Blowing An Activist Investing Bubble

Updated on

h/t professorbainbridge. The story of the moment sounds like a bad comedy sketch:

2012: Under pressure from Trian Fund Management LP, Kraft decides to split in two, spinning off its mature North American grocery business to highlight its global snack-food business. The larger global business–which includes Oreo, Cadbury, Wheat Thins, and other brands–is named Mondelez International Inc. The smaller company, dubbed Kraft Foods Group Inc., gets the Kraft cheese products, Maxwell House coffee, Jell-O, and Planters nuts, among other brand. …

March 2015: Kraft Foods Group and Heinz agree to merge,

August 2015: Activist investor William Ackman unveils a $5.5 billion stake in Mondelez International Inc. The activist investor believes Mondelez has to grow revenues faster and cut costs significantly or sell itself to a rival. Mr. Ackman suggests that one potential buyer could be the newly formed Kraft Heinz.

So one set of activists insisted that Kraft break itself in two. Kraft did so. Now another set of activists want to put them back together.


I admit it is possible that in the last 3 years conditions have changed such that a reunification of Kraft and Mondelez makes sense (although I note that no less than Warren Buffet has thrown “cold water” on the idea.)

But consider an alternative possibility; namely, that we’re in the midst of an activist bubble in which too much money managed by too many second rate activists is leading to a rash of really bad ideas. As the WSJ recently noted:

Activist investors, who take positions and agitate for financial or strategic changes, are increasingly showing up in the same stocks, often with different agendas.

They can’t all be right, after all. Some contend that:

“There just aren’t enough good ideas out there,” said David Rosewater, who heads Morgan Stanley‘s activist-defense group.

But consider the possibility that there are almost no good ideas out there. After all, do we really think a hedge fund manager is systematically going to make better decisions on issues such as the size of widgets a company should make than are the company’s incumbent managers and directors? Of course, a hedge fund is more likely to intervene at a higher level of generality, such as by calling for the company to enter into or leave certain lines of business, demanding specific expense cuts, opposing specific asset acquisitions, and the like, but the argument still has traction. Because the hedge fund manager inevitably has less information than the incumbents and likely less relevant expertise (being a financier rather than an operational executive), his decisions on those sorts of issues are likely to be less sound than those of the incumbents. It was not a hedge fund manager who invented the iPhone, after all, but it was a hedge fund manager who ran TWA into the ground.

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