And Elliott is one of the most effective campaigners. Consider what happened after Starboard Value moved early last year to eHealth Inc., a health insurance marketplace that specializes in enrolling people in Medicare, when the company’s stock had halved in 12 months. After launching a proxy contest to win seats on eHealth’s board, the activist quickly reached an agreement with eHealth to add a healthcare executive to the company’s board. A few months later, eHealth CEO Scott Flanders left in favor of someone with more direct healthcare experience.
How is eHealth stock doing? They’re trading around $8, 87% below where they traded when Starboard first disclosed its stock. Share prices of eHealth competitors GoHealth Inc. and SelectQuote Inc. have also declined over the same period. Each of the companies has been squeezed by huge increases in marketing costs, thanks to increased competition, which casts doubt on the business model. It is not clear that these firms can offset the high marketing costs with the money they earn from the Medicare sales commission. Starboard is at a huge loss, having paid about $100 million for a stock that is now worth $14 million.
Most of the media, and many investors, celebrate the appearance of an activist investor in a company as if it were a white knight riding to the rescue of small investors from incompetent management. But activist recipes – usually focused on selling assets, buying back shares or replacing a CEO – only work a few times. And they can completely miss the mark if a company is dealing with structural changes in an industry that will take years to resolve. In other words, investors should be much more skeptical about the proposed solutions of an activist investor.
What about Elliott, the activist of the moment? At least he understands the industries he’s diving into. Elliott is known for his in-depth research on his targets. But while that may help him avoid disaster, that doesn’t mean Elliott has all the answers. Whether his bets succeed depends on his definition of success.
Consider AT&T: Elliott revealed a stake in the telecom giant in September 2019, saying the stock could double to $60 by the end of 2021 if the company overhauled its portfolio and rethought its leadership. At the time, AT&T’s stock lagged that of its chief rival, Verizon Communications Inc. The company had spent tens of billions of dollars to buy satellite TV firm DirecTV and entertainment giant Time Warner, a diversification into businesses with what could be philanthropy. called challenging long-term growth prospects. Elliott’s appearance seemed to have an impact. Seven months later, CEO Randall Stephenson suddenly announced he was stepping down in favor of John Stankey, his No. 2. Stankey quickly resolved the two major media acquisitions Stephenson had undertaken, refocusing the telecom giant on its core business.
These were smart moves. But so far that hasn’t helped AT&T’s stock price. Instead of hitting $60 by the end of 2021, it was around $18.56, 33% below where it was when Elliott first disclosed his interest. It’s still in that neighborhood.
There’s no question that it’s better for AT&T to be more focused on its core business, if only so it can properly invest in telecom and better compete with its niche-focused rivals, Verizon and T-Mobile US Inc. But mobile is a slow-growing business that requires massive investment in spectrum and network upgrades, where competition is intense not only from other mobile rivals, but also cable operators who are now entering the business. AT&T’s investment in media set it back years, but even Verizon, which has maintained its telecom focus, is struggling with growth.
Similarly, the emergence of the activist as a Twitter shareholder in February 2020 led to Twitter’s agreement to evaluate its CEO succession plan and pursue several other corporate governance changes, such as eliminating shocked board that made it difficult for outsiders to challenge control of the company. . Twenty months later, after Elliott’s representative walked away from a board seat he had won as part of that deal, CEO Jack Dorsey resigned. But Twitter’s fundamental business challenges, which include a lack of scale and uneven advertising growth, have not been resolved. Elon Musk appeared for a moment as a potential savior, but this has turned into a circus.
Elliott’s 2020 push for SoftBank to improve corporate governance and make a stock buyback paid off on both counts. SoftBank’s share price rose through 2020 — and then promptly crashed in 2021 as a government crackdown on China’s tech industry squeezed Chinese tech stocks, to which SoftBank had heavy exposure.
Put simply: An activist investor, even one as thoughtful as Elliott, may be able to score some quick hits that temporarily boost a company’s stock price. But these benefits are often fleeting. Other activists who jump into industries they don’t understand may not achieve even temporary gains.
And while more aggressive activists, such as Starboard, often seem to see management replacement as a solution, in many cases the company may be facing structural issues in an industry that a new management team cannot easily resolve.
Pinterest or PayPal might be a different story. Think Pinterest first. Elliott’s investment in Pinterest—first reported by the Wall Street Journal in mid-July—came just weeks after founder and CEO Ben Silbermann stepped down in response to an ongoing flurry of unfavorable news coverage of the company’s management. his. His successor, former Google executive Bill Ready, seems ideally placed to improve Pinterest’s e-commerce-focused advertising business.
This sequence of events suggests that Pinterest’s board was on track to replace Silbermann anyway. However, having Elliott as a major shareholder pushing for aggressive changes can only help.
Also PayPal. If you go back to the company’s first quarter call, CEO Daniel Schulman was talking at the time about the same issues he discussed this week on the second quarter call, which took place the day Elliott confirmed its interest. Schulman has focused on strengthening PayPal’s position in the checkout portion of the e-commerce software market, where competition from startups like Bolt has been intense.
Elliott may have pushed PayPal to focus a little more intensively on cost-cutting and stock buybacks (though whether an acquisition is in PayPal’s long-term business interests is an open question). And of course, it won’t hurt to have Elliott on Schulman’s case. But Elliott should stay, maybe for a few years. Otherwise, whatever impact it may have may be short-lived.
This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Martin Peers is a Bloomberg Opinion columnist covering technology and media. Previously, he was deputy editor of the Wall Street Journal’s Heard on the Street column and managing editor of Information.
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