Should CEOs Welcome The Activist?
By Jeff Cunningham
On December 10, 2018, Starboard Value managing partner Jeff Smith sent a politely threatening letter to Gary Philbin, Dollar Tree’s CEO, notifying him that the activist has a 1.7% stake in the company and wants board seats and strategy changes, and wants them now:
“We believe that Dollar Tree is a great company and one that is significantly undervalued in the market today. We also believe that Dollar Tree has the potential to create significant value for shareholders moving forward by embarking upon the initiatives we have outlined.”
Smith made it clear that Philbin is underperforming. He says that Dollar Tree under Philbin’s leadership has been hurtful to shareholders. Starboard Value outlined two remedies that could change future direction and turn the company around: “(fix) the issues at Family Dollar and (change) the unwillingness to consider price as a variable at Dollar Tree.”
So Not Happening
Philbin rejected Starboard Value’s offer of ‘help’. He hired Wachtell, Lipton, Rosen & Katz to defend management in the ensuing battle, and responded with a letter of his own that reiterated the company’s desire to seek strategic value without the activist’s participation or role on the board of directors:
“Dollar Tree is committed to a strong, independent Board…. We note that Starboard’s nominations for the board were made without seeking any engagement or making any communication to the Company.”
In Philbin’s defense, he previously considered some of the options Starboard suggested. They turned out to be more challenging than Starboard’s back of the envelope calculations would indicate. According to analysts at Raymond James, Dollar Tree would be “fortunate” to get two-thirds of the $9 billion paid for Family Dollar (which Dollar Tree acquired in 2015), and unloading the company to another retailer is not practical in the current political climate:
“It is our view the FTC remains protective of low-income families and is not supportive of large horizontal mergers that impact this segment of the market.”
Analysts added, regarding the pricing strategy, that “previously when Dollar Tree tried to offer higher-priced items, customers were “confused” and the results “disappointing.”
So was Philbin right to reject the activist’s embrace? Isn’t the activist just looking for a quick buck at the expense of long term shareholders? The right answer is that those who take the strategy messaging too literally might be misled. It is about making the company more responsive, and the strategic options are merely to gain entry into the thought process of the boardroom.
The fact is that Smith’s advice is the opening gambit that Starboard is hoping will impress Wall Street (Dollar Tree is 90% institutionally owned) long enough to sell the shares while the stock is hot. That’s certainly true. They don’t care how Dollar Tree does it. Activist embraces are about time, not ideas. Knowing all of this, how should a CEO respond?
Treat them like a free “put” you can accept or reject at any time. Recognize that their intrusion provides a chief executive with a formidable opponent that can wake up the team, unite the employees around common goals, and achieve both the gain in shareholder value while maintaining the integrity of leadership. To reject them without deliberation is to weaken the defense that management has the shareholder’s interest at heart.
Activists are not clairvoyant. Their financial rewards come from calculating odds, not the future. But they rarely devote the amount of energy required to guide the company through the seemingly impossible changes they outline unless there is a legitimate expectation the shares will respond to shifts in strategy.
If they believe there’s room to grow your company’s value, you should give it every consideration. Examine the options in light of actual history, not their projections, and hypotheticals. Either their advice will appear naive or formulaic, or it will be sound, or it will inspire new thinking on your team that may be the right way forward.
The added benefit is the world knows you are engaging in battle. The goal should change from fending off an activist to aligning the company, its shareholders and employees, around the need for process improvement. With the catalyst of the activist, a house cleaning that opens up the company to new ideas, new talent, and new shareholders is possible.
Does it matter if the activist is wrong? There are many ways an activist can be misguided. They may overvalue the company or Wall Street’s opinion of the strategy changes. The customer base may not react well, or management may not be able to pull off the coup in strategic direction. The way to assure against these outcomes is to first engage and then require the activist to increase shareholdings. This would lift the stock and align them with long-term players because exiting a large position would have to be done over time.
An activist embrace does not mean marriage. It only suggests the leadership team is confident enough to examine every option to increase value. Even if it means dealing with people you don’t really like very much.