peltz’s Trian Partners is left holding 3 percent of a company that cannot compete with global leaders like Nestlé and Unilever. So Mr. Peltz wants PepsiCo to buy Mondelez and then split into two companies: beverages and snacks, including Mondelez. This financial engineering makes no sense. Rather, it demonstrates Mr. Peltz’s lack of understanding of what is required to run successful global enterprises.
PepsiCo’s results demonstrate the validity of the “performance with purpose” strategy of its chief executive, Indra K. Nooyi. It recently reported its sixth consecutive quarter of solid organic revenue growth as core earnings per share grew 17 percent and gross margins expanded. Its global portfolio of snacks, beverages and healthy foods has high co-purchase and co-consumption levels, generating $1 billion a year in scale benefits. Ms. Nooyi uses cash flow from traditional beverages to finance investments and growth in emerging markets, innovation and healthy brands, which now account for 20 percent of PepsiCo’s revenue. PepsiCo’s stock is up about 25 percent over the last two years, compared with 11 percent for its archrival, Coca-Cola.
Mr. Peltz is not the only activist going after healthy companies. Here are some other examples:
Mr. Burkle moved in on Whole Foods when its stock was at its 2009 low of $4, having fallen from $39. Whole Foods’ leadership ignored Mr. Burkle’s pressure, stayed true to its mission and strategy, merged with Wild Oats and invested in deluxe new stores while expanding sales at stores open more than a year. Today its stock is above $50 and has traded above $55.
In 2009, Mr. Ackman tried to pressure Target to break up its integrated portfolio of retail, real estate and credit card holdings, mimicking Eddie Lampert’s disastrous strategy at Sears. Target fought back, won 80 percent of shareholder votes in a proxy fight over Mr. Ackman’s proposed board slate and focused on its long-term strategy to compete with Wal-Mart Stores. Since then, Target’s stock is up 64 percent.
Mr. Ackman next bought into J.C. Penney with a stake that now amounts to about 18 percent and hired Ron Johnson from Apple as chief executive. They hastily undertook a complete remake, abandoning traditional customers and losing 30 percent of revenue. When Myron E. Ullman, the former chief executive who was brought back, tried to stabilize the company, Mr. Ackman publicly attacked the board. Finally, the board forced Mr. Ackman to resign, leaving him with an estimated $500 million in losses. To his credit, Mr. Ackman is acknowledging his mistakes.
Procter & Gamble
Mr. Ackman also went after venerable Procter & Gamble and its chief executive, Bob McDonald, proposing questionable short-term actions to drive up the stock price. He personally attacked Mr. McDonald even as the company posted two strong quarters. Under pressure, the board decided to replace Mr. McDonald with his predecessor, A.G. Lafley. Meanwhile, P.&G. continues to lose ground globally to its archrival, Unilever.
Michael S. Dell proposed taking private the company he founded at a 40 percent premium so he could operate it without stock market scrutiny. Hoping to squeeze $1 to $2 more a share out of Mr. Dell, Mr. Icahn bought up Dell stock and proposed his own financial structure. Now the company is in limbo, posting declining results while the ownership struggle continues.
Chief executives are responsible for building their companies for the long term, while delivering near-term results. When economic conditions and market changes put pressure on quarterly results, it takes wise and steady leadership at the top to avoid the pitfalls of cutting investments to achieve quarterly targets. Chief executives who “borrow from tomorrow” to meet today’s numbers inevitably jeopardize the future of their companies. For poignant examples, review the histories of Hewlett-Packard, General Motors, Sears and Kodak.
The best chief executives — including Alan R. Mulally of Ford, Paul Polman of Unilever and Ms. Nooyi of PepsiCo — anticipate short-term challenges but don’t react to them by sacrificing long-term strategies. They know how to compete globally by creating sustainable value for customers and their shareholders.
In attacking well-run companies, activists are overplaying their hand. The only way to sustain growth in shareholder value is by creating competitive advantage to provide superior value for your customers. Corporate leaders should stay laser-focused on this goal.