Interview: Activist funds can be ‘conduits’ for positive change: Trian CIO

Nikkei Asian Review
By Akira Yamashita
16 March 2016

Activist funds are becoming increasingly vocal shareholders, not shying away, for example, from pushing for strategic mergers. Trian Fund Management is one such fund, having played a major role in the recently agreed merger of Dow Chemical and Dupont.

Edward Garden, chief investment officer of Trian, recently sat down with the Nikkei Asian Review to discuss the situation surrounding activists funds in the U.S.

 

Q: Activist funds have become increasingly influential in the U.S. lately. What are the factors behind that?

A: For a long time, ownership and control were essentially viewed as two different concepts. You had management and the board, who basically had control, on the one hand, and shareholders, the owners, on the other hand, whose only options if they were not happy with the direction of a company were either to sell their shares or continue to hold on to their shares and quietly suffer.

Today, more and more institutional shareholders view themselves as real owners with all of the rights and privileges that go with ownership, which means that they tend to want more influence over the operations and strategy of the companies they invest in.

Activists serve as the conduit for shareholders, expressing their views on how the business can be operated for the long term, and working with management and boards to facilitate positive change. I think the market generally, and that includes a lot of constituents — institutional shareholders, advisers, corporate governance experts — now view activists as healthy and adding value.

 

Q: Some activist funds are now focused more on mergers and acquisitions. What about Trian?

A: At Trian, we have always been income statement-centric. We believe we distinguish ourselves by working closely and constructively with management teams and boards of directors to optimize the performance on the income statement. We seek to make the company more profitable, and to do that the right way — not by cutting costs that shouldn’t be cut — but by making sure that a company is operating efficiently and spending on projects that will allow the company to be best in class for the long term. I think the market perceives Trian as all about operations and fixing operations, regardless of the macro, with a strong M&A skill set when needed.

 

Q: Late last year, Dow Chemical and DuPont decided to merge, with plans for the new company to pursue a tax-free split into three separate public entities. What can you tell us about this deal?

A: Trian was very involved in the Dow-DuPont deal. Dow and DuPont asked us to sign confidentiality agreements and to assist in the negotiations, including structure and governance. We believe it’s a very strategic deal, because both Dow and DuPont have disparate businesses, businesses that don’t belong under the same corporate umbrella, with different cycles, different capital requirements, different raw materials needs and different end markets. In short, not a lot of synergies. But by bringing the two companies together, there is a great opportunity to rearrange the portfolios.

In the case of DuPont, the major part of the agriculture business is seeds. In the case of Dow, the major part of their agriculture business is crop protection chemicals. So, the combination creates an elegant fit. The combined business is stronger. Further, Dow has some very good technology which DuPont can work with. DuPont has a best-in-class distribution system for the farmers, which Dow doesn’t have. So you are creating complementary product lines, with more products and technology that can be put through the DuPont distribution system, which we believe creates a competitive advantage. Over time, we think the combination should produce superior results. Not necessarily next quarter or next year. But over time, the combined agriculture business should be a much stronger competitor. So we think there is very strong industrial logic to putting these businesses together, and we were happy to play a role in making it happen.

 

Q: What was Trian’s contribution to the deal?

A: We contributed to the board of DuPont thinking about strategic issues and ultimately in structuring these businesses in a way that allows them to be best in class operationally over the long term. Our goal is to help make the companies we invest in best in class operationally, which I’ll define as best-in-class organic revenue growth and best-in-class margins.

 

Q: Some commentators say activist investors can destroy long-term company value. What is your response to that?

A: If you’re destroying the long-term potential of a company as an activist, you won’t be in business very long. Let me tell you why I say that. The owners of corporate America are, for the most part, large institutional investors with a long-term view. If you look at the shareholder base of any given large U.S. publicly traded company, you’re going to see a lot of the same institutional investors: State Street, BlackRock, Vanguard, Capital, Fidelity, Invesco, T Rowe, Franklin, just to name a few. In order to facilitate change at a large U.S. publicly traded company, an activist is going to need their support. If you do something that’s good for you in the short term but bad for the company in the long term, you’re not going to get the institutional shareholder support the next time.