Does the fact that an earnings-per-share figure has not meaningfully
improved over, say, five years justify an overhaul pushed by a hedge-fund
activist investor? Put another way, is a
steady earnings-per-share tantamount to failure? Especially for an established
company, steady numbers do not evince bad performance. An airline would only
foolishly fire a pilot for not climbing once having attained a cruising altitude.
Maintaining such an altitude during a flight is hardly a reason to turn a plane
around or set it in a radically different direction.
With 40 million shares, which amounts to about $3.5 billion,
in Nestlé, Third Point hedge fund urged the company’s management in June of
2017 to “sell its stake on L’Oréal and sell off nonessential operations as part
of a broad shake-up.”[1]
The conglomerate’s shares had appreciated nearly 15% over the preceding 12
months—behind Unilever but better than Mondelez and Kraft Heinz. So why a
shake-up?
Dan Loeb of Third Point. Relax, Dan, Nestle is not on a nose-dive.
To be sure, the conglomerate structure is itself arguably
too much of a strain on the extant science of management, especially in the
United States given the penchant for specialization over “big-picture”
management. Selling L’Oréal thus may make sense so the management can
concentrate on food. It was not as if such a focus would leave corporate
managers with nothing to do.
In May, Nestlé announced a joint-operation with Amazon to
offer a cooking companion with recipe instructions and other help for
customers. At the same time, Nestlé set to work eliminating unpopular
ingredients to its Maggi line. The company had been working to remove
preservatives from its ice creams. Lastly, the company announced in June that
it was the lead investor in a $77 million in Freshly, a subscription meal
service. Such adaption to changing consumer tastes and changes in the industry
is a solid means by which an established company improves its profitability.
Slogans like “a bold strategy” and a “broad shake-up” make for good press, but
they do not fit with a company that has achieved cruising altitude. In other
words, severing arms and legs should only be attempted in the more dire of
cases, rather than as business as usual.
[1]
Michael Merced, “Third
Point, a Hedge Fund, Sets Its Activist Sights on Nestlé,” The New York Times, June 26, 2017.