What is Shareholder Activism?
If you are a current shareholder of The Walt Disney Company, you may be wondering who Nelson Peltz is and why he wants multiple seats on the board of your holding. Peltz’s Trian Fund owns roughly $2.5 billion, or more than 30 million shares, in the entertainment company, which has been rapidly losing money. We have yet to see what he has in store for Disney, but Trian calls itself a “highly engaged shareowner” that “seeks to invest in high-quality but undervalued and underperforming public companies and to work collaboratively with management teams and boards to help companies execute operational and strategic initiatives designed to drive long-term sustainable earnings growth for the benefit of all shareholders.” Trian thinks that Disney shares are significantly undervalued today and that the company needs a board that is more focused, aligned with shareholders, and accountable.” Time will tell. Peltz also has other business interests. He is currently non-executive chairman of The Wendy’s Company, sits on the boards of Unilever and Madison Square Garden Sports Corp., the parent of the New York Knicks and Rangers, and is no stranger to pushing his views on companies.
Historically, activism is nothing new. Its roots can be traced back over 100 years ago. In 1906, the federal government filed an antitrust lawsuit against Standard Oil. The case went all the way to the Supreme Court, which ruled in favor of the government. In 1911, the Court ordered Standard Oil to be broken up into 34 separate companies. The breakup of Standard Oil was a major victory for antitrust activists and for consumers. It helped to create a more competitive oil market and lower prices for consumers.
It was a watershed moment in American economic history. The company was founded by John D. Rockefeller, and it used its dominant position by controlling over 90% of the oil refining business to stifle competition and raise prices.
The jury is out whether stock activists’ sole intention is to benefit shareholders, but by trying to benefit themselves, you should take a closer look at their plans. Not all activist campaigns are successful and some activists are better than others.
Drivers Of Activism
Activist investors can build a stake for many reasons of course, but as the founder of a firm that looks for value creation ideas, I can safely narrow it down to a handful of possible motives for change.
You must remember that even with all this technology surrounding us, the ultimate direction of the company lies with the management and the board. They are still people businesses run by humans with emotions that dictate the direction of the company and ultimate value for shareholders and higher stock prices.
After winning three board seats at Exxon Mobil in 2021, activist hedge fund Engine No. 1 pushed the oil giant to address climate change. As the first activist investor to successfully replace Exxon board members, Engine No. 1 scored a major triumph. The activist suggested that Exxon’s existing management team is not competent to address the issue of climate change within the company. The fund also claimed that Exxon should expand its operations beyond the oil and gas industry.
The executives at Exxon pushed back against it but the fund ultimately won over other important stockholders. Three of Engine No. 1’s nominees for Exxon’s board of directors were elected. Significant progress has been made in the oil and gas business with the election of the activist’s nominees to the board. This indicates that shareholders are willing to back activist shareholders who are lobbying for action on climate change by voting for them at the polls.
Strategic change is the most common aspect of value creation we look for in a company and one of the more commonly executed amongst activists. Activists may propose changes to a company’s strategic direction to increase shareholder value. This may include divestitures, mergers, acquisitions, or product line adjustments.
One of the higher-profile changes currently going on is within General Electric
GE
Company. The iconic firm, once admired under Jack Welch for leadership and vision, financial performance, innovation, and efficiency has in recent years been frowned upon by the same investors because of multiple changes of leadership, accounting issues legal wranglings, lawsuits and destruction of the share price. These problems have attracted none other again the eyes of Trian and Peltz. It’s not totally clear whether Trian was a direct proponent of the announced three-way split, but the move is the culmination of a long process of shrinking the company. Trian, whose partner Ed Garden sits on GE’s board, said it welcomed the split. “The strategic rationale is clear: three well-capitalized, industry leading public companies, each with deeper operational focus and accountability, greater strategic flexibility and tailored capital allocation decisions,” it said in a statement. The strategic change was announced at the end of 2021 and the value is being created already. GE is higher by 30% year to date. The most recent spinoff of GE healthcare happening earlier this year.
The company has restructured its business into three core segments: GE Aviation, which specializes in aircraft engines, aerospace systems, and related services and is a prominent supplier in the global aviation industry; GE Healthcare
GEHC
, focused on the healthcare sector, offering a comprehensive range of medical imaging, diagnostic, and biotechnology products and services, including MRI machines, ultrasound devices, and healthcare IT solutions; and GE Renewable Energy, dedicated to renewable energy technologies such as wind turbines, hydroelectric systems.
As GE plans to create three independent companies by 2024, the long-term outlook for Aviation is more favorable driven by recovery in the commercial aviation and jet engine spaces. However, Aviation may have to deal with the risk of global economic weakness and potential near-term pressure from Renewables, which is falling short on portability. Meanwhile, the healthcare industry has matured and is dominated by a few global players. Therefore, margin-driven growth and operating leverage will play an important role for the SpinCo. Additionally, Power & Renewables both face global macro and micro headwinds. GE plans to spin off GE Renewable Energy at the end of the this year and the remain co will be the aviation segment which is one to watch, as it could be the best of their businesses.
Activists also often propose financial restructuring measures like share buybacks, dividend increases, and debt reduction to boost a corporation’s stock price. Additionally, operational changes, such as cost-cutting and departmental restructuring, can significantly affect profitability and warrant consideration.
Companies To Watch Going Forward
Starboard Value topped our previous ‘King Of The Activists’ list. So, monitoring what they are doing is important. Jeff Smith’s firm has been notable in major brands in the past, such as Darden Restaurants
DRI
, Staples, AECOM and Salesforce
CRM
, Inc. In the last few days they have announced a position in Fotrea Holdings Inc., a a global contract research organization that provides services with the goal of advancing health. As of yesterday, they have also built a stake in News Corporation. Starboard Value believes NWSA, one of Rupert Murdoch’s media empire’s two legs, trades at a considerable discount to its true market value due to its conglomerate structure. They are recommending a spinoff off its digital-real-estate division and a collapse its dual-class share structure, which gives the Murdoch’s voting power in excess of their economic ownership. They claim the breakup could unlock $7bn in value for shareholders.
Also in the past few days, Engaged Capital, the Newport Beach activist, has become a shareholder in V.F. Corporation where it ‘Outlines Actions with Potential to Triple VF
VFC
Corp.’s Share Price in Less than Three Years’ according to their statement. VFC is a prominent American apparel and footwear company with a diverse brand portfolio. They design, manufacture, and market a wide range of clothing, footwear, and accessories. Some of their well-known brands include The North Face for outdoor and adventure gear, Vans for skateboarding and lifestyle footwear, Timberland for rugged outdoor footwear, Dickies for workwear and uniforms, Wrangler for denim jeans, and Lee for casual and denim clothing. The company has fallen on hard times through macroeconomic disruption, excess inventory, and brand performance. Engaged Capital has stated that it sees a “clear path” to more than $300 million “in immediate cost reductions” and has proposed reinvesting part of the saved monies to increase innovation and growth.
Whatever the motive for activists, regular investors should pay attention to what they are doing because activist campaigns can have a significant impact on the companies they target as well as on the broader investment landscape.
If you are interested in learning more about activist ideas, drop me an email at research@edgecgroup.com
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