While I’m not privy to the biggest fears of America’s CEOs, I’m confident speculating a notice that Elliott Investment Management has taken an interest in their company ranks among their most horrific nightmares. Hedge funds are a bloodsucking lot, slurping corporate plasma by the gallons. Elliott prefers to guzzle by the barrel.
The ruthlessness of Elliott and its founder Paul Singer cannot be overstated. In 2012, after a decade-long legal fight over defaulted sovereign bonds, Elliott convinced a court in Ghana to detain the ARA Libertad, a three-masted Argentine naval training frigate docked in the country. The ship — a floating symbol of national pride — was effectively taken hostage in a high-stakes debt standoff. It took international legal wrangling, United Nations involvement, and a diplomatic uproar to finally secure its release.
Elliott’s take-no-prisoners model is simple: target companies with sagging stock prices, buy a stake big enough to rattle the boardroom, and then demand ruthless cost-cutting, executive firings, new revenue streams, breakups, or asset sales — whatever it takes to juice short-term returns. Then cash out and move on to the next target.
Being a hedge fund goon is a helluva racket — Singer has parlayed his firm’s corporate shakedowns into an estimated $6.7 billion fortune. Whoever coined the phrase nice guys finish last no doubt had someone like Singer in mind.
Elliott’s Unfriendly Skies
Southwest Airlines loyalists are now experiencing what it means to be Elliottized. After acquiring an 11% stake, Singer’s firm promptly blasted the airline’s management for “poor execution” and “leadership’s stubborn unwillingness” to adapt. Not long after, Southwest began abandoning what made it beloved — open seating, free checked bags — in favor of nickel-and-diming passengers like its legacy rivals.
Southwest loyalists feel betrayed, but Singer and his crew couldn’t care less. Revenues will rise, the stock will pop, and Elliott will cash out — leaving behind an airline hollowed out and unrecognizable from the one travelers once loved.
Elliott’s Pepsi Challenge
The Elliott barbarians have turned their sights on PepsiCo, a fate that couldn’t happen to a more deserving management. Elliott, with more than $76 billion under management, disclosed on Tuesday that it had taken a $4 billion stake in the ailing beverage and food company, declaring a “rare” and “historic” opportunity for a turnaround.
Elliott’s Pepsi investment is one of the firm’s biggest ever, and the company isn’t looking to realize modest returns. Elliott claims PepsiCo shares can see at least a 50% upside if the company embraces the fund’s ideas. The activist fund said Pepsi should evaluate the potential refranchising of its bottling network, while streamlining its portfolio by divesting non-core and underperforming assets.
Here’s some critical insight about Pepsi and its Barcelona-born CEO Ramon Laguarta, reportedly the first Spaniard to oversee a major U.S. corporation. As an aside, Coke CEO James Quincey hails from the UK, so it’s an encouraging sign that perhaps few American business leaders are willing or able to run major beverage companies whose products have been scientifically proven to cause diabetes, obesity, cancer, and a host of other ailments.
Under Laguarta, Pepsi for years aggressively engaged in so-called greenwashing, preening to Wall Street and the media that it was a socially responsible company addressing diversity and climate change. The virtue signaling was during a time when socially responsible investing, also known as ESG, was all the rage. Boosting ESG metrics during the Biden era made a company more desirable to Wall Street and sexier to the media.
I called out Pepsi’s greenwashing in this March 2023 post highlighting some of the company’s efforts to distract from its core business peddling sugary drinks and snacks.
The company in July 2022 issued this news release boasting of the great strides it made since launching PepsiCo Positive (pep+), “a strategic end-to-end business transformation with sustainability and human capital at the center of how the company will create growth and value.” Pepsi’s stated accomplishments included “economically empowering women” with “gender smart solutions along our agricultural supply chains in Dominican Republic, Ecuador, and Guatemala.”
In addition to declaring that its mission was to safeguard the global water supply, Pepsi boasted about its DEI efforts and how they were critical to the company’s success.
“At PepsiCo, we’re guided by our overall vision, our CEO [Ramon Laguarta]’s vision of pep+ [pep Positive], which is our ongoing, end-to-end, strategic transformation of how we create growth and shared value with sustainability and human capital at the center,” Tina Bigalke, Pepsico’s then Global Chief Diversity, Equity, and Inclusion Officer, told Forbes two years ago.
“The DE&I agenda tucks under this PepsiCo positive vision of us wanting to create a space. That’s our mantra in DE&I: A space to be you. We want to create a space for our associates, for our business partners, and for our communities to thrive and be their best selves.”
I had no clue what Bigalke was talking about, and it’s unclear if she’s still employed at Pepsi. In any case, Pepsi’s proclaimed social responsibility efforts didn’t generate increased sales or goose its stock price.
Lost Market Share
Pepsi’s namesake classic soda recently dropped to fourth place by U.S. sales volume, bested by Dr. Pepper, owned by Keurig Dr. Pepper, and Sprite, which also is owned by Coke.
“In comparison to Pepsi, consumers view Dr Pepper as having a more promising future, doing a better job at keeping up to date and, importantly, being more distinctive and different than Pepsi,” Lynne Field, head of strategy at FutureBrand, told Marketing Dive.
How did Dr. Pepper pull ahead of Pepsi?
Since the 2018 acquisition that brought together Keurig Green Mountain and the Dr Pepper Snapple Group, Dr Pepper’s parent company has remained committed to the brand amid a portfolio-wide double-digit increase in marketing spend. Dr Pepper’s success can be attributed to a combination of investment and patience, said Brad Rakes, senior director for brand marketing at Keurig Dr Pepper.
Meanwhile, Pepsi cut back on its marketing and advertising spending. Coke did as well, but not to the same degree.
“It really is a commitment across the board, not just in things like content and media, but also investment in prioritization and making sure that Dr Pepper continues to be the workhorse for the organization,” Rakes told Marketing Dive.
Unlike Bigalke’s DEIspeak, I readily understood Rakes’s comments.
Under Laguarta’s watch, Pepsi has spent between $3 billion and $4 billion annually on marketing and promotion, a far cry from the $4.7 billion it spent in 2019, one year after Laguarta assumed command. What has been consistent is the some $1 billion a year Pepsi has spent to buy back its stock.
Put simply, for every five dollars Pepsi spent on marketing and stock buybacks, four were earmarked to sell the company’s products and one went to fizzing the stock price.
Stock buybacks typically boost a company’s share price because there are fewer outstanding. Unfortunately for Laguarta, Wall Street wasn’t blinded that Pepsi’s core business was declining.
Pepsi’s stock market value has shrunk to about $204 billion, nearly a 25% drop from a peak of $270 billion in May 2023. Elliott’s $4 billion stake in Pepsi represents roughly what the company has spent on buybacks in recent years.
Perhaps if Laguarta, who has pocketed well over $180 million in compensation since assuming command in 2018, had invested more in growing Pepsi’s business rather than attempting to manipulate its stock price, the company would have performed better, and Wall Street would have rewarded the effort with a higher valuation.
Wall Street is a function of the “Greater Fool Theory,” which holds for every fool there’s an even bigger one. Paul Singer and his cronies at Elliott Management understand this, which is why they smelled blood at Pepsi. The company deserves the fate that awaits it — and so do investors who hold PepsiCo shares when Elliott is finished dismantling the company and moving on to its next hapless corporate target.