After a bid attempt, the inclination to overreact needs to be resisted
Don’t just do something — sit there. This old joke, which might do double duty as a Zen koan, is not to be dismissed. It is of particular use for the boards of public companies, who are under constant pressure to take action, even when inertia would be wiser.
The pressure is never greater than when a company has rejected a premium bid from a rival. So Paul Polman, Unilever’s chief executive, and Marijn Dekkers, its chairman, will be feeling the heat. They have seen off a $50-a-share cash-and-stock offer from Kraft Heinz, an 18 per cent premium to the share price before the bid became public, saying the bid undervalued their company.
An iron law of convention dictates that Unilever must now perform a review aimed at discovering and realising the value that the suitor overlooked. It has done so. “The events of the last week have highlighted the need to capture more quickly the value we see in Unilever,” the company said.
A company in this position has a short list of options. It can announce a bold cost-cutting plan; pay a bigger dividend; do a share buy-back; split itself up; buy another company, or some combination of these. One or more of these choices may be fitting. This may indeed be true in Unilever’s case. But there are four good reasons for Unilever, given its particular circumstances, to be suspicious of all of them.
That the bid from Kraft Heinz was seen off with such ease suggests that it was a misjudged effort by the Kraft Heinz team. It is absurd to contemplate a new strategy because someone else made a mistake. There is the old saw that any company receiving a bid is “in play”. But this is no game. A suitor with as much financial firepower as any in the industry has just been turned away.
Imitators will think twice. Second, Unilever’s long-term record is respectable. This does not imply that management is doing a good job but it does suggest that its problems are not of the structural sort that may require a big transaction to solve. Over 20 years, Unilever’s shares have returned nine per cent a year on average, better than most benchmarks.
Its performance does trail Nestlé — but Nestlé is, arguably, the best-run consumer company in the world. Over ten years, the performance has been closer to average and revenue growth has been modest, three per cent a year. Margins are lower than some competitors. So there is clear room for improvement.
Unilever’s special strength, however, is its deep presence in the emerging world, where it earns more than half its revenue. It has been an uneven decade for the developing world. As a long-term bet, though, these make as much sense as ever. Next, doing big things — as companies under pressure do — is expensive, even if those costs are often hidden. Fat fees for bankers and lawyers are just the start.
Restructuring costs that follow a big acquisition or spin-off are often left out of the “adjusted” profits reported when the deal is done. This is unfortunate, because the costs are real, and go on for years. Finally, Mr Polman and Mr Dekkers must realise that because the “normal” behaviour expected from leaders in their position is bold action, they will be dangerously biased in that direction.
They know that if they do nothing, and Unilever’s fortunes do not improve, they will face more criticism, and possibly feel more regret, than if they had “at least tried something.” But this is irrationality itself.
Choosing to do nothing is, ultimately, an action like any other, to be assessed in just the same way. If more business leaders recognised this, we would live in a richer, if less exciting, world.