Activist investors generally get involved with a company because they want management or the board to do something. And that's exactly what you need to understand when you see an activist investor taking a big stake in a stock you own. What happened at Beyond, Inc. (BYON 1.27%), which was formerly known as Overstock.com, is a great example.
Overstock.com gets an overhaul
Overstock.com started life as a discount retail website that sold exactly what its name implied -- overstock items and products that weren't selling well elsewhere. It dealt in close-outs, drawing customers with cheap prices. It has been a work in progress for a number of years, however, shifting most recently toward selling home goods.
Image source: Getty Images.
When Bed Bath & Beyond went bankrupt, Overstock saw an opportunity to take advantage of the still-strong brand recognition of the Bed Bath & Beyond name. It bought the company's intellectual property and rebranded Overstock.com to Bed Bath & Beyond. It seems like a pretty good idea orchestrated by Overstock CEO Jonathan Johnson. However, JAT Capital Management, an activist investor, got involved because it owns a big stake (about 9.6%) in the company.
In an open letter to the board, JAT Capital offered up a collection of complaints and a few recommendations. The negatives can basically be summed up in a short list: The current leadership of the company wasn't doing very well, wasn't communicating to investors well, and had thus lost the trust of shareholders at a time when the retailer was going through an important and dramatic change. The big recommendation was to switch out the CEO. And that's exactly what happened within days of JAT Capital's letter being issued.
Things can move fast when there's an activist involved
Activist investors take different approaches -- some prefer to work behind the scenes, while others like to work in public. Some focus on change over time and others prefer to see quick and decisive action. If you see an activist investor get involved with a company you own, you should probably take a moment to understand the approach that activist generally takes.
For example, Nelson Peltz, who generally has a soft touch, got into a major fight for a board seat with Procter & Gamble (PG -0.78%). He lost, but was eventually put on the board anyway. His suggestions were pretty mild, in that he wanted the company to focus on core brands, slim down its decision-making process, and tie pay to performance more closely. That worked out well for P&G, and when Peltz started talking to Unilever (UL 0.63%), asking for the same basic changes, Unilever effectively welcomed him onto the board.
JAT Capital isn't normally that outspoken. In other words, the call for swift change at Beyond seems like a unique situation for the investor. Doing something outside the norm is probably worth considering as you evaluate what has been proposed in this case, or with any activist you are evaluating. Simply put, JAT Capital was pushing hard -- and, given its large stake in the company, had a big voice. It isn't surprising that Beyond ended up going down the suggested path.
The bigger-picture question, though, is what do you do about all of this as an investor? The first answer is that you might consider selling out of the stock if you don't want to be involved in a potentially public and fast-moving drama. One that, importantly, can have major implications for your financial life. Of course, there wasn't much time for thought with Beyond given the short period between JAT Capital's letter and the board's decision to part ways with the CEO. But this story isn't over, and you can still walk away.
If you don't mind hanging around while a possibly tense business situation plays itself out, the next question is why stick around? In the case of Unilever, for example, having Nelson Peltz involved might be an attractive thing given the prior success he had with P&G. With Beyond, however, the future is far from certain, and the business isn't nearly as large and stable as either of the consumer staples giants Peltz took on.
Relatively tiny Beyond is going through a big business transition, and, at the same time, is now going to go through a big leadership transition. Even if you don't mind Wall Street drama, the risk here may have jumped up a notch or two. You have to ask if you want to be involved in something that could conceivably come crashing down because there are just too many moving parts.
No easy answers, but food for thought
When an activist investor gets involved in a company you own, you need to dig in and understand what's going on. Why is the activist there? What approach does the activist normally take? What exactly is the activist asking for? And then you have to figure out if what is happening with the activist sits well with your investment thesis for the company and your broader investment approach.
If you are uneasy, you might want to just not be involved. But just as possible is a situation where you are happy that an activist is there. The key is to know where you fall on the unfolding situation, which may require a little extra homework.
