With ‘activist investor,’ will Nestle stay sweet?
Dan Loeb of Third Point is forcing CEO to advocate for company’s long-term needs
Late in 2013, Vanity Fair magazine published a profile of a hedge-fund manager named Dan Loeb under the headline “Little Big Man.”
Pleasingly, it placed the words “activist investor” in quotation marks, just like that, signaling to the reader that a raised eyebrow was the appropriate response to Loeb’s self-appointed role as corporate rabble rouser.
Loeb had a reputation for accumulating shares in targeted underperforming companies and sending off excoriating letters to the U.S. Securities and Exchange Commission, a carpet bombing manoeuvre that took aim at padded corporate resumes, alleged gross incompetence, rampant nepotism, inside deals, dereliction of duty and so forth.
The game plan: force change at the top, or asset divestiture or outright sale. The targets were often smallish firms.
In May, 2013, Loeb boldly went after Sony Corp., calling on CEO Kazuo Hirai to take public a stake in Sony Entertainment.
That was enough to ignite George Clooney. “I’ve been reading a lot about Daniel Loeb, a hedge fund guy who describes himself as an activist but who knows nothing about our business, and he is looking to take scalps at Sony,” the actor said in an interview with an online entertainment news site. “It makes me crazy. A guy from a hedge fund entity is the single least qualified person to be making these kinds of judgments, and he is dangerous to our industry. What he’s doing is scaring studios and pushing them to make decisions from a place of fear.”
The Sony board declined to spin off a piece of the entertainment division and Loeb sold out a year later.
How a company reacts in this “place of fear” is top of mind once again as Loeb and his fund, Third Point LLC, go after Nestle SA, the Swiss-based giant with more than 2,000 brands in its global catalogue, from ice cream (Haagen-Dazs) to chocolate (Smarties) to pet care (Purina, Alpo) to bottled water and baby food. And timely innovation (Nespresso).
On Sunday, Third Point released a “Dear Investor” letter announcing the purchase of 40 million shares and unhappiness with the company’s share performance when measured against such peers as Unilever.
“While Nestle has stood still, its peers have pursued productivity increases aggressively and made other changes in order to deliver earnings growth and create shareholder value in a slower sales growth world,” the letter states.
The comparison to Sony is worth making: Hirai had been Sony chief executive for a scant 13 months and remains there still.
At Nestle, Mark Schneider was appointed CEO almost exactly a year ago.
The activist message appears to be this: The honeymoon period for a new CEO maxes out at the one-year anniversary mark. Schneider arrived with an impressive track record. Even Loeb allows as much, noting that Schneider was a proven value creator when he ran Fresenius, a medical supply company, delivering strong organic sales growth with shares appreciating at a roughly 20-per-cent compound annual growth rate during his tenure.
You’d think that hard-earned reputation would allow Schneider a longer period of grace than 12 months.
Loeb’s letter to Nestle investors reads like any new CEO’s to-do list: review and reshape the portfolio of brands and contemplate judicious asset sales (Loeb is pushing the company to hive off its stake in L’Oreal, which, he admits, has been a superb investment for the company). He’s also agitating for Nestle to set a formal operating margin target range of 18 to 20 per cent by 2020.
Some of the Third Point agenda sounds as though it has been cribbed from Unilever’s own action plan. Unilever, remember, rebuffed the takeover advances of Kraft Heinz earlier this year. Unilever CEO Paul Polman has given interviews on the pressures of finding the third way between caving to an activist’s agenda and staying true to a long-term vision. For Polam, that vision has hinged on sustainability, doing well by doing good, etc.
Central to Unilever’s plan is to accelerate cost savings, pursue an asset spinoff and formally adopt an operating margin target of 20 per cent by 2020. “I have to find a balance between not giving up on our long-term sustainable compounding model and satisfying increasingly a group of shareholders who want to see at any time the short-term return,” Polman said in one interview. “That’s a fine balance, I don’t deny it.” Here’s another Polman quote: “Graveyards are full of companies that have been cutting costs but ultimately not fulfilled their purpose to do anything useful for society.”
Nestle’s Schneider will now have to convince investors of his own third way. He has wasted little time. On Tuesday, the company made its first move, announcing a $21-billion (U.S.) share buyback commencing in early July. Otherwise, the company reiterated a strategy already in train: exploring strategic options for the U.S. sweets business and focusing capital spending on high-growth categories (coffee, infant nutrition).
Schneider’s next challenge will come in defending the long-term outlook for the company, far beyond the short-term needs of Dan Loeb. Jennifer Wells can be reached at jenwells@thestar.ca