By Dr. Ben Gilad, ACI Faculty
In a recent piece I published on competing.com called “Competing in the age of Bill Ackerman”, I suggested that Hedge Fund activists such as Bill Ackerman, Dan Loeb, Carl Icahn, Keith Meister, Jeffery Ubben and Nelson Peltz are a blessing for public companies because they shake up non-paranoid CEOs and their complacent boards (as contrasted with Andy Grove’s famous “Only the Paranoid Survive” mantra).
The fact that these activists succeed is a testament to the appeal of their proposals for reforming corporate structures and performance. An in-depth analysis by the Economist shows that companies with the largest activist holdings improve their R&D, capital investment and profit between 2009 and 2014. This is no short term asset stripping a-la the 1980s’ corporate raiders or “greenmailers”.
About half of all activists’ campaigns demand either buy-back of stock, spin off of non-core businesses or finding a merger partner. Activist funds’ positions outperformed the S&P (before they took their fees). In other words, they were able to bring up the performance of those companies they “attacked”. As Dan Loeb says, “Unless you have one eye on the long term –how customers and products are affected – you will not succeed.” And as one head of a traditional equity-fund management company says in the piece, “natural selection will ensure that activists who make foolish suggestions fade away over time.”
Attacks that are rebuffed by management and the board and go into proxy fights succeeds in defeating management 73% of the times. So given a rational CEO, with normal size ego (inflated ones are doomed), CEOs have only two options:
- They can fight the activist tooth and nail, lose and go home or
- They may ask: Is it possible that the activist proposal makes sense, and if so, why?
Undoubtedly, some activists’ demands have little to do with business strategy. Buy-back demands are more in this domain. At time, however, clear headed and objective competitive intelligence (remember – CI is a strategic perspective, not minutia from information vendors) points to the same rationale. The recent move by a private college in VA to shutter its doors despite having $94 million in its endowment represent a clear head analysis of the opportunities in the changing educational market..
If buy-backs are not often strategic, spin-offs are. I’ve worked with many large companies with wide portfolios of products or services that had no reason to be. The lessons here are closely linked to competitive intelligence and its use by corporate officers. For one, let me suggest that the activists’ strategic analysis of the companies and their industries is often (not always!) superb. They typically put together a 300 page analysis of their targets which they send to the board. They do their homework, they do it ruthlessly, and they can teach corporate executives a great lesson about quality competitive intelligence.
Beyond activists’ superb competitive intelligence, though, it is the CEOs who fail to do their homework. If a CEO can’t convince investors that her executive team adds any value to her diverse businesses’ ability to compete, then spinoffs are the solution.
CEOs add to their portfolio more because monopoly games are loved on Wall Street than because of strategic rationale. The old Boston Consulting Group’s rationale from the 1970s that a portfolio affords investing cash from cash cows into star business has proven both simplistic and inferior to more focused strategies. Still, many CEOs fail to understand this simple perspective: business strategy comes first. Corporate strategy often adds overhead to businesses that could do better without corporate “supervision.”
Kraft as a case in point
The case of Kraft is a classic example of failure of competitive intelligence at the highest level (as in failure to identify early enough where the strategic risks and opportunities lie in the changing food business). Kraft has always been known for obsessively worshiping of market share, executing a mechanistic marketing formula, and having no sense of strategy (as in consistent set of activities deliver unique value). Irene Rosenfeld, its CEO since 2006, failed to deliver profitable growth. The unfocused collection of brands never competed well with the much more focused and highly competitive Mars, and never had the reach of the much bigger Nestle. Stuck in the middle, in 2010 Irene spent 19 billion to acquire Cadbury, a British confectionery company, repeating the mantra of many CEOs that “scale is a source of great competitive advantage”. The simple fact is that this is a myth – for one, the presumed leverage over the trade (giant grocery chains like Wal-Mart), critical for profitability, has never been proven. Actually, if anything it might be the opposite as the recent acquisition of Heinz, a much smaller and more focused company for 20% premium and the 70% premium paid by Tyson Foods for Hillshire Brands show.
The acquisition of Cadbury failed to recharge the giant, and activist Nelson Peltz started pushing the break up option. Though Kraft claims it had decided on this option independently of Peltz, that is as likely as Obama deciding to cancel Obamacare. As the Wall Street Journal reported, in announcing the breakup, Rosenfeld claimed “focus… will provide even greater opportunities.” Hmm…
Since the breakup, old Kraft, the staid US-focused grocery business which under Rosenfeld was a cash cow, has been doing way better than Mondelez, the global snack company led by… Rosenfeld.
CEOs- create your own “activist”!
When a company’s current competitive strategy isn’t optimal, there should be someone who can stare the powerful CEO in the face and say so. The CEO should be personally invested in having one such person from within the company, as in his or her “own activist.” Who in the company is responsible to tell top executives the King has No Cloths? Hypothetically that’s why competitive intelligence functions were created in the first place. Alas, most top executives pushed these down the organization and made their analysts stick fetchers for tactical competitor minutia rather than doyens of strategic (early warning) analysis.
If an activist launches an attack, chances are the CEO doesn’t even know he or she has a competitive analyst. They can only blame themselves.