Small children are afraid of monsters under the bed, but for CEOs, its Elliott Management in the board room which will give them a cold sweat in the middle of the night.
In a move apparently designed to appease and mitigate the ambitions of the business world’s bogeyman, Twitter has announced a partnership with Elliott Management, as well as new investor Silver Lake, which will see three new board appointments and a $2 billion share buy-back programme.
Known as a vulture fund, Elliott Management specialises in identifying companies with underperforming shares, muscling its way onto the board through the purchase of material stakes in the business, before attempting to cash-in by introducing new strategies to boost share price. It is an incredibly disruptive business model, one which is designed for short-term financial gain, but it works.
In recent memory, Elliott Management has bought its way onto the Telecom Italia (TIM) Board of Directors before ousting CEO Amos Genish and effectively distinguishing the DigiTIM strategy. It has also thrown its weight around AT&T, demanding the head of CEO Randall Stephenson and the end to the media-driven business model. The companies being disrupted might not like Elliott Management, but it is an investment company which makes a lot of money.
Now the activist investor has turned its attention to Twitter. Through various different investment vehicles, Elliott Management now owns 4% of Twitter shares and it is demanding change. An alternative business model has not been presented to investors just yet, but the removal of CEO and Founder Jack Dorsey has been requested.
The announcement here is a very interesting one. Some companies have shown the intentions of Elliott Management can be resisted, National Express demonstrated this in 2011, though the activist investors certainly wins more often than it loses. Each element of this partnership could be viewed as an element of the strategy to combat the activist investor.
Firstly, in appointing Elliott Management Partner Jesse Cohn to the Board of Directors, the traditional Twitter comrades might be attempting to appease the intentions, or at least delay the aggression. Ignoring Elliott Management does not work, just ask Vivendi after the TIM fiasco, and although one Board appointment will not completely satisfy, it buys some breathing room.
This first element has had some immediate success; Elliott Management is no-longer demanding the resignation of Twitter CEO Jack Dorsey.
Secondly, bringing Egon Durban, co-CEO and Managing Partner of Silver Lake, onto the Board adds another friendly for Dorsey, and counteracts the Cohn presence. Silver Lake is a more traditional tech investor, much more likely to buy into the current Twitter strategy.
The final appointment will be somewhat of a land-grab. Whoever is successful in securing a position for their own nomination will find themselves with another friendly. Elliott Management will be fighting for its own appointment, while Dorsey and co. will be attempted to land their own. This independent appointment is likely to be as impartial as a White House probe into Huawei.
Finally, the share buy back programme remove shares from the free-for-all of the open market. Less shares which are on the market mean investors have less influence on the day-to-day operations of the company. It also comes at a time where market volatility make such initiatives an attractive bet for a corporation, but this could be viewed as a handy double-edged sword.
What is currently in play now at Twitter is a game of corporate chess. On one side of the table, Twitter wants to pursue the strategy it has been working towards for years. In opposition, Elliott Management is likely to pursue a model which favours higher dividend payments and short-term share price increases.
Although investors might be encouraged by the pump and dump practice which is favoured by Elliott Management, in most cases the alternative business strategies which it presents are not in the long-term interest of the business. For both TIM and AT&T, Elliott Management has favoured the divestment of differentiator business units and infrastructure assets. This might look attractive for short-term cash, but it does no favours for long-term sustainability of the business.
Its own vision for Twitter has not been presented just yet, but Elliott Management spend hundreds of millions acquiring 4% of the company for a reason. Precedent suggests there will be a disruptive business model presented to shareholders in the new future.