This week’s newsletter really ought to start with a mea culpa. Like most others, I didn’t see Amazon’s $13.7 billion acquisition of Whole Foods Market coming. In reporting the web giant’s initial interest, Bloomberg gave the impression that the plans had been dropped. After all, Amazon’s reasons are still far from clear.
Now that the deal has been announced, there is a good deal of thinking to be done about what this means for the market as a whole. Clearly, this is seen as a very good thing for activist investors – even if Amazon is limiting its new impulse to splurge to this one instance, the inference that there are plenty of cash-rich firms willing to buy growth in businesses that do not fit with their own in an entirely obvious way suggests that activism to push companies to sell could be a more attractive strategy. Already this week, activists at magicJack VocalTec and Potbelly have sought the same. However, I wouldn’t be surprised to see activists throwing some Hail Mary’s on the assumption that Amazon is now a potential buyer for just about any consumer business. It probably isn’t, but that isn’t how risk-reward works.
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For those exact reasons, the market suddenly looks quite glum for short sellers. I’ve spoken with several this week for a feature to be included in our half-year review. Most admit that even as they are attracted by the frothy valuations out there, the bar is higher for a successful short.
The risk of an unexpected acquisition – as with Straight Path Communications – or a surge in equity prices before a correction takes hold, means it is hard to commit capital purely on the basis of valuation. As such, short sellers are looking for fraud and other serious red flags, which will at least make for an entertaining pipeline of articles. As Warren Buffett’s opportunist bailout of Marc Cohodes’ short target Home Capital Group highlights, there’s no accounting the actions of the market’s big beasts.
The slow-motion drama at Uber this week has given way to the realization that venture capital investors can be pretty activist too – at least when the magic upward valuations slow. CEO Travis Kalanick was forced out while on nominal personal leave, though reports suggest his actions during that period did him little good, but remains on the board with enhanced voting rights.
For an indication as to how dangerous that can be, look no further than Tuesday’s proxy contest at Cypress Semiconductor, where Thurman Rodgers’ nominees won 60% of the votes. Rodgers himself had a pretty small stake in the company, but his reputation as the founder of the business clearly carried weight. More important still was knowing where the bodies were buried.
By forcing the contest into court, Rodgers ensured that the shareholder base knew his adversary, Ray Bingham, had potential conflicts of interest in his role as executive chairman of the company and a managing partner of private equity firm Canyon Bridge Capital. Indeed, the board had already heard that Canyon Bridge was a likely purchaser of Cypress and had required Bingham to dismiss his assistant on the basis that her working for both parties was inappropriate. Those facts helped swing Institutional Shareholder Services behind the dissident and paved the way for the outcome of the shareholder vote.
With that in mind, keeping Travis on the board for now might be the best case for Uber.
Article by Activist Insight