Weekly Reads - October 31, 2022
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Another day another activist investor demanding a long-time consumer staple giant to split itself up. Today it was announced that Third Point led by Dan Loeb has requested that Colgate spin off its Hill’s Pet Nutrition as a way to bolster shareholder returns. Third Point believes that Hill would command a higher multiple than the company’s legacy business and would give the legacy business the dry powder to consolidate legacy market segments such as oral care. Third Point has blasted the company for delivering subpar returns to shareholders with the company posting a total return of just 19.5% over the last five years versus 61.2% for the S&P 500 and 56.9% for the consumer-staples index. Despite these subpar returns some sell side analysts disagree with Third Point’s plan to spin off Hill since Hill has contributed more than 100% of the company’s revenue and profit growth over the last ten years. There is also an argument that Hill benefits from significant synergies from being owned by Colgate, like lower ingredient input costs for their product. While there are disagreements in regards to what Colgate should do to improve shareholder returns it is obvious that the current structure of the business is not delivering adequate returns to investors. Management faces a tough challenge in convincing investors that the best route to attractive returns is continuing the status quo
The largest healthcare products company in the world, Johnson & Johnson, is acquiring Abiomed a leader in breakthrough heart, lung, and kidney support technology at a 50%+ premium to its current stock price. This deal follows the company’s plan to split its healthcare division and consumer products division in hopes of improving shareholder return. The Abiomed transaction broadens Johnson & Johnson’s position in the cardiovascular segment which is a massive market as cardiovascular disease is the number one cause of death. Abiomed was the first-to-market provider of cardiovascular medical technology with its treatment of coronary artery disease and heart failure. Abiomed is bringing an 18-year track record of profitability alongside explosive top-line growth to Johnson & Johnson’s medical device segment.
Argo AI, the self-driving car startup that once attracted $1 billion investment from Ford in 2017, is shutting down with some parts of the business getting absorbed by Ford and Volkswagen. Argo has been engaged in research and development of L4 autonomous driving technology since 2016 and has delivered very little tangible results. The decision to shut down Argo comes after Ford and Volkswagen have seen growing losses and lack of progress in L4 technology development. Ford has decided to move its capital spending away from L4 technology in favor of L2 andL3 technology they plan to develop in house. The shift to L2/L3 technology indicates that Ford does not see any path toward commercializing L4 technology. L4 technology, which consists of an entirely driverless experience, will continue to face headwinds as industry players struggle to push the technology forward while dealing with worsening macroeconomic conditions. With the shutdown of Argo the hopes of L4 technology remain in the hands of startups like Waymo and Cruise.