(Cpg brain) activist investors- gift and a curse




 The rise of the activist investor in the last two decades has been well documented but with regards to consumer staples, we felt the recent uptick of activist activity in the deserved some light. At CPG Brain, we’re pro investor and see activist investors as a necessary check on management after wayward performance but we’re also a little uncomfortable with activists wielding an overbearing influence over capital allocation decisions especially considering their spotty record activists once they have a seat at the table. 

It speaks to the power activist funds have that legendary Carl Icahn is preparing to hold McDonalds, arguably the most iconic American company, feet to the fire over the treatment of pigs. We applaud Icahn’s concern with how pigs are treated but with a £50,000 stake in the company, it’s was a surprise McDonald’s sought to put out a response to Icahn’s threat of a proxy fight. No company wants to go through as they’re expensive and may complicate strategies already in place. Add to that managers having to deal with an outsider with a board seat pushing for control over capital allocation decisions, the presence of activist shareholders may make a situation worse. 


Maybe Icahn cares how pigs sourced by McDonald’s are treated or maybe Icahn is seeing the massive tide of ESG campaigns finally coming for fast food chains and wants to get ahead of the game either way, Icahn didn’t make his name and fortune fighting for animal rights. Research shows that activist campaigns produce positive results short term but those quick gains fade over time. However, there are times when activist investors get their way, the consequences can be grave. 


Of all the corporate collapses of the last twenty years, there’s a strong case the blockbuster tragedy was the most avoidable. Contrary to much of the lore surrounding the video rental giant epic collapse, blockbuster met the dilemma of disrupting its own business as it competed aggressively with then upstart Netflix to the point the Los Gatos based future streaming giant were willing to sell the company to their rival for kibbles and biscuits ($50 million). 


 Blockbuster demise has many culprits from its CEO failing to buy Netflix when it was on the ropes but the telling culprit was our old friend, Carl Icahn. By 2004, upstarts like Netflix and Redbox were eating into blockbuster’s business prompting a response. if then CEO John Antioco had his way, blockbuster would have fought back with a hybrid strategy which involved using their stores and launching an online subscription service, a deadly combination Netflix doubted they’ll survive.  


But with Icahn buying blockbusters shares and earning a seat on of the company's board, those plans were in jeopardy. Icahn was no fan of Antíoco's plan to (or Antíoco for that matter) compete with Netflix as Icahn wasn’t comfortable with the online project losing money. Icahn was of the opinion that blockbuster strength lied in its stores, Antioco was overcompensated and maybe company should be taken private. In any case, by 2007 Antioco was gone and its online service shelved in all but name. Blockbuster went bust three years later. 

Hindsight is 20/20 as Icahn condemned blockbuster as his worse investment but perhaps if Icahn let blockbuster's management run the company and eventually acquire Netflix, he would have a good chunk of one of the greatest turnaround stories us corporate history. 


In any case, activist investors are powerful they’ve ever been but as Icahn learned the hard way, that power is a curse as much as it’s a gift. 

  

 



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