The Hindu Business Line : Bottle-up that saucy raider

Corporate raiders may play a beneficial role in shaking up an atrophied management but it is a specific role and there must be limits on it. Running an enterprise is very different from financial jugglery and it is time corporate raiders were given that message. Investor groups that buy 5 per cent or more of the stock of a company and want to have a say in the management should be required to hold on for two years or pay a tax to the stock exchange if they intend to exit earlier.

Successful companies have a tendency to decline. That seems like a contradiction, so let me explain. When companies do well for a while, their managements tend to believe in their own excellence and become blinded to signs of potential decline. Even when the decline becomes apparent, the management tends to revert to responses tried in the past thinking the same approach will work. Quite often, it only delays revival and makes the decline even worse.

That is when an external push can come in handy. The external push serves to shock the management into realising that standard operating procedures do not work anymore and some creative action is necessary. The external source also puts into the top management the fear of losing the job that helps focus its energies more than anything else.

The Heinz case

H. J. Heinz and Co., makers of ketchup, is facing a decline and a challenge from an outside investor on how to run the business. The Heinz CEO since 1998, Mr William Johnson, was an insider, having made an impact earlier in turning around the company's pet-food business, and having managed the transition from bottle to plastic containers of the ketchup business earlier.

Mr Johnson's turnaround plan to boost Heinz's performance involves laying-off about 8 per cent of the workforce, cutting costs, and increasing spending on advertising to push more ketchup. He has already divested businesses that were on the periphery, such as seafood and poultry. His efforts have already boosted market share from about 48 per cent to more than 60 per cent. Mr Johnson is now being challenged by an investor, Mr Nelson Peltz, who feels more needs to be done to boost market share, and more costs are to be cut to improve profits.

The expenditure involved to gain additional share points may not be worth it. Mr Peltz's plan is also not very different from what Mr Johnson already has in place. So, before we go too far in recommending what Heinz should do, let us first check their performance.

Soon after Mr Johnson's appointment as CEO, the stock did not perform too well. It dropped and only recently bounced back to what it was then. Also, perhaps the company is not doing as well as it can or other food companies are doing. For Heinz last year was a bummer; revenues and profits fell though the company is still making good money. Net income was about $650 million (Rs 2,925 crore) on revenues of $8.6 billion (Rs 38,700 crore). The company is not in the red. So what's all the fuss about?

Mr Peltz runs a hedge fund, Trian Fund Management, which owns 5.5 per cent of Heinz shares which he bought in March and the approximately $5 (Rs 225) rise in the share price since then has not been enough to satisfy him. The problem is that he wants to see a quick return on his investment. There is nothing wrong with that, as long as he realises that running a company is a little different from sitting in front of a screen and trading shares.

Classic raider

Mr Peltz's approach is that of a classic raider; the kind that manages to raise a pile of funds, and then look around for vulnerable companies. So he is getting antsy and now wants to get himself and four others onto the company's board to shake up management. But that is where he is going beyond doing good for the company to being selfish. By staying outside and making regular calls to the company, he can make himself enough of a nuisance to make the management stay sharp.

From Mr Peltz's announced plans and ideas, one cannot develop any confidence that he can either be of help in setting the direction for the future nor in its operations. Moreover, as an outsider, it is not his job to second-guess the management about how much money is to be spent advertising ketchup. He wants the company to cut in-store advertising and administrative costs. He has been making suggestions on what promotions the company should sponsor. The company board has already rejected his suggestions on the grounds that they would damage the company. He has no explanation for why he believes Mr Johnson's plan would not work, and his plan is no different.

Wrong tactics

But the tactics Mr Peltz is using will certainly damage the company more than it can help. He has already distracted them enough that they are spending time trying to checkmate him rather than running the company. That will not help performance. The directors he has proposed do not have any special expertise in the food business. They include his business partner, his neighbour (a professional golfer) and his son-in-law.

The company shareholders will decide very soon if they should elect Mr Peltz and his nominees to the board. The company's web site comments that the Heinz performance compares quite favourably alongside that of the Trian Group — perhaps Mr Peltz should be paying more attention to the performance of his own company? Fortunately, other investor groups and advisers are split on Mr Peltz's moves giving the company a fighting chance to resist him.

Mr Kirk Kerkorian is trying the same thing as Peltz on a larger scale at GM right now. Clearly, there is a trend of private equity seeking to make quick bargains by buying sufficient stock to seek control and show some short-term boost to stock price. The question is whether there is genuine improvement in the company due to their efforts or they have manipulated the news sufficiently to cash out when the price of stock rises.

Soon after Mr Peltz's announcement that he wants his nominees on the board, the stock price rose giving him further ideas. Clearly, there are several other investors trying to ride his coat-tails. Having bought their shares on the assumption that he will make news, they are trying to broaden their margins.

Grab and run

Countries try to think of ways to regulate hot money movements due to their de-stabilising effect. Mr Mahathir Mohammed, former Prime Minister of Malaysia, first banned withdrawals for a year and then put a tax on portfolio investors who wanted to grab their money and run when the Asian financial crisis hit the country.

It is time stock market regulators put a time limit or added a tax to discourage similar behaviour in the corporate world. Private equity or other investor groups that buy 5 per cent or more of the stock in a firm and want to have a say in the management of the enterprise should be required to hold the stock for two years or pay a tax to the stock exchange if they intend to exit earlier. Corporate raiders do play a beneficial role in shaking up an atrophied management but it is a very specific role and the broader community needs to set limits on that role.

Running an enterprise is very different from financial jugglery and it is time corporate raiders were given that message.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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