If anyone was in any doubt about the ambitions of activist investors, events at Nestle during the last 24 hours should convince them otherwise.
Activist investors, specialists who take big shareholdings in companies and then agitate for change at them, are nothing new.
The likes of Carl Icahn, Bill Ackman and Nelson Peltz have been household names for years.
What has changed, though, is that the companies that they are targeting appear to be getting bigger.
This is partly a consequence of Quantitative Easing, which has showered the world with cheap money, therefore making it easy for the businesses targeted to ramp up their borrowing relatively cheaply and increase their cash pay-out – a typical activist demand – to shareholders.
It is also partly down to the changing nature of shareholders.
The rise of passive investors – like index trackers – around the world has, in some cases, led to situations where company bosses find an increasingly small part of their shareholder base willing to talk with them.
Shareholder bases have also become more fragmented in many cases.
Those two factors risk creating complacency among managements, due to what has been called the “absentee landlord” effect and because it has become harder for traditional shareholders to co-ordinate action against under-performing boards, but has also opened the door for those investors willing to take reasonable stakes in the size of a business and then push for change in such a way that they cannot be ignored.
Accordingly, there have been some spectacular and high-profile campaigns waged this year by activists such as Elliott Advisors, most notably against Akzo Nobel, the Dutch paints and coatings giant, and BHP, the world’s biggest mining company.
Now it is the turn of Nestle, which on Sunday night was disclosed to being in the sights of Third Point – one of the biggest activists of them all.
Third Point, headed by Daniel Loeb, has taken a $3.5bn stake that represents around 1.3% of the world’s largest food-maker.
The holding in the Nescafe, Perrier and Kit-Kat maker represents the biggest initial stake in a business ever taken by Third Point, which has previous agitated for change at Yahoo and Sony and which has certain recommendations it wants to see implemented.
Specifically, it wants Nestle to set a formal profit margin target of between 18-20%; sell non-core assets; raise borrowings in order to buy back its shares and offload its existing 23% stake in the French cosmetics giant L’Oréal.
Its timing is interesting, to say the least: Nestle has only recently appointed a new chief executive, Mark Schneider, who has already announced plans to sell the company’s US confectionery arm and made clear his intention to cut costs.
He has also expressed an interest in finding new ways of reaching customers, as with the noodle brand Maggi, which is in some countries now being sold by Nestle in partnership with street vendors.
Yet Nestle is a super-tanker of a company and it may prove a tough nut to crack.
It could probably rely on the support of the Swiss government, should things get ugly, as part of that country’s corporate establishment.
Moreover, while Mr Schneider has already signalled his openness to change, his chairman, Paul Bulcke, has been at the company for almost four decades and may prove resistant to anything too radical.
At the same time, as has been often noted, the rules are different in Europe.
Elliott recently found itself frustrated, for example, in its attempts to bring about change at Akzo Nobel and eventually had to give up.
Another factor is that news of Third Point’s shareholding has already sent shares of Nestle to an all-time high.
Its stock market value of SwF254.85bn (£206bn) means it is Europe’s largest publicly-traded company.
Yet that early share price increase may, ironically, mean further easy gains for Mr Loeb are less likely as any improvement in Nestle’s operating performance may already be starting to be priced in.
Either way, it promises to be a fascinating situation to follow, and not just for foodies.
Source: SKY News