Pinterest and PayPal problems won’t be solved overnight by Elliott



Judging by the approximately 10% share increases in Pinterest Inc. and PayPal Holdings Inc. received this week after Elliott Management disclosed a stake in each company, investors are confident that the activist investor can quickly solve the problems of the two companies. They may be expecting too much.

Do not mistake yourself. Elliott has scored a few home runs in persuading companies to overhaul their businesses, with eBay one of the most recent examples in the tech sector. Following Elliott’s advice to sell its StubHub and classifieds businesses, eBay increased its share price by more than 150% between the start of 2019, when Elliott appeared, and last fall, before the market starts to decline. But the result of Elliott’s efforts in other situations such as AT&T Inc., Twitter Inc. and SoftBank Group Corp. was, in comparison, nothing extraordinary.

And Elliott is one of the most effective campaigners. Consider what happened after Starboard Value moved early last year to eHealth Inc., a health insurance marketplace specializing in enrolling people in Medicare, when the company’s stock fell. by half in 12 months. After launching a proxy fight to win seats on eHealth’s board, the activist quickly struck a deal with eHealth to add a healthcare executive to the company’s board. A few months later, eHealth chief executive Scott Flanders left in favor of someone with more direct health experience.

How are eHealth shares doing? They are trading around $8, 87% below where they were trading when Starboard first disclosed its stake. Share prices of e-health competitors GoHealth Inc. and SelectQuote Inc. also fell over the same period. Each of the companies has been squeezed by steep increases in marketing costs, thanks to increasing competition, which casts doubt on the business model. It’s unclear whether these companies can recoup the high marketing costs with the money they make selling on commission to Medicare. Starboard is sitting on a huge loss, having paid around $100 million for a stake that is now worth $14 million.

Much of the media and many investors celebrate the appearance of an activist investor in a company as if they were a white knight riding to save small investors from incompetent management. But activists’ prescriptions — usually focused on selling assets, buying back shares or replacing a CEO — only work once in a while. And they can completely miss the mark if a company is facing structural change in an industry that will take a few years to sort through. In other words, investors should be much more skeptical of the solutions offered by an activist investor.

And Elliott, the activist of the moment? At least he understands the industries he dives into. Elliott is known for his extensive research on his targets. But while that may help him avoid disaster, that doesn’t mean Elliott has all the answers. The success of his bets depends on the definition of success.

Consider AT&T: Elliott disclosed a stake in the telecom giant in September 2019, saying the stock could more than double to $60 by the end of 2021 if the company reviews its portfolio and rethinks its leadership. At the time, AT&T shares lagged those of its main rival, Verizon Communications Inc. The company had spent tens of billions of dollars to buy satellite television company DirecTV and the giant Time Warner entertainment, a diversification into businesses with what might be charitable. called challenging long-term growth prospects. Elliott’s appearance seemed to have an impact. Seven months later, CEO Randall Stephenson suddenly announced that he would step down in favor of John Stankey, his No. 2. Stankey quickly unwound the two big media acquisitions Stephenson had undertaken, refocusing the telecom giant on its core business.

These were smart moves. But so far, that hasn’t helped AT&T’s stock price. Instead of reaching $60 at the end of 2021, it was around $18.56, 33% below where it was when Elliott first disclosed its interest. It’s still in this neighborhood.

There is no doubt that AT&T is better off focusing more on its core business, if only to be able to invest properly in telecommunications and better compete with its singularly focused rivals, Verizon and T-Mobile US Inc. But cellular is a slow-growing business that requires massive investment in spectrum and network upgrades, where competition is intense not only from other cellular rivals, but also from cable operators just getting started. now in business. AT&T’s investment in media has set it back years, but even Verizon, which has maintained its focus on telecommunications, is struggling with growth.

Likewise, the activist’s appearance as a Twitter shareholder in February 2020 led to Twitter’s agreement to assess its CEO succession plan and to pursue other corporate governance changes, such as than the elimination of the staggered board of directors that made it difficult for outsiders to challenge control of the company. . Twenty months later, after Elliott’s representative vacated a board seat he had won as part of that deal, CEO Jack Dorsey resigned. But Twitter’s fundamental business challenges, which include a lack of scale and uneven advertising growth, have not been resolved. Elon Musk was, for a moment, seen as a potential savior, but it turned into a circus.

Elliott’s 2020 push for SoftBank to improve corporate governance and conduct a stock buyback paid off on both counts. SoftBank’s stock price soared through 2020 – then quickly crashed in 2021 as a government crackdown on China’s tech industry squeezed Chinese tech stocks, to which SoftBank had been heavily exposed.

In short: an activist investor, even as thoughtful as Elliott, may be able to score quick wins that temporarily boost a company’s stock price. But these gains are often short-lived. Other activists who jump into industries they don’t understand may not make even temporary gains.

And while the more aggressive campaigners, such as Starboard, often seem to see replacing management as a solution, in many cases the company may be facing structural problems in an industry that a new management team can’t solve easily.

Pinterest or PayPal might be another story. Think Pinterest first. Elliott’s Pinterest investment, first reported by The Wall Street Journal in mid-July, came just weeks after founder and CEO Ben Silbermann stepped down in response to a steady pace of unfavorable media coverage. of his direction. His successor, former Google executive Bill Ready, seems uniquely positioned to improve Pinterest’s e-commerce-focused advertising business.

This sequence of events suggests that Pinterest’s board was well on its way to replacing Silbermann anyway. Still, having Elliott as a big shareholder pushing for aggressive change can only help.

Same as PayPal. If you go back to the company’s first quarter call, CEO Daniel Schulman was talking at the time about the same issues he addressed this week on the second quarter call, which was the day Elliott confirmed his interest. Schulman is focused on strengthening PayPal’s position in the payment end of the e-commerce software market, where competition from startups such as Bolt has been intense.

Elliott may have spurred PayPal to focus a bit more on cost cutting and stock buybacks (although whether increasing a buyback is in PayPal’s long-term business interest remains an open question) . And of course, it won’t hurt to have Elliott on Schulman’s case. But Elliott has to stay, maybe for a few years. Otherwise, whatever impact it might have, it might be short-lived.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Martin Peers is a Bloomberg Opinion columnist covering technology and media. Previously, he was associate editor of the Wall Street Journal’s Heard on the Street column and news editor.

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