The golf expression, “That is a game I’m not familiar with” is used to describe a competitor’s game that is much different than your own. The player may be able to hit 350 yard drives against your 250 yard drive, or they may be able to read the green differently and take bigger chances at sinking long putts. In any case, understanding your game is a good reason to play the game that you are capable of managing, and not try to mimic your competitor. The same is true in investing. You should never attempt to manage your portfolio using a method developed on criteria that you are not familiar with.
I think this moto will apply over the next several weeks, or months, as Mr. Ackman begins to “manage” Mondelez International (MDLZ) from the outside. Mr. Ackman is a billionaire who has made a practice of maneuvering publically traded companies in the direction he believes is beneficial for improving “shareholder value”. When evaluating an activist’s actions and motives, it is useful to know the activists investment time horizon; does it match yours? It is most likely a much shorter period than you expect. Why is it so short? There is a target price that is being sought by the activist, nothing more, and when that price is reached, either up or down, the investment will no longer be of interest to the activist. In regards to a motive behind the investment, on balance, you need to understand there is a much lower level of interest in customer satisfaction, employee well-being, or long term stability of the enterprise, the primary focus is the stock price.
Recommendations will be flowing from Mr. Ackman and/or his hedge fund, Pershing Square over the next several days, or weeks, or months. Ideas will surface such as merging with Pepsico. Pershing Square has taken a 7.5% ownership interest in Mondelez worth $5.5 billion. This is not an investment that will be taken lightly by Mr. Ackman or Mondelez’s Board of Directors. Mondelez has already issued a statement stating that they “welcome Pershing Square as investors”. Really? What management group welcomes an uninvited outsider to join them and proceed to tell them how to manage the company? Does management not believe they are already doing a good job? Maybe they are just looking for some new good ideas, right. Why didn‘t they call him earlier? Maybe they didn’t have his phone number.
In 2012 Kraft split into two enterprises, Kraft and Mondelez, to become more “focused and smaller”. Then earlier this year, Kraft merged with Heinz to become Kraft-Heinz so it could become larger. Now one of the possible outcomes suggested by Mr. Ackman is Mondelez be merged into Kraft Heinz to be even larger. The other possibility is for the company to be broken up to become more smaller. I’m beginning the real motivation is just making a change. Maybe the biggest challenge the company has right now is constant turmoil from mergers?
Is management doing a good job? Since 2009 the share price has moved from $14.58 to $46.29 a 217% increase while the overall market has managed about the same. The company has paid a regular divided in the range of 1.60% which is also in the general range of the overall market. This is not a bad track record especially considering the turmoil the company has experienced, but it is not great either. It is interesting to look back over different time periods to see how management has been viewed. During the period of the Great Recession management was praised because the stock price held up much better than the market. Then after 2009, management was criticized for not growing faster even though it was matching the market. The split up of Kraft into Kraft and Mondelez did little for the stock price and only in the last nine months since the Kraft-Heinz merger has the stock moved upward faster than the market.
The Kraft-Heinz merger pushed the stock price into the higher regions of fair value and almost into overvalued territory. The recent announcement of Mr. Ackman’s interest has pushed the stock price up to 120% of fair value, into what I call “cautionary”. This is the area just before overvalue.
Going forward the share price will either not add value at the same rate as the market or will return to a position closer to fair value which could potentially be a downward movement in share price. Unless an artificial external pressure influences the stock price and interest from an activist is an external pressure. The pressure may make the future uncertain and unpredictable.
There are two activists involved in this company now, Mr. Ackman and Mr. Peltz who already owns a 3% interest. This mix could possible result in a conflict in the market if their objectives differ. The future for Mondelez has just become highly uncertain and involves unknown objectives, over an unknown time frame, with a management group that suddenly has a new advisor with influence. The question to the rest of the stockholder group is who is in charge, if anyone?
This is a game I am familiar with, and I generally choose not to play.