Cartoon 842: Scorched earth

Often we hear the liturgy of Investors, “Return On Investment” or ROI. It simply means for the money tied up in an enterprise what is the amount of profit or loss.

There are a couple of things worth knowing.

First, Activist Investors like Carl Icahn seldom acquire a large percentage of a company. In fact their goal is to tie up as little of their resources as possible. Activist Investors seduce large institutional investors and hedge funds to allow them to act on their behalf. The hook is profits.

Second, activist investors make their wealth through the “velocity of money”. It means the rapidity of which they can move their money in the financial system of things. Money tied up is not profitable. Their goal is to execute some financial move to drive up immediate profits and get out and move on to the next opportunity.

Third, the short term moves of Activist Investors have disastrous affects on a Corporation. They trade tactical and strategic needs for instant balance sheet gratification.

Fourth, Activist Investors have a limited arsenal.

They try to spin off (sell) a profitable or growing part of a corporation. The sale improves the corporation’s balance sheet and gives a boost to the stock. The Investors typically bail having gotten richer through the stock price.

They try to get a business with lots of real estate locations to sell the real estate and lease it back from the buyer. Again, another improvement of the balance sheet and stock price boost. But almost immediately after the euphoria, the recurring lease debt strikes home. Unusually they can delay it appearing on the balance sheet for a year afterward. It is the perception of the sale that counts. They can drag on the actual culmination for some time.

The only major business to successfully block an Activist Investor selling the real estate was Target in 2008. The management in a proxy fight was able to block activist investor William Ackman in his bid to sell Target locations.

They try to sell the company. A good sale will raise the stock value. There were a lot of games played with the recent Dell sale.

They try to merge the company with a rival to achieve larger market share and dominance. Wall Street loves it because it implies layoffs and supposedly reduced labor costs and greater efficiency.

They try to get people on the Board of Directors that will act according to their desires.

Tim Cook, the head of Apple, was attacked at the share holders meeting. Some vocal Investors did not want Apple investing in “green” projects. They said it was not the best Return on Investment. Supposedly Cook said the most unholy thing, “it is not all about Return on Investment”. We do products for the blind and many other things never expecting a profit. Needlessly to say the Conservative media went wild. I imagine Cook has a target on his back.

They try to get companies to buy back their outstanding stock. This drives up the stock price.

The final thing they do is try to force businesses that have cash to give it to investors in the form of dividends. They successfully forced Microsoft to do so a few years ago. More recently Apple was also forced to do so.

In the Activist Investor cross hairs right now is eBay. Carl Icahn wants the very profitable “PayPal” sold off. I sincerely hope he fails.