J.C. Penney Company (JCP) is in a particularly bad place, and has been for some time. At the beginning of 2011 the struggling brick-and-mortar retailer attempted to right the ship and replaced their CEO Myron Ullman with former Apple, Inc. (AAPL) executive Ron Johnson. Johnson instituted broad changes: top-to-bottom reorganization; eliminating the coupon-and-sales strategy that had been a hallmark of the company; and the scuttling of the St. John’s Bay line.
It would be an epic understatement to say the strategy backfired. JC Penney almost immediately started hemorrhaging money. Sales fell 25 percent. The stock lost half its value.
On the surface, it would seem easy enough to lay the blame solely at Johnson’s feet. But Johnson himself was handpicked not by the board, but by investor Bill Ackman. Ackman, who’s Pershing Square Investment owns almost 18 percent of the company, pushed aggressively to instill Johnson without polling stockholders or doing retail market research. And now that Johnson has proven to be an unmitigated disaster as CEO, Ackman is again using his clout to try to challenge Ullman’s reappointment.
If it seems unusual for an investor to take such a heavy hand to his investments, it is. Ackman is part of a growing cadre of activist investors who don’t just suggest changes at the company’s top, but demand it, citing their vested interest in getting a company to become as profitable as possible.
The question is, profitable for how long?
Housecleaners, or "Carpetbaggers?"
George Clooney recently fired off on activist investor Daniel Loeb after Loeb suggested spinning off Sony Corporation’s (SNE) entertainment division to focus on electronics. Clooney, whose production company has a deal with Sony, fired back that Loeb wasn’t thinking long term, and only had the immediate future in mind. And he called Loeb a carpetbagger, likening him to the Northerners who moved to the South to profit (temporarily) off of Reconstruction after the Civil War.
The metaphor is clear: activist investors are there to come in, maximize profit, and walk out, without a second thought given to the long term effects. Clooney said as much when he pointed out that Loeb's fears were bsed on the underperformance of Sony's last two blockbusters, while forgetting that a movie from the entertainment division (James Bond flick Skyfall) made over a billion for the company. So, Clooney reasons, people like Loeb are only focused on the immediate. That is, what is the to maximize profts now? This perception of greedy activist investors harkens back to an even more recent pejorative for opportunistic investors: corporate raider.
Carl Icahn, the investor famous for buying a dismantling TWA in the 80s, is now engaged in a bitter struggle over the fate of Dell Inc. (DELL) . In the 80s Icahn was a corporate raider. Now, as a Forbes trend piece put it, he’s an activist investor. To be fair, his strategy has changed over time to shun asset stripping and be friendlier to value investing. What hasn’t changed is his zeal for shaking companies he’s invested in (like Dell) from the top down.
Are Activists too Aggressive?
With Icahn and Loeb, and even Ackman, you have investors who undoubtedly take the anti-passive stance to their major investments. And with Ackman, there’s the perception of bullheaded short-sightedness with instillation of Johnson as CEO. Activists almost never have the history with a company that the board does. But they do understand one thing well: how to create money. And not just necessarily for themselves.
Activist investors don’t always crash and burn a company like Ackman did with JC Penney. Some even go out of the way to make sure they truly have the shareholder’s best intentions at heart. Larry Robbins, whose hedge fund Glenview Capital takes a non-passive approach, says his philosophy is less activist and more “suggestivist,” furnished documentation proving he had the support of shareholders before asking to have the leadership at Health Management Associates Inc. (HMA) completely overhauled. Robbins has a 14.6 percent stake in the company. His firm has outperformed the S&P by nearly 10 percent, making him one of the most successful hedge fund managers in the country.
Activism Going Forward
In April an investment group called Value Act purchased 1 percent of Microsoft Corp. (MSFT) for $2 billion. The company soon began seeking a board seat and to influence corporate decisions. As their name implies, the company has a history of investing it companies it sees as undervalued, and then pushing to make the company more profitable. The company holds major stakes in Adobe Systems Incorporated ($ADBE), Motorola Solutions Inc. (MSI) , and Valeant Pharmaceuticals International Inc. ($VRX).
The question for investors will ultimately always be, what’s my return like? For stockholders in JC Penney, the answer has been “not good.” For others that take the time to poll stockholders, or research the company like the mega-successful Glenview and Value Act – whose very purchase of 1 percent of Microsoft caused the stock to go up a percent and a half – things can be quite good indeed.
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