Activist or No activist: talking value from activist shareholder campaigns

In his Fortune Oct. 1st. ’17 article “Resisting activists, and winning”, Ryan Derousseau argues shareholders “fare better” when they fend of activists demands, that is, when management says no.

In the article, there’s a run down of the Nelson Peltz (Trian Fund Management) campaign at P&G. Most of you working in finance are already familiar with it. Trian published a white paper awhile ago accusing Procter & Gamble of settling for “mediocrity”, and the company replied to that the view was “outdated and misinformed.” Stock up since.

The article gets into Trian’s history with Pepsi-Cola, that Trian tried to split its beverage unit and snacks divisions back in 2013. That split didn’t happen, Trian reached a “truce” with Pepsi giving Trian a board seat. Since then Pepsi has been doing fairly well. Another case looked at in the article is the 2011 Clorox (CLX) Carl Icahn campaign that didn’t catch either. (Icahn didn’t buy that company). However, since then Clorox’s stock “has risen 95% compared to 87% for the consumer staples index.” Clorox is richly valued and pays a healthy dividend of 2.4%.

There are more examples, the MGM Resorts(MGM)  spinning off Las Vegas real estate in a REIT in 2015 (the fight was with a group called Land and Buildings) and the all too familiar Bill Ackman-Herbalife (HLF) battle now going on 5 years (that’s a short bet, of course). Derousseau points out HLF is up 16% since a settlement with the FTC, and 85% since Ackman’s campaign began.

What do we see in these instances (and many more):

A definitive positive result in performance, years later, whether the campaign enriched the activist or not -Bill Ackman is the poor dog. We see the management piggybacking on the activist moves all the time.

To be clear, these activist examples are very different in nature, what Ackman does at HLF is totally different than what Peltz is doing at P&G and what Icahn did at Clorox.

Activists succeeding with implementing the plans they propose, which is the measure Derousseau uses when citing the FactSet 2012-2016 studies, is not the same as the final results of the companies that had activist involvement.  (Derousseau cites FactSet studies that essentially show poorer performance for the companies where activists were able to implement their initial plans).

I’m asking Derousseau, has he considered Icahn “plan” wasn’t to buy that company after all ? Or how Trian’s Pepsi happy ending looks very different that the original split idea ?

Ask: How did we get here ?

Hey, maybe, just maybe, activists have some plasticity in their demands and can alter course for the benefit of everyone ?

Yes, yes, but that didn’t happen until the management resisted. Hello genius, maybe, just maybe, the activists were counting on that. How hard is it to figure it out ?

Oh, yes, then they were just bluffing ! No, they weren’t bluffing, they were creatively devising a plan. And in the end management makes better decisions, whether the original decisions activists proposed or not, and the company does better.

Should we encourage management resistance to activist campaign, then ? I think we shouldn’t encourage anything, but we should plan for it. Because, like magic, shareholders win in the end.

Derousseau could have better titled his piece  “Activists are good for your health.”

Today’s reader’s question:

Q: What’s the last thing you would do as a hedge fund manager ?

A: Hire a female performance coach.