New Data Underscores Impact Of Investor Activism On Brands

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By John Lovallo :

Activist Bill Ackman isn't just going after Herbalife (NYSE: [[HLF]]) with the typical complaints lodged by most activists - the company is underperforming, specific board members need to be replaced, or there is a need for the company to return capital to shareholders through a meaningful share buyback or dividend increase. From the very inception of his campaign, Ackman has accused the company of being a Ponzi scheme, and in his now infamous July 22 presentation , he labeled Herbalife CEO Michael Johnson a "predator" at the helm of a "criminal enterprise."

The fact that Ackman over-promised but under-delivered on the "death blow" to Herbalife in his July 22 presentation is not the point. His aggressiveness was an extreme, but telling, example of what's really at stake for all companies facing well-funded and media-savvy activist aggression - they must protect the brand and remove the threat today, or pay the ransom and rebuild the compromised brand tomorrow.

In activist encounters, which are becoming more prevalent every day, the corporate brand is suddenly vulnerable, whether the brand is as controversial as Herbalife's or as solid as PepsiCo's (NYSE: [[PEP]]). Since brand value reflects a company's growth strategy and marketplace leadership as key indices, any interest from an Ackman, Icahn, or a Peltz represents an implicit challenge to a company's brand. In turn, investors (as well as other key stakeholders) demand confidence in leadership, a clear understanding of the road map for results, and a speedy resolution - one way or another - to maximize value.

If investor activism defines crisis in the new Age of Permanent Crisis, the essence of crisis management is strategic communications. The good news is that some major companies have shown that a proactive approach in the face of an activist challenge can be effective, and serve as a best-practice paradigm for others.

These dynamics of brand imperilment are not just theoretical. There is rich data tracking the ebb and flow of brand (and stock) value in the aftermaths of activist crises. In July 2014, the branding firm CoreBrand published some compelling numbers in a study that focused on the experience of three companies: Electronic Arts (NASDAQ: [[EA]]), Marsh & McLennan (NYSE: [[MMC]]), and Family Dollar Stores (NYSE: [[FDO]]).

CoreBrand measures brand strength along two indices: Familiarity and Favorability. A company with high marks in both is doing very well. By contrast, companies that are well known in the marketplace but generate extremely low Favorability ratings are facing problems. That, of course, is an opportune time for activist investors to get involved and push their agenda.

There are 58 companies in the final CoreBrand tally that faced activist uprisings. Of those, 36 companies, or 62%, experienced major brand impact as a result. Of those, more than half (19) suffered significant long-term declines in Favorability. The key word is "long-term," as four companies experienced short-term Favorability run-ups followed by declines. Only seven showed improvements in Favorability.

Electronic Arts, targeted by activist Ralph Whitworth in 2011, offers a direct example of how activist aggression can negatively affect both brand and value. According to the CoreBrand study, Favorability declined along with revenue for the two-year period after the videogame publisher agreed to appoint Whitworth to the board in return for his abandoning a separate effort to elect three new directors. Brand Equity Value ((BEV)) fell from 3.1% to 1.0% of market capitalization, and the value of the brand declined from $207 million to $70 million. The company's share price did not recover until 2013.

In 2008, when activist Nelson Peltz took a stake in the insurance brokerage Marsh & McLennan, Favorability promptly declined as BEV fell from 6.2% to 2.8% of market capitalization. The value of the brand increased from $702 to $715 million, but CoreBrand calculates that had there been no decline in Favorability, the value of the brand should have reached $1,595 million.

Predictable as these scenarios may be, the example of Family Dollar may be the most important, as it demonstrates that under the right circumstances and response, brand declines are not necessarily inevitable in the wake of activist activity.

In fact, Family Dollar's Familiarity and Favorability increased during and after efforts in 2010-2013 by Nelson Peltz and Carl Icahn to replace the board and sell the company. Both stock price and revenue increased as BEV grew from 11.7% to 14.4% of market capitalization. Brand value increased from $721 million to $1,068 million, culminating in the current bidding war for the company. Although this bidding war represents a victory for the activists, it can be argued that the protracted activist pressure on Family Dollar did not damage the company's brand. At least not yet, as this story continues to develop. This week, activist Elliott Management has added seven candidates to be considered for the board of Family Dollar.

What is it that some, if not many, companies are doing right in these situations? Fundamentally, it's often a combination of strategic communications and significant business remodeling. The communications challenge for management is all about responding to changed circumstances, and in this context, no changed circumstance is more crucial than the enhanced reputational profile of investor activism.

Today's dominant view is that activism can increase value and enhance governance. Even SEC chairman Mary Jo White has said that the negative view of shareholder activists "has its roots in the raiders of the 1980s... [It] is not necessarily the current view and it is certainly not the only view."

The size of the activist community and its targets are growing. Companies that are still content to simply respond by labeling activists as short-term profiteers are putting a bigger target on their backs. By not respectfully addressing each and every challenge as well as the business case, they are confirming what the activists are telling shareholders and other key stakeholders - that management's mind is closed and shareholder value is a secondary focus.

The older narrative was all about good guys and bad guys, the barbarian at the gate. From a communications perspective, a new narrative is required that reaffirms brand value even as it meticulously answers each activist contention. We recently saw this new approach in action when Peltz pressured PepsiCo to buy Mondelez (NASDAQ: [[MDLZ]]) and split it into two companies, beverages and snacks. According to Peltz, the split "would create two leaner and more entrepreneurial companies." That was his story and value proposition, to which PepsiCo was legitimately obligated to respond.

PepsiCo could have relied on the old narrative, especially because it is characterized by third-parties as one of the world's best-managed enterprises. In other words, "We're real good so don't let this pirate plunder the treasure."

Yet, PepsiCo understood that none of its brand assets were relevant if Peltz could do better, and that the burden of proof is on management. So PepsiCo proactively built a narrative that marshaled enough evidence to overwhelm its stakeholders. The company provided a constant litany delivered by chief executive Indra Nooyi about positive revenue growth, core earnings per share, gross margins expansion, and not least, stock performance that compared most favorably to Coca-Cola (NYSE: [[KO]]). As a way to answer a resolute activist, why not leverage a legendarily competing brand to enhance your own?

The new narrative is one part of a new strategy that also includes good-faith negotiation with activists who might be strong enough to endanger your brand. The willingness to engage in conversation does not show weakness, but sends a positive message about management's commitment to improved performance and shareholder value. In addition, companies also have a chance to gather valuable insight during these discussions that will fortify business intelligence. Being responsive will be remembered when activists would much rather caricature you as close-minded and on a different page than your investors.

In the end, it is all about how you build brand equity now to protect brand equity later, and reward shareholders and key stakeholders over the long term.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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