As the dust settles on the Amazon/Whole Foods deal, I figured it’s time.
Time for what?
It’s time to reveal why Amazon bought the organic grocery store chain for $13.7 billion.
Hint: It’s not because Whole Foods’ salad bar is so darn tasty.[ad#Google Adsense 336×280-IA]Nope.
Amazon plans to turn Whole Foods into a technology company.
Let me explain…
Amazon is the world’s foremost “big data” company.
In fact, Amazon is in a race with Google to claim the title of “world’s largest database.”
Data are the blood that supplies Amazon its oxygen.
The company leverages trillions of data points — millions per second — to serve you the juiciest ads.
Therefore, Amazon bought Whole Foods for one single reason…
The 400 existing Whole Foods locations will now exist solely to transmit data back to the mothership.
If you’re a Whole Foods customer, you’re now a data point for Amazon.
Also, if you work for Whole Foods, you now work for a data farm.
The truth hurts sometimes, doesn’t it?
There, I said it!
Now, in other news, the retail carnage continues.
An activist hedge fund just disclosed a large stake in the owner of Saks Fifth Avenue.
The activists are already calling for Saks to go private.
Is the arrival of an activist bullish for the company?
My senior analyst, Martin Hutchinson, blows the lid off of activist investing below.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Question: Martin, let’s continue along the compilation of a library we’re building here at Wall Street Daily, chronicling important catalysts. These are baseline concepts that every investor should know. Today we’re going to discuss activist investors. So let’s jump right in. Martin, what’s an activist?
Martin Hutchinson: Activist investors are big shareholders. Typically they are individuals, but not always — since there are some institutions that do it. These investors use their share state to put pressure on management.
There are two distinct groups. One is investors such as hedge funds — who use activism as part of their investment strategy to maximize returns. And secondly, there are institutions and some individuals who use their shareholdings to pursue a political or social goal. For example, this divestment from disfavored regimes. A few institutions, such as CalPERS, the California teachers pay pension scheme, fall into both categories.
Question: Hutch, tell us a few techniques that these activists like to use to influence management.
Martin Hutchinson: There are a number of them.
One is a proxy battle, where they put a resolution to the shareholders meeting and try and get the shareholders’ vote for it.
Then there’s a publicity campaign among the shareholders. There are shareholder resolutions of one sort or another. Litigation, inevitably — when they sue management.
And then they can just go to management and negotiate with them — with the threat of doing other things if management doesn’t do what they want.
Question: Interesting. So Hutch, as a shareholder, are activists on our side or are they working against us? What’s the lowdown on that?
Martin Hutchinson: It’s an interesting question. The second group of activists, the ones who are trying to make a moral point, distract management. So as shareholders, they’re not your friend unless you believe the same moral point they do.
If you’re neutral on the issue, you should probably vote against their proposals. By and large, following them will reduce shareholder returns. Otherwise management would be doing it already.
But keep an eye on these social-goals activists. Because if a lot of their votes are winning, it’s probably better to follow the herd, because all the rest of the big money’s going to be doing the same thing.
For example, if the activists are telling you to sell Venezuela and tobacco — and they’re successful in shareholder votes — then probably you want to follow the herd because the big money is going that way.
Question: And Hutch, what about the other group?
Martin Hutchinson: The first group of activists, the group that are trying to make money, hedge funds and such, they can be more useful to individual shareholders. Activist investors often outperform, so in other words, activism does work to a certain extent. By following them, you can outperform too.
It’s especially useful in very large companies that are too big for takeover bids. For example, Nelson Peltz should be able to shake-up Procter & Gamble (PG). Procter & Gamble is something like $230 billion — too big to take over. But you can shake it up with an activist.
So the pluses of a big activist are they shake up a dozy management, they may produce a profitable spinoff and they may produce a tender offer for part of the shares or a big dividend or an outright sale of the company.
Question: How about a few of the downsides, Hutch, when an activist is involved?
Martin Hutchinson: The minus is they may recommend something stupid. They distract management. It’s obviously costly to go through the process of shareholder resolutions and such.
They will tend to encourage management to overleverage the company. And they may indulge in “greenmail,” which is where they get paid off to go away and other shareholders don’t benefit.
Question: All right, Hutch, just give us the bottom line on activism — bullish or bearish?
Martin Hutchinson: It’s probably not wise to chase after activists. There are too many people doing it for the modest benefit they bring. But if an activist buys into your company, Google his track record and try to determine whether he’s made money for other shareholders. Because some activists do make money for other shareholders, and some don’t.
Question: All right, Hutch. As always, thanks for your wisdom on the matter.
Martin Hutchinson: Great pleasure.
Question: This is Wall Street Daily, signing off.
Source: Wall St. Daily