Photograph by Mark Peckmezian for Bloomberg Businessweek
Why don’t you tell us about activism. You prefer the word constructivism?
The whole category of activism is very hot today. Everybody used to get their capital from a hedge fund bucket. Now we are starting to see capital coming in from the public equity bucket, which is usually 5 to 10 times larger. You know what term you don’t hear anymore? Arbitrage. The markets have gotten too efficient. Instead of trying to figure out what’s going to happen, we’re buying stock, and our goal is to get that company to do something that’s in the best interest of shareholders. We accomplish it a little differently than most. Our background is operations. The first place we look is the income statement. The majority of activists look at the balance sheet.
If you’re starting from the income statement, how does that change your strategy?
We like a lever to pull on the balance sheet. But in certain cases we can prescribe how the income statement can work a bit better. Heinz is a very interesting example.
I understood the power of Heinz since I was a kid and I started to work for my father, selling food to restaurants. But if you look at Heinz prior to our involvement, sales and earnings per share were deteriorating for a very long time. Yet they’re paying a nice dividend. If you looked at Heinz back then in 2006, it was doing $8 billion. They were giving 22 percent to stores for what they call deals and allowances: “Do I pay to be on the eye-level shelf as opposed to being on the shoe-level shelf?” Well, that’s a discount for the store. And yet those years they were paying 1.6 percent of sales on direct marketing. That’s probably less than ConEdison (ED) was spending, and they have a monopoly.
So how do you fix it?
We said, “Guys, we own 7 percent of the company. We’d like a seat on the board.” We said, “You’ve got to reduce the discounts. Don’t put the money in your pocket. Put it on television. Put it on the Internet. Start spending more money on direct marketing and get that 1.6 percent up.”
Their problem was not share. It wasn’t the numerator. It was the denominator. How do we get the guy walking into Wendy’s (WEN) ordering fries to finish that thought? He’s got to have the ketchup. You almost don’t care what brand of ketchup. You just want more ketchup. We got our board seats, and not only did peace break out, but love broke out.
More broadly, what about activism today? Sorry, constructivism.
You can call it activism.
Whatever. Arbitrage. Greenmail.
No, that you can’t call it. That’s not fair.
OK. What does that suggest about corporate structure going forward?
There are many companies that aren’t getting it right. They’re not living up to their potential. We like to play in the larger and the mega cap companies. We like the risk-reward. I understand my downside when I’m buying Kraft (KRFT) where we bought it. Then if we could get them to do what we wanted them to do, we had a lot of upside, and I did it. We urged them to buy Cadbury. And they saw it our way. And they split into two businesses, and look what happened. Kraft, the slow-growth, slow-moving business—their stock has gone up. Mondelēz (MDLZ) [the global snack company spun off by Kraft]—we hate the name.
Would it have worked out better for everyone if Hershey (HSY) had bought Cadbury?
It probably would have. I think that with the right execution, Mondelēz, if they change that damn name, can be a great company. I hate saying the name. I mean, really.
It sounds like a car.
Or a disease.
You must have screwed up along the way during your career, right? You must have made some big mistakes.
Well, not big ones, but we made mistakes.
What’s the one that keeps you up at night?
The one that really irks me is—and it was my fault—we sold Starbucks (SBUX) at 18 in ’08.
Why did you sell it?
Because I thought people were not going to be spending four and five bucks for lattes anymore.
It was right in front of my nose. I missed it even though I’ve got so many kids. The kids didn’t know there was a recession going on. Only their parents knew. They were still going to Starbucks.
What should Barack Obama and John Boehner do to make some progress?
Sequestration, sequestation—however you pronounce that word—and gridlock aren’t all that bad. You know, the economy is getting a little better. There is a lesson to be learned there. Play a little bit more golf. The weather is nice. This economy can do amazing things if the government would just step away.
You’ve been more patient than others are. Do you feel as if other activists back their targets into a corner?
When we show up, there is no popping of Champagne corks, but I hope what they think is, “Better them than the next guy.”