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Don’t Be Caught Unprepared: Shareholder Activism in CPG

Shareholder activism in the consumer packaged goods industry has been on the rise in the past few years. Shareholder activists spent $40 billion targeting 136 companies with market values of more than $500 million in the first half of 2018, and activists deployed $62 billion across 193 companies in 2017, more than double the amount in 2016. Shareholder activism in CPG has been occurring more frequently over the last few years for many reasons, including capitalizing on short-term investment gains and driving institutional change, and it will continue to influence the strategy of consumer packaged goods companies.

Shareholder Activism in CPG

Shareholder activism is when shareholders use their rights and power to bring about change in the company. Most commonly, shareholder activists are hedge funds, and they make specific demands to the company in order to improve performance and the value of the company. Frequently, activists investors propose for a split-up, share repurchases, and reduced operating costs, with the intention to increase shareholder value. If the company does not agree to these demands, the shareholder activist will wage a proxy fight and aim to vote out the current board of directors. Company management who fights back against the demands of activist investors often argue that these investors are focused on short-term gains, while their strategy is designed for long-term returns.

Nelson Peltz, founding partner of Trian Fund Management, has been frequently engaged in shareholder activism in CPG. Peltz launched a two-year war against PepsiCo, in which it had a $2 billion stake. Peltz wanted PepsiCo’s beverage division Pepsi to split off from PepsiCo’s food and snack division and merge with Mondelez, one of Peltz’s holdings. PepsiCo and Peltz reached an agreement in which it didn’t have a split-up, but it increased productivity efforts and advertising investments and appointed Trian business advisor William Johnson to the board of directors. In an even bigger proxy fight against P&G, Peltz formed a $25 million campaign to win a board set, and he plans to cut 90 percent of its corporate employees, break up the company into three divisions, and develop a more direct-to-consumer (DTC) model rather than a B2B model. P&G did not agree with Peltz’s vision, and it wanted a new board member with big data and analytics experience, but it ultimately agreed to Peltz’s proposal.

While big companies like PepsiCo and P&G receive a large amount of attention, activist shareholders often target small and mid-size companies, as well. In 2017, 94 percent of activist campaigns were targeted at mid-cap, small-cap, and micro-cap companies rather than large-cap or mega-cap companies. For example, this April, activist investor Jana Partners took a 9 percent stake in Pinnacle Foods and pushed for the integration of Pinnacle with Conagra Brands, which successfully occurred two months later. Jana Partners earned $144 million from the transaction.

Shareholder Activism in CPG for Mid-Sized Companies

How should mid-size CPG companies deal with activist investors? For one, companies should lay out a clear long-term strategy. Shareholder activists may be seeking short-term financial gains rather than acting in the best long-term interest of the company. Institutional investors can be management’s ally in any proxy contest if their long-term growth strategy is clear and reasonable.  To create short-term value, shareholder activists often recommend a reduction in spending, termination of employees, and the split-up the company, which temporarily increases cash flow but can work against the company’s goals in the long-run.

Management of mid-size CPG companies need to continually think like activist investors when setting up their long-term strategy. Doing so will help companies prepare for activists and successfully collaborate with them. To think like an activist investor, management needs to examines many different questions that activists often analyze when forming a campaign, including:

  • How do critical measures like return on invested capital or total shareholder return compare to industry?
  • Is there a strong strategic case for keeping multiple lines of business together? What’s the overhead of supporting tangential businesses?
  • Are you over or under leveraged in your balance sheet?
  • Should we issue a special dividend or share buy back?
  • Are there assets we should sell that are not related to our core business?

Getting executive compensation right is also an important part of the shareholder relations strategy. Executive pay is a frequent target of shareholder activists, who often cite declining performance and increasing exec pay as one of their main reasons for creating a proxy fight. Companies should implement a clear pay-for-performance executive compensation strategy that rewards executives in good times and is aligned with the corporate strategy. Transparency around your board of director’s skills and why these skills are critical to govern your business is another important part of the equation that shareholders care about.

Finally, companies should be transparent with shareholders and create a plan for frequent communication. In practice, being transparent means publishing public statements, addressing concerns during earnings calls, and having year-round personal meetings to create a culture that garners the trust of shareholders and generates strong shareholder engagement.

Often, we think of activities investors targeting only the largest consumer products companies or the companies who are underperforming. This shareholder activism in CPG trend is changing. Activists of all types are targeting small to mid-sized consumer goods companies, even if your earnings are meeting expectations.  It is critical to create a clear and transparent long-term strategy and share that transparently with shareholders long before you find an activist investor has taken a 3% (or more) stake in your business.

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Contributions from Thomas Wang.

Tags: Strategic Advisory, Strategy