Nelson Peltz / Getty
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/ By Clive Minchom /
Nelson Peltz, now 71, is an American businessman born in Brooklyn and one of the partners of Trian Fund Management, which he founded in 2005 together with Peter W. May and Edward P. Garden, as an alternative investment management company. According to Forbes he is worth approximately US$1.2 billion in 1913.
Last week it was reported that Peltz had picked up a substantial position in Dupont Co, one of America’s leading industrial companies with a total market cap of about US$54 billion. After initially disclosing to regulators it had acquired and owned 5.78 million shares of Dupont at June 30th, 2013, this was updated in the press with the Wall Street Journal later reporting Trian’s total position may now be as many as 21 million shares which would give it a 2.2% stake in the company. On Friday Dupont stock closed up at US$58.28 – for a trailing twelve month P/E of 12 times earnings. The position may have cost them around US$1.1 billion to acquire, and is now already worth about US$1.25 billion in total at Friday’s closing price.
Trian styles itself as an activist hedge fund. Quoting from Trian’s web site… “Leveraging off of the 35+ years’ operating experience of its Principals, Trian Partners seeks to invest in high quality but undervalued and under-performing public companies and to work constructively with the management and boards of those companies to significantly enhance value for all shareholders.”
The three partners had all participated in the buying, re-building and operating of some notable industrial and marketing-oriented companies in their earlier careers. By founding Trian they felt they could achieve similar goals with very large cap stocks, but this time without necessarily having to buy them up completely first.
Dupont is a good example of such “activism”. It is also reported in the press that in recent weeks Trian has met with Chairman and Chief Executive Officer of Dupont, Ellen Kullman, and other senior managers to talk about ideas to drive long-term growth, according to un-named sources. Peltz may now accordingly be proposing to break up DuPont into two companies, one focused on its agriculture business and the other focused on materials.
In private life when someone bullies you to do want they want, and holds a threat of some kind over your head until you do, it is sometimes called blackmail.
In the investment world something similar used to be called “greenmail”;– when a corporate intruder would take a major share position in a public company and then threaten to take you over unless you do what he wants. Or worse still, he might even start-out by making an unsolicited hostile takeover bid for the whole shebang to get the same result. In the process this usually then stimulated a counter-offer from a “white knight” sympathetic to company management who would come along, stage right, to take out the “greenmailer“, who then left the field, stage left, with a nice profit, which was of course his intention all along. No self-respecting public company CEO in America was without a secret friendly “white knight” tucked away in his pocket in case of need some day.
The nice thing about greenmailers was that for the most part they used to be perfectly honest rogues, who were completely up front and centre about why they were doing what they were doing, just like the highway robbers of old who held-up stage coaches traveling in the wild west. Greenmailers also used to put quite a lot of bucks at risk, too, to get what they wanted, and a good deal of it was often their own money as well.
Today’s greenmailer, however, can be much less staight-forward about his motives, and often wears a discreet cloak of disguise by calling himself an “activist” investor. An activist investor is someone who buys 1% or 2 % , or so, of a big company’s stock, often with his investors’ money, then announces it to the world together with a laundry list of “improvements” he demands that the company implements immediately in the name of corporate activism. And activism must be good right, that is the “spin” part of the whole process; mere words can indeed convey deep impressions. In the world of asymmetrical warfare too, for example, there are no longer any “terrorists” only “activists” – it is the same sanitizing linguistic principle at work. And finally there is the term “hedge fund” itself – whose origins lie originally in the pursuit of safety and the locking out of risk, but which today frequently connotes any and all kinds of risk investment, no matter how wild. I think we call this all marketing!
Hence in the world of 2013 such a new activist friend of the company may demand, for its own good, that businesses be spun off, or he may demand that portions of subsidiaries be separately listed on an exchange, or he may demand that other businesses be acquired, or all of the above. Most often he will also demand as well that the target of his attention should return chunks of its hard earned cash to shareholders as increased dividends, or through share buy-backs, or both – “forthwith”.
Rarely, however does such a financial intruder have much true professional insight about what is really going on inside his target company at an operating level – though there have certainly been exceptions, and Peltz and his partners are more able than most to make this claim. Word on the street has it he may now push Dupont even so far as to break the company into two, with one entity focusing on its agribusinesses, farm pesticides, biosciences and health products and another entity dedicated to its chemical, electronics and safety products. Just as happened to Daniel Loeb at Sony, however, he is likely to meet ultimately with a stony response, and there is no particular obvious, a priori, logic behind such a move anyway – except of course the publicity which it garners, and which can sometimes give a turbo-boost to a share price all by itself.
In 2013 there has been a clear rise in the number of such activist excursions by hedge funds and private equity investors, a number of which have been reported by this newspaper. This is partly at least the result of a dearth of mega M&A deals where, in the past at this stage in the business cycle, corporate raiders would instead offer to put up billions to actually buy those companies whose performance was lagging and who had then become takeover targets, thus putting their money where their mouth is. Hostile takeover bids have also largely vanished from the landscape today, partly perhaps because of the success of “poison pills” and other legal means of defence companies in the past became able to deploy to good effect.
So large investment management firms have found that, in today’s markets, it is much cheaper be an “activist ” investor by buying up a little bit of stock for a billion or two. Then, ok, lets go out and harangue timid managements to get some extra dividends, or share buy-backs and use the massive publicity that then ensues to get a bounce in the stock, so we can then leave the field with a profit – just like the old fashioned greenmailer of old but without nearly the same level of risk.
From what we read in the papers Peltz may have chanced on a ready victim, too, in Dupont as the very first corporate actions Dupont seem to have taken in response to his attentions have been to organize a three year severance pay-out for their CEO Ellen Kullman, and two year pay-outs for her senior colleagues, if there should be a change of control and, as well, to alter some of their corporate by-laws affecting certain corporate manoeuvres. This does not exactly convey confidence in the fire-and-brimstone character of the leadership of Dupont, and if this is how they react maybe they shouldn’t be running the company either could certainly be a legitimate comment.
However, twenty five years or so ago, in 1985, when Canada’s Bronfman family put billions of their own money at risk by trading their holding in oil company Conoco, acquired earlier in 1981, into a 22.5% position in Dupont when Dupont itself acquired Conoco, they were a much more formidable opponent. Nevertheless in the end Dupont totally absorbed and outflanked them, over a period of a few years, and they eventually sold their shares back to Dupont when Edgar Bronfman Junior had got bored with being in such old-fashioned industrial businesses.
So let’s see who blinks here first; my own money would be on Dupont, timid managers or not, but Peltz and his partners will likely still walk away with a good profit anyway.