By Seongeun Tammy Lee
Seongeun Tammy Lee’s essay on the short and long-term effects of activist investors in the Dow-Dupont merger was written for Business 4444H: Honors Case Studies in Business.
Traditionally, shareholders of a company are invested in maintaining long-term relationships with that company rather than focusing on their short-term interests, such as earning a higher stock price. However, some shareholders are heavily involved with a company, acting as activists who manipulate the company in order to increase the share price of their investment in the short term. These activists try to change a company’s day-to-day operations, modify the company’s model, or even encourage a merger with other companies for their own purposes. Some people argue that activist investors help to monitor management of the company (Greenwood and Schor). For example, in the recent Dow-DuPont merger, activists were heavily involved in the company’s decision to generate current cash-flows regardless of how this impacted the company’s value. If we see their role at a glance, the activists do not appear problematic because it seems that they are also worried about their company’s future. However, since the activists are mostly focused on short-term goals, their push for Dow-DuPont to create current cash flows could hurt both consumers and investors in the long term.
Activists forced Dow-DuPont to reach short-term goals regardless of the company’s long-term interests. In other words, they were only interested in short-term profits, not the company’s sustainability. For example, Trian Fund Management, a hedge fund led by Nelson Peltz, pushed DuPont, a conglomerate chemical company, to stream down its operating division in order to generate cash and to cut down on R&D expenses before merging the company with Dow. Peltz forced DuPont to focus only on the agriculture and nutrition industries, which had generated most of the company’s cash (Bunge 4). Peltz and other activist investors believed that if the company focused on a few industries, it would evolve faster, meaning that the company would not waste money on non-cash generating industries (Bunge 5). In addition to stripping down poor cash flow industries, the activists tried to get rid of R&D expenses because they asserted that they wasted money rather than bringing in profit.
In addition to their investment in earning a quick profit, the activists were also involved in the merger between DuPont and Dow, so that it would generate a high premium (Greenwood and Schor). Activists, Peltz from DuPont, and Daniel Leob from Dow, played a significant role in the merging of the two companies. Both activists wanted the companies to narrow down their core business industries to make their stocks profitable in the near future. Peltz, in particular, had a proxy battle against the CEO of DuPont a few months before the merger (Benoit 2). In emphasizing the importance of the company’s cash flow, he asserted that DuPont needed to separate into three parts. He also wanted to be part of DuPont’s board. However, he could not get sufficient votes for the seat. Since Peltz could not apply enough pressure to get higher profits, he tried to get a higher stock price in a roundabout way, merging Dow and DuPont. The deal seemed positive because the merged company would be bigger, more focused and better equipped to handle activists’ challenges and diverse revenue. According to Lydia Mulvany, a reporter at Bloomberg News, “if the merger was completed, a combined Dow and DuPont would have 16% of the world’s pesticide business.” However, when one looks closer, it seems that the merger benefits the activists more than the companies. The merger saved Dow-DuPont $3 billion in costs (Benoit 2), and the activists were able to narrow down the industries to earn a lucrative profit.
Beyond the specific Dow-DuPont case, activists have had an invasive impact on the business world in general. Activists have pursued quick profits and steered companies away from making necessary investments for the future (Gellman and Hoffman). However, pursuing short-term goals has caused problems in both business and society. Pressure from activists results in fluctuating market prices and general instability. In turn, these fluctuations reflect only the activists’ strategies rather than a company’s operations. Bill George, a Harvard Business School professor and former Medtronic CEO, mentions that, because of the influence of aggressive activists, “the stock market, particularly the New York Exchange, is shorter term than ever.” He also asserts that “the market’s obsession with short-term performance ultimately hurts investors, companies, consumers and society” (George). Companies do not exist solely for generating short-term profit. When a company diversifies and tries to research and develop new areas, it creates business sustainability, passing on value to both customers and society as a whole. DuPont officials mentioned that, “[j]udging R&D efforts by the revenue from specific products ignores broader benefits of integration” (Bunge). For example, DuPont invented Freon, which has benefited society by enabling the invention of the eco-friendly refrigerator.
In addition, the pressure by activists could eventually hurt investors. If a company operates only for attaining short-term returns, rather than establishing a profitable long-term business, it will not be able to share gains with its workers and communities. Then, investors would not be able to make both short and long term investments. As the influence of activists has been pervasive, it is necessary for companies to prepare “activism-defense work” (Benoit and Mattioli 2). This defense would prohibit activists from chasing short-term profit.
In the past few years, activists have become celebrities in the media as hedge funds have become a more available tool to make money for wealthy people or institutions (Regnier). Activists have targeted their finance reengineering on big companies such as Microsoft, Apple, Netflix, and so on (Solomon). Due to their effect on society, many business students want to become activists rather than pursue traditional finance roles (Gellman and Hoffman). If too many activists involve themselves in a company’s decision making without a full understanding of the company, the stock price would not reflect business operations, and we would lose sustainable companies that benefit society. In other words, the movement would hurt investors down the road.
Benoit, David. “Dow, DuPont Deal Cements Activists’ Rise.” WSJ. N.p., 11 Dec. 2015. Web. 10 Apr. 2016.
Beniot, David, and Dana Mattioli. “Activism-Defense Specialist Anderson Leaving Goldman Sachs.” WSJ. N.p., 3 July 2015. Web. 9 Apr. 2016.
Bunge, Jacob. “DuPont’s R&D Is at Center of Fight With Activist.” WSJ. N.p., 27 Oct. 2014. Web. 9 Apr. 2016.
Bunge, Jacob. “Investors Weigh Bid to Break Up DuPont.” WSJ. N.p., 18 Sept. 2014. Web. 9 Apr. 2016.
Gellman, Lindsay, and Liz Hoffman. “Activist Investors Are Shaking Up Business Schools, Too.”WSJ. N.p., 6 Aug. 2015. Web. 9 Apr. 2016.
George, William. “Bill George on Rethinking Capitalism.” McKinsey & Company. N.p., Dec. 2013. Web. 11 Apr. 2016.
Greenwood, Robin, and Michael M. Schor. “Investor Activism and Takeovers.” Science Direct. N.p., 1 May 2008. Web. 13 Apr. 2016.
Mulvany, Lydia, et al. “A Merger That Activist Investors Can Love.” Business Week 4455 (2015): 22-23. Business Source Complete. Web. 9 Apr. 2016.
Regnier, Pat. “Why Companies Have to Listen to Carl Icahn.” Time Money. N.p., 1 Oct. 2014. Web. 10 Apr. 2016.
Solomon, Steven Davidoff. “In DuPont Fight, Activist Investor Picks a Strong Target.” DealBook. New York Times, 27 Jan. 2015. Web. 11 Apr. 2016.
Published September 8, 2016