October 9, 2016 - This week has seen another ‘activist investor’ taking a ‘run’ at a company in the lifting equipment sector.
This time Terex is the target and Richard ‘Mick’ McGuire of Mercato Capital the protagonist. He has suggested that Terex look at more disposals and that it should ‘slash costs’. In comparison with others of his ilk, such as Carl Icahn, McGuire seems considered and thoughtful, and possibly means well. Terex chief executive John Garrison has been involved in the streamlining of Terex and is increasingly involved in the three core businesses that remain. He is unlikely to be pushed into any short term actions by McGuire.
Other investors however, such as Icahn are far more aggressive, and are more likely to cause damage to companies than help, in some cases their interference is terminal, long after the investor walked off with a short term killing. Icahn’s current modus operandi is to buy a 10 percent stake in a business, make a great deal of noise and try to force his cronies onto the board, while lobbying to break up the business - regardless if it makes sense for the long term health of the company. This type of activist is purely out to make a quick buck before moving on to their next target.
In recent years Oshkosh/ JLG, Manitowoc and Hertz are all examples where Icahn got involved. Oshkosh managed to see him off and held onto JLG, which later proved to be a very good decision. In the other two cases though he timed his attack when senior management was either weak or disrupted and in both cases he got his way splitting them in two. Whether this proves to be of long term benefit to the four business created remains to be seen. Manitowoc Crane is certainly making changes and is beginning to benefit from a good number of excellent new products it has recently launched, or that were in the pipeline, several of them are best in class, or even ‘game changers’. Would it have done better if it had not had the cost and management distractions involved with the separation with its food division, which took almost 18 months? We will never know.
The problem is that investors/fund managers have rarely run a regular company, and have little to no experience of the industry. A fresh view from outside can of course be enlightening, and managers should always listen to and evaluate any such suggestions, they may well offer a different view that makes a lot of sense. But at the end of the day the company’s management is responsible for running the business and ought to be the most knowledgeable about the company and the industry. As such must make their own decisions, and not be afraid to say “no we are not doing that- it is wrong for the business at this time”.
When management runs scared of loud investors and allows activists to start influencing their agenda and policies, regardless of their merit, it is the start of a slippery slope and the business will suffer. When that happens the losers will be the employees, customers, and other investors. While the activist walks off with a fat profit, having talked up the share price at the start, with exciting ideas and suggestions to add value, but are that are not actually good for the business, which is why they then cash out before the hype and short term changes cause long term damage..
I have sat through many a quarterly conference call where it has been obvious, that the chief executive is feeding excuses to the investors/analysts on the call - that would not stand up to scrutiny by an industry insider - and then announced a new restructuring plan to deal with it, even though their previous ‘restructuring plan’ - barely six months old- has not been fully implemented yet.
In summary, and at the risk of generalising, most activist investors do not know how to run a real business, and have little interest in the long term health of the company, being more interested in making a quick buck. Short term focus for an equipment manufacturer can be suicidal, we do after all operate in a cyclical market with products that take a lot of up-front investment, require excellent long term support and rely on buyers having confidence in the brand and the company.
While the discipline of a public company can be very beneficial, and provide more fund raising opportunities to invest in growth, they do require a strong chief executive who is on top of his game, knows his business well, listens to those involved in the business, including customers, employees, suppliers and shareholders, and has the full confidence of a decent board of directors. This is what companies and their shareholders need to prosper, not an ‘activist investor’.
We appear to be sliding into an era where truth and facts are seen as disruptive irritations, not only by outspoken ‘populist’ politicians, but increasingly of large companies and industry associations.
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