Understanding the Mindset of Activist Investors


What are the Business Acumen Skills Needed?

Nelson Peltz, Bill Ackman, Daniel Loeb, Ralph V. Whitworth, Clifton Robbins, Scott Ferguson, Carl activist-investors-mindset.jpgIcahn, Christer Gardell, and Jeff Ubben are a few of the most predominant names that continue to emerge and disrupt successful companies by taking on the role of an “Activist Investor.”

Activist Investors aggressively challenge the strategy, results, and leadership of a company they target (notice I didn’t say have invested in) by pointing out the targeted company’s perceived inefficiencies and “unlocked value.”  For those of you who aren’t familiar with the term “unlocked value” it’s code for “the stock price and return on assets are way down because the current leadership is a bunch of dummies who don’t know what they are doing and if I can take control, I will fix things up, break things apart, and make my investors a ton of money in the process.”

In many of the Business Acumen training journeys that I design and deliver, participants ask me about these Activist Investors in terms of what they do, how they do it, and what is their mindset?  My participants are curious because these total strangers, who they’ve never heard of, and have nothing to do with the real business, all of a sudden are dictating strategy and actions that have direct and meaningful impact on the lives of the people doing the work.

To understand the mindset of the activist investor from a Business Acumen perspective, I will share a few core big picture elements of their approach:

Big Picture Hot Buttons of the Activist Investor

Overall Strategy and Value Proposition

One of the first things an Activist Investor will pounce on is the perception of an unfocused or inconsistent strategy.  The Activist Investor despises a business strategy that has shared services and resources such as one big R&D department that comes up with innovations for a portfolio of different business units. Instead they believe that true business value is in focus and the ability for corporate functions to be driven by a pure value proposition of either a cost focus, customer focus, or product innovation focus is very desireable to them.

Learning Tip:  Assess your organization; if you have shared functions that feed into business units that have different value propositions your company is ripe for an activist investor.

Differentiated Company / Business Unit / Brand Portfolios

It is impossible to be all things to all people in 2017 and beyond.  Activist Investors don’t like large companies that have assembled a portfolio of business units and brands that have different value propositions to different customer segments and perhaps also compete with each other for market share. Activist Investors believe there is a lack of focus and therefore ability to create value by training to be too many things to too many different customer segments.

Take a look at the patterns of Mr. Nelson Peltz of Trian.  In 1997, he purchased Snapple from Quaker Oats for $300 million after Quaker had paid $1.7 billion for it just 4 years earlier. Peltz felt Snapple was lost and unfocused in a mish-mash of Quaker brands and emerging drinks.  By separating it out and re-focusing on the core value proposition, he was then able to sell Snapple to Cadbury for $1.0 billion a few years after that making a $700,000 profit.  Peltz did similar things within the food industry when he “invested” in Heinz, the maker of Ketchup and 57 other varieties of products, and had them get rid of many of their secondary brands!

Learning Tip: Assess your company’s brand portfolio and determine if there are products and brands that aren’t getting the right focus and seem unaligned to the overall value proposition.

Capital Allocation

Another area of Activist Investor focus is on capital allocation or where large companies invest their money.  The key issue for the Activist Investor is again focus.  In a large company with shared resources like R&D, it’s too easy to dump a lot of money into it and just spread it around with the hope that some new innovations come out of the investment.  The Activist Investor’s mindset is to stop gambling on a wide portfolio and investments that you “hope” will pan out. Instead, take that same investment and focus on the R&D investments that you know will pan out because you are investing the necessary capital to make innovation happen.

Learning Tip:  Assess and analyze where the capital is going; the more evenly distributed it is the less likely the right products are getting the right focus.

Financial Metrics and Performance

Some of the most significant drivers of the Activist Investor’s behaviors are functions of the financial metrics and performance of an organization.

Financial Strategy

A specific financial favorite of the Activist Investor is the amount of free cash flow being generated by the business; the more free cash flow, the better.  Free cash flow in the amount of cash coming from business operations plus or minus the cash from investing activities in the business.  In other words, the business should be extremely profitable in its peer group and use the assets it has invested in to generate the positive operational cash flow.  Activist investors despise companies who spend a lot of money on assets that aren’t productive assets as that cash could be returned to investors in the form of dividends.

A company’s debt position is another area of contention for the Activist Investor.  They want to see a certain amount of debt because strong leaders take on debt and create a return greater than the cost of the debt.  However, they also don’t want to see too much debt; especially debt that isn’t being properly allocated and invested.

Operating Results

Activist Investors have several significant operating results metrics that they hold near and dear to their hearts including:

Return on Net Assets (RONA) – Which is defined as the profit being driven for the actual or net value of assets after they have been depreciated.

Return on Capital Invested (ROCI) – Which is defined as the profit being generated from the capital invested in the business.

In summary, Activist Investors mean serious business.  We are going to see and feel the “experience” of having Activist Investor get more aggressive and target our businesses more and more over the next few years.  By developing your core business acumen skills, you can understand the process better and make the decisions that can keep either them at arm’s length or get ready for significant change.

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About The Author

Robert Brodo is co-founder of Advantexe. He has more than 20 years of training and business simulation experience.