The Persistent Mr. Peltz, Activist Investor

One of my favorite stories from last year was the debate about investing in a specific social mission at the brand level in consumer-facing companies. Does it increase customers and drive shareholder value, or does it distract operations and marketing professionals from their core responsibilities? I covered the pros and cons using case studies from Old Navy and Unilever in Losing the Plot: Social Mission v. Business Fundamentals on Dial P for Procurement.

It was while researching Unilever that I first encountered activist investor Nelson Peltz, co-founder of multi-billion dollar asset management firm Trian Investment. He is now a non-executive director on their board… an ‘activist investor.’

I don’t actively follow the investment space, but when I caught a news headline a few weeks ago involving Disney, an activist investor, and the name Peltz, I thought, “That has to be my guy.”

On January 11th, Nelson Peltz announced that he would launch a proxy battle to get a seat on Disney’s Board of Directors. The company turned down his ‘polite’ offer to join the board, so he is approaching shareholders directly and asking for their vote. Disney has not minced words in their public statements about Peltz, and yet – he persists.

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This is not Peltz’ first rodeo. He has served on the boards of many consumer-facing companies, even if (as Disney points out) he “lacks the skills and experience” to support a company in the digital entertainment industry. Other examples of where he has intervened as an activist investor include Wendy’s, Madison Square Garden Corp, P&G, Mondelez International, Sysco, Heinz, and GE.

When a CEO has a major problem on their hands, the last thing they want to hear is ‘activist investor.’ Peltz is the person nobody wants around. Seeking Alpha described him as a “corporate rabble rouser,” one of the most fabulous titles I’ve ever heard.

Are activist investors worth the trouble?

Opinions about Peltz’ results – and the results of all activist investors – are mixed. Even beyond questions about how individual companies fare compared to the market, there is skepticism about the efficacy of activist investing.

Activist investors and activist hedge funds buy a significant minority stake in a publicly traded company to secure a seat on the board and change how it is run. They typically emerge after bad news: missed earnings expectations, long run losses in shareholder value, failed strategic plans. They are the classic skunk at the garden party. They blow in, demand immediate change, and then move on.

A Harvard Business Review article from 2014 points out that activist hedge fund strategies work to increase shareholder value, but not sustainably. They usually improve the company’s share price just long enough for the activist investor to profit and then get out, potentially leaving the company with burdensome levels of debt and an unsure strategic future.

What does cost cutting mean to an activist investor?

As a procurement professional, I find many of Peltz’s approaches interesting:

• His common objectives are cost cutting, emphasizing profitability, getting rid of underperforming business units, and eliminating jobs
• Trian advocates for zero based budgeting, accelerating decision making by streamlining the organizational structure, and management accountability
• And Peltz’ philosophy: Sales up, expenses down. That seems logical enough to me.

Although procurement is addressed as part of global shared services in a P&G case study on Trian’s site, his approach to savings (or cost cutting) takes different forms. It brings into context procurement’s long held and well-intentioned desire to ‘contribute to the top line’ and ‘create shareholder value.’ A more efficient cost model is always a good thing, but when expectations are being missed, it takes seismic shifts (and in many cases unpleasant changes) to move the needle. That is what Peltz specializes in.

For instance, Peltz advocated for a number of cost cutting forms at GE: shrinking corporate staff (as well as other distributed operational jobs), centralizing IT operations, reducing research spending, and reducing discretionary spending, such as internal travel. At Unilever, he had himself assigned to the ‘compensation committee,’ and I can assure you it was not because he wanted to hand out the bonus checks.

Can Peltz help the House of Mouse?

Nelson Peltz and newly re-established CEO Bob Iger both know that Disney needs to cut costs. I’m sure Iger would prefer to improve his company’s profitability without an activist investor and additional media scrutiny, but shareholders may feel differently. With Peltz, they will arrive at the destination faster – albeit feeling like they just got off Space Mountain.

At the heart of Disney’s profitability dilemma is their direct-to-consumer (DTC) segment, which houses their streaming business. Disney owns Disney+ and ESPN+ as well as part of Hulu. While they have 235 million subscribers (compared to Netflix’ 223 million) they also have a high customer acquisition cost. Bob Iger has already acknowledged that the streaming business needs to become profitable, not by adding more subscribers to cover costs but by making structural changes to lower those costs altogether. As reported by CNBC, hiring freezes will stay in place at Disney, and those impact the company beyond the DTC segment.

Iger’s plan to emphasize profitability over new customer acquisition may sound sage, but it is also driven by data that suggests major streaming platforms are plateauing. To keep growing and absorb subscriber churn, streaming companies may have to increase advertising spending, increasing customer acquisition costs.

Or – there is the ever-popular option of raising prices for current subscribers and placing ads in streaming services, exactly the kind of thing consumers choose streaming over cable television to get away from. Bloomberg reports that Netflix and Disney+ have both introduced ads, “while every major streaming service except Peacock has raised prices in the last 18 months.”

The challenge at Disney is very real. We will have to watch their annual shareholders meeting to find out whether or not Peltz is successful.

My Final Thoughts?

• Procurement may want to materially change the profitability of a company, but we cannot do that while maintaining gentle partnerships with the business. This is doubly true when the company is missing expectations.
• Battles carried out in public may be uncomfortable, but they are also educational. The more we can learn about how Disney plans to cut their costs without affecting shareholders, the better.
• Short term progress can be the predecessor to longer term failure. Shareholders certainly appreciate dividends and returns, but depending on how they are generated, the cost of cost cutting may not be worth it.... and that's coming from a procurement professional.

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