DuPont investors voted against the board members nominated by Nelson Peltz’s Trian Fund Management, surprising much of Wall Street. Peltz’s loss triggered a sell-off in DuPont shares, which plunged on Wednesday.
Holding DuPont management accountable
But the fact of the matter is that while Trian may have lost those board seats, it still won the war—at least for now. Peltz has made a mark on DuPont despite not landing seats on the company’s board and has said that he will remain involved for some time.
Investors can safely consider Peltz to be like a police officer keeping an eye on DuPont management to make sure they deliver on their promises. Peltz and his firm will likely be the ones to hold the company’s management accountable for making the changes they promised, and if they don’t deliver, Peltz may just try again to get seats on the chemical company’s board.
DuPont management gets constructive
ValueWalk spoke with attorney Chris Davis of Kleinberg Kaplan, chairman of the firm’s Mergers and Acquisitions and Investor Activism groups. He shared some interesting perspectives on DuPont and how both sides can essentially chalk this up to a win. For example, he said the company’s management demonstrated how some companies are starting to look for more constructive ways to deal with activists—by working with them while also trying to keep them at bay.
[drizzle]”Yesterday was an interesting event,” Davis told ValueWalk in an interview. “It shows, I think, that management and boards that are serious about getting ahead of the curve and really emphasizing value creation and change and creative improvements and that a company can still win against even really talented and well-represented activists. But the fact that boards lose as often as they do probably does give some credence to Carl Icahn’s hints about corporate boards. There’s a high degree of, he would say ‘incompetency,’ I might say ‘not being fully up to the task of what’s going on there.'”
Cases like the DuPont battle demonstrate how management of public companies should be challenged to update their boards often with new members, new abilities, different viewpoints and the like, said Davis. Trian basically challenged the company to make changes and did win some changes along the way even though it didn’t get any board seats.
Trian gets the credit
On Nelson Peltz’s side, he doesn’t think Trian has gotten enough credit for the changes that have been made at DuPont and, in fact, he thinks the firm is largely responsible for those changes. Of course Trian has been tooting its own horn, explaining that since it first bought shares in the middle of 2013, DuPont has upgraded its board, authorized $5 billion in share repurchases, started slashing costs and made other changes. The company also announced that it would separate the Chemours segment.
Davis believes Trian should indeed have the credit for these changes because he doesn’t think DuPont management would have been pushing so hard to make changes and improve sales and profitability if there wasn’t an activist “out there at the gates.” Overall, he credits Peltz’s firm with “tremendous value creation for shareholders” in the DuPont campaign.
Further, Davis said the loss of the board seats doesn’t mean this is the last chapter for Trian and DuPont. In fact, DuPont management should feel the pressure to keep their promises because if they don’t, Nelson Peltz may try again and win. CEO Ellen Kullman should take this week’s win as a sign that they have earned investors’ trust—at least for now.
DuPont wins despite ISS recommendation
One of the more interesting aspects of the DuPont – Trian battle is the fact that usually-influential shareholder advisory firm Institutional Shareholders’ Services sided with Trian, but shareholders sided with DuPont management. While statistics show ISS’ influence is waning, it is still a bit of a surprise to see shareholders vote against the firm’s recommendation on such a high-profile activist battle.
Davis said this case demonstrates the “ridiculousness” of the situation, as firms like ISS and Glass Lewis often wield too much power. He noted that it’s very common for advisory firms to recommend at least part of an activist’s slate of board nominees—as long as the activist is a “quality” one (like Nelson Peltz, whose reputation precedes him) bringing “quality” nominees and seeking just a minority representation.
In DuPont’s case, Davis thinks institutional investors considered the recommendation and what has been happening at DuPont, including the changes that have already been made and those that have been promised. He believes that they felt as if enough progress has been made that for now, it make sense to stay the course.
What analysts are saying about DuPont
Naturally analysts from multiple firms are weighing in on what happened at DuPont on Wednesday. Deutsche Bank analysts David Begleiter, Jermaine Brown and Ramanan Sivalingam said the pullback in DuPont shares offers a buying opportunity for investors. Like Davis, they expect Nelson Peltz and Trian to continue pushing for more cost cuts, improvements in operations and optimization of the company’s portfolio.
Further, they noted that Kullman has said they won’t be finished making changes even after they complete the spinoff of Chemours and take the cost cuts involving Fresh Start. They’re expecting even more value creation ahead. They pointed to the additions of Jim Gallogly and Ed Breen to the company’s board, noting their experience in cost cutting and portfolio restructuring and saying that they will be a great benefit as well.
DuPont outcome a win for activism?
RBC Capital Markets analyst Arun Viswanathan said DuPont shareholders may have been worried that voting for Trian would result in many more proxy battles going forward, including some that would be unnecessary.
Nonetheless, the analyst also thinks Trian should get some credit for its involvement, particularly on cutting costs, increasing transparency, and improving returns to research and development, mergers and acquisitions, and capital expenditures.