Is Elon Musk the Harbinger of a New Era of Hostile Corporate Takeovers?

Commentary“Get woke, go broke” refers to a company that engages in woke politics and, thereby, alienates a large share of its customers. The canonical example is Gillette. A major seller of men’s shaving products, it ran a 2019 Super Bowl ad attacking men as inherently toxic. The result was customer alienation and an $8 billion writeoff due to a loss of market share. This story has been repeated over and over, with examples ranging across myriad sectors of the economy. Consider Disney’s recent decision to wade into Florida politics in a very public way, followed by leaked videos of senior Disney executives bragging about the quantity of gay content they inject into their entertainment products. Florida lawmakers promptly stripped Disney of its special tax and governance arrangements, angry protests exploded in front of its California headquarters, and #boycottdisney trended on Twitter. The negative effects of woke business practices don’t end with alienated customers. Corporate “diversity, inclusion, and equity” bureaucracies have proliferated throughout the corporate world. Not only are these appendages to the human resources department costly, but their “anti-racist” training programs most commonly increase racial tensions and lower organizational morale (Coca-Cola faced a backlash when its call for employees to “be less white” went public). Beyond DIE, the stakeholder capitalism and corporate social responsibility movements encourage managers to serve interests other than those of their shareholders. All in all, a substantial amount of shareholder value is being bled away by executives who are boldly self-righteous in justifying these unprofitable—and, hence, anti-shareholder—acts. Why are managers doing it? I conjecture that virtue signaling is the new coin of the realm among our executive elite as they vie for status. Trying to prevent managers from self-serving behavior is a problem as old as the invention of the corporation itself. Executive activism is simply the modern incarnation of this problem. One corrective for it is the market for corporate ownership. What does the BMW motorsport team do with a driver who enjoys attending Daytona parties more than winning Daytona races? They take the car away from him and give it to someone capable of maximizing its performance. So too with corporations. Mismanaged firms have depressed stock prices. This invites outsiders to purchase the company, inviting a new set of executives to manage it properly, and then sell it at a profit. In the 1960s, conglomeration—accumulating multiple unrelated businesses under one corporate umbrella—became faddish. There was no coherent economic logic for these sprawling organizations. However, they did open the door to opportunistic behavior by management. For example, the size and quality of the corporation’s jet fleet became a badge of CEO prestige. Executive expense accounts ballooned. One corporation “invested” in racehorses (the Hanson conglomerate). Another used corporate jets to ferry the CEO’s pet dog around (RJR Nabisco). This prompted a spree of hostile takeovers in the 1970s and ’80s. Famous takeover artists, like T. Boone Pickens and Carl Icahn, bought these conglomerates, took them private, and sold off their unrelated businesses to new management teams focused on performance. Because the value of the sum of the parts (properly managed) was greater than the value of the whole (the mismanaged conglomerate), hostile takeovers were very profitable while the supply of mismanaged firms lasted. Which brings us to Elon Musk’s offer to buy Twitter. Much has been made of the free-speech advocacy accompanying his bid (“Free speech is essential to a functioning democracy,” he wrote in a tweet). While I don’t doubt his sincerity on this point, I believe his bid is primarily a corporate raider play: buy a corporation being systematically damaged by bad management, restructure it, and sell for a handsome profit. Twitter went from a $1.4 billion profit in 2019 to a $1.1 billion loss in 2020. Rather than serving a diversity of viewpoints (its original business model), Twitter’s management has gone to extreme lengths to censor speech that departs from its preferred political narratives. In so doing, Musk and his financial backers must believe Twitter is falling short of its performance potential. By purchasing and restructuring it, they stand to enjoy financial rewards (independent of its effect on the functioning of democracy). Hostile takeovers are a blunt weapon against opportunistic executives. To see a wave of them, as in the 1970s and ’80s, something systemically wrong in the corporate world must be begging for correction. Has woke executive activism brought us to that point? Perhaps. Ratings-crushed CNN was recently taken over by Discovery, which says its goal is to return CNN to impartiality. A recent article by Richard Rushfield suggested Netflix is also a takeover candidate. And Disney shares dropped 31 percent i

Is Elon Musk the Harbinger of a New Era of Hostile Corporate Takeovers?

Commentary

“Get woke, go broke” refers to a company that engages in woke politics and, thereby, alienates a large share of its customers. The canonical example is Gillette. A major seller of men’s shaving products, it ran a 2019 Super Bowl ad attacking men as inherently toxic. The result was customer alienation and an $8 billion writeoff due to a loss of market share. This story has been repeated over and over, with examples ranging across myriad sectors of the economy.

Consider Disney’s recent decision to wade into Florida politics in a very public way, followed by leaked videos of senior Disney executives bragging about the quantity of gay content they inject into their entertainment products. Florida lawmakers promptly stripped Disney of its special tax and governance arrangements, angry protests exploded in front of its California headquarters, and #boycottdisney trended on Twitter.

The negative effects of woke business practices don’t end with alienated customers. Corporate “diversity, inclusion, and equity” bureaucracies have proliferated throughout the corporate world. Not only are these appendages to the human resources department costly, but their “anti-racist” training programs most commonly increase racial tensions and lower organizational morale (Coca-Cola faced a backlash when its call for employees to “be less white” went public). Beyond DIE, the stakeholder capitalism and corporate social responsibility movements encourage managers to serve interests other than those of their shareholders.

All in all, a substantial amount of shareholder value is being bled away by executives who are boldly self-righteous in justifying these unprofitable—and, hence, anti-shareholder—acts. Why are managers doing it? I conjecture that virtue signaling is the new coin of the realm among our executive elite as they vie for status.

Trying to prevent managers from self-serving behavior is a problem as old as the invention of the corporation itself. Executive activism is simply the modern incarnation of this problem. One corrective for it is the market for corporate ownership. What does the BMW motorsport team do with a driver who enjoys attending Daytona parties more than winning Daytona races? They take the car away from him and give it to someone capable of maximizing its performance. So too with corporations. Mismanaged firms have depressed stock prices. This invites outsiders to purchase the company, inviting a new set of executives to manage it properly, and then sell it at a profit.

In the 1960s, conglomeration—accumulating multiple unrelated businesses under one corporate umbrella—became faddish. There was no coherent economic logic for these sprawling organizations. However, they did open the door to opportunistic behavior by management. For example, the size and quality of the corporation’s jet fleet became a badge of CEO prestige. Executive expense accounts ballooned. One corporation “invested” in racehorses (the Hanson conglomerate). Another used corporate jets to ferry the CEO’s pet dog around (RJR Nabisco).

This prompted a spree of hostile takeovers in the 1970s and ’80s. Famous takeover artists, like T. Boone Pickens and Carl Icahn, bought these conglomerates, took them private, and sold off their unrelated businesses to new management teams focused on performance. Because the value of the sum of the parts (properly managed) was greater than the value of the whole (the mismanaged conglomerate), hostile takeovers were very profitable while the supply of mismanaged firms lasted.

Which brings us to Elon Musk’s offer to buy Twitter. Much has been made of the free-speech advocacy accompanying his bid (“Free speech is essential to a functioning democracy,” he wrote in a tweet). While I don’t doubt his sincerity on this point, I believe his bid is primarily a corporate raider play: buy a corporation being systematically damaged by bad management, restructure it, and sell for a handsome profit.

Twitter went from a $1.4 billion profit in 2019 to a $1.1 billion loss in 2020. Rather than serving a diversity of viewpoints (its original business model), Twitter’s management has gone to extreme lengths to censor speech that departs from its preferred political narratives. In so doing, Musk and his financial backers must believe Twitter is falling short of its performance potential. By purchasing and restructuring it, they stand to enjoy financial rewards (independent of its effect on the functioning of democracy).

Hostile takeovers are a blunt weapon against opportunistic executives. To see a wave of them, as in the 1970s and ’80s, something systemically wrong in the corporate world must be begging for correction. Has woke executive activism brought us to that point? Perhaps. Ratings-crushed CNN was recently taken over by Discovery, which says its goal is to return CNN to impartiality. A recent article by Richard Rushfield suggested Netflix is also a takeover candidate. And Disney shares dropped 31 percent in just six months which, for a new breed of takeover artist, has “opportunity” written all over it.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


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Michael Ryall is Professor of Strategic Management and Director of the Executive Virtue Development Lab at the University of Toronto.