Media Center

12/10/2024

What Went Wrong at Wolfspeed

Axios (12/10/24) Eanes, Zachery

Before Gregg Lowe took over as CEO in 2017, Wolfspeed (WOLF) was not even Wolfspeed. It was still known as Cree, a company primarily focused on LED lighting. But under Lowe's leadership, the Durham company underwent a radical transformation, changing its name and selling off its LED lighting and radio frequency technology businesses. Wolfspeed began to focus solely on its fledgling silicon carbide chips business, which was quickly gaining momentum in the electric vehicle space — ushering in a period of company expansion and high demand for its products. That transformation, however, is now under scrutiny after the company decided to oust Lowe as CEO last month, cut 20% of its workforce and shelve plans for a plant in Germany. The fall can most strikingly be seen in the company's share price, which in November 2021 peaked at nearly $140. Shares now trade at around $11 — a drop of more than 90%. With Lowe at the helm, Wolfspeed, founded on technology built at N.C. State University, went all in on its silicon carbide tech, which is more energy-efficient than traditional silicon components. This made it popular with some EV makers, including GM and Mercedes, which are trying to increase the range their cars can go on one charge. Wolfspeed invested heavily in scaling the business, putting $1 billion into a silicon carbide devices factory in New York and up to $5 billion into a silicon carbide materials plant in Chatham County that could employ an additional 1,800 workers. Those investments, however, significantly increased the company's debt load — and some investors remain worried about the future of the CHIPS Act funding approved for its Chatham County plant once the Trump administration takes over in January. Wolfspeed's silicon carbide material stands out among its peers, but attempting to scale up that business has not been easy, according to George Gianarikas, who leads sustainability research at Canaccord Genuity, a financial services firm. Wolfspeed has routinely revised its earnings nearly every quarter, often due to operational and equipment issues at its factories or lower demand for EVs and other electrifying industries, Gianarikas said, causing its stock to fall. Wolfspeed's plant in New York operates at only 25% utilization due to technical issues and delays with manufacturing devices, estimates Jed Dorsheimer, head of the investment bank William Blair's energy and sustainability sector. On top of that, Dorsheimer said, Wolfspeed has found it difficult to build a vertically integrated business manufacturing its own silicon carbide devices while still selling silicon carbide material for its competitors' devices. Investors haven't been happy with the company's results and operations. One notable example: Jana Partners, an activist investment firm that took a large stake in the company this year. Jana urged Wolfspeed's management to review its operations and even seriously consider selling itself due to how much the company's value had declined. That review will have to be done by a new CEO, even as Lowe said he still believed in the company's existing strategy on his way out. But both Dorsheimer and Gianarikas believe the debt load will be an issue to be solved by the next CEO given that demand for electric vehicles has slowed. "The company has to restructure its balance sheet," Dorsheimer told Axios. "That's the key, because the debt burden is so enormous that something would have to miraculously change in terms of demand in order to grow into its balance sheet." At the same time, Wolfspeed remains an attractive acquisition target because of its underlying technology and low share price, Dorsheimer added. "Is there strategic value in the business that would be attractive to other suitors? Yes, I think there is," he said.

Read the article

12/10/2024

Heard on the Street: Macy’s Bargain Shares Tempt Activists Again

Wall Street Journal (12/10/24) Lee, Jinjoo

Chronically underperforming department stores have been irresistible targets for activist investors. Few have succeeded, but that isn’t stopping another pair from taking a shot at Macy’s (M). On Monday, Barington Capital and property-owner Thor Equities disclosed a position in Macy’s, alongside some recommendations to fix the business. Activists have knocked on the iconic department-store chain’s door over the years with little success so the company’s investors mostly shrugged off the news: After jumping by as much as 5% Monday, Macy’s shares ended the day up just 1.8%. Their first recommendation for Macy’s is to reduce capital expenditures in favor of shareholder returns. There is some logic to this: After all, the department-store business isn’t exactly growing quickly. Its best use of cash might be to return it to shareholders than to invest. Dillard's (DDS) has had a successful record of doing this: Over the past decade, it spent 2.5 times more on shareholder returns than on capital expenditures. Macy's, by contrast, spent just 51% more on shareholder returns. That has paid off for Dillard's, whose stock has appreciated roughly 250% over the last 10 years in contrast to peers, which have all declined. The size and timing of the cut, though, might have to be thought through more carefully. The activist investors propose reducing capital expenditures to 1.5% to 2% of total sales, in line with Dillard's. Macy's has been spending about 3.8% of revenue on capital expenditures on average over the past five years, in line with Nordstrom (JWN) and Kohl's (KSS). Its return on invested capital has averaged negative 0.5% over the last five years, a poor track record even compared with struggling peer Kohl's. But investment does seem necessary at Macy's, at least as its new chief executive tries to stabilize the namesake business. There are signs that some of the retailer's sales-boosting initiatives are working. Skimping on necessary upgrades, such as technology, could leave the retailer further behind. Even so, maybe Macy's should give a more detailed disclosure of where capital-expenditure dollars go. The investors are also proposing to squeeze more value out of Macy's real estate, which activists think is worth between $5 billion and $9 billion — more than the company's current market capitalization. They aren't immediately suggesting a sales-leaseback, as Starboard Value pushed for in 2015. An outright real-estate spinoff can generate immediate returns but comes with the risk of burdening the retail business with rent payments. Macy's valuable real estate has come in handy in the past: The company was able to raise a substantial loan backed by its real estate in 2020 when the demand shock of the pandemic hobbled its business. Instead, they are urging Macy's to create an internal real-estate arm staffed by real-estate experts. That entity would collect rents from the retail operating company, partly as a way to help build more operating discipline at the retail company, according to a person familiar with the matter. Both units—real estate and retail—would still be owned by Macy's. That structure could help Macy's have a more critical eye toward its existing real estate, though it also looks like an intermediate step before an eventual spinoff. Meanwhile, the investors' suggestion to evaluate strategic alternatives for its high-performing luxury footprint — Bloomingdale's and cosmetics seller Bluemercury — is tempting, but would leave the core Macy's business stranded and undiversified. Macy's does look frustratingly cheap, both relative to its historical multiples and peers. But with a turnaround plan newly in motion, some patience and gradual tweaks of its cash spending priorities look more sensible than splashy spinoffs.

Read the article

12/8/2024

Shareholder Activism Boosts Japanese Stocks, but Only for 18 Months

Nikkei Asia (12/08/24) Tomita, Mio; Murakami, Tokio

Activist investors are expanding their presence in Japan Inc. as they aim for higher returns on their investments. However, even though their involvement often leads to an initial increase in the stock prices of target companies, the effects tend to be short-lived, a Nikkei analysis shows. After receiving investments from activist funds, the 521 companies that were analyzed outperformed the Topix index, the Tokyo Stock Exchange's broad-based benchmark, by up to 4 percentage points on a median basis in the first year. However, their performance began to lag after 18 months and trailed the index by 6 points three years later. The analysis spanned from the beginning of 2013 to September of this year, tracking the stock prices and financial performance of companies that received investments from activist funds. The dates of initial investment were based on data compiled by BofA Securities Japan from regulatory filings and press reports. Nissan Motor's (7201) shares briefly surged by about 20% in November after a regulatory filing revealed that a fund linked to Singapore-based Effissimo Capital Management had acquired a stake in the automaker. However, the stock has since returned to its pre-announcement level. The rise in stock prices is more lasting in some cases than in others, as activist investors have helped Japanese companies shift their focus from management stability to enhanced capital efficiency. Dai Nippon Printing's (7912) shares have risen 70% since it was revealed in January 2023 that U.S. hedge fund Elliott Management had taken a significant stake in the company, outperforming the Topix by 50 points 18 months after the initial report. The U.S. fund played a pivotal role in Dai Nippon's decision to unveil a plan to raise its price-to-book ratio (PBR) above 1. Olympus (7733) has also undergone significant management reform through activist investment. In 2019, senior officials from U.S. investment company ValueAct Capital joined the optical equipment manufacturer as outside board members, helping it refocus its resources on the healthcare sector. As a result, Olympus' stock price rose 2.4 times in the three years following ValueAct's investment. Shares of Chiba Kogyo Bank (8337) were roughly 150 points higher than the Topix one year after Tokyo-based Ariake Capital invested in the regional bank. Overall, however, the positive effect of activist investment on stock prices does not last long, with many companies experiencing declines after initial price surges.

Read the article

12/6/2024

Opinion: Rio Tinto Won’t Easily Ditch Its Dual Structure, Despite Its Lack of Style

Financial Times (12/06/24)

Even when a style goes firmly out of fashion, some loyal devotees still don’t give it up, according to this commentary. Take the dual-listed company (DLC) structure. Typically this is where two companies have — instead of a conventional merger — kept their separate legal identities and stock market listings but are operated as a single business. Benefits can include tax advantages. But increasingly DLCs are seen as outmoded, value destructive, and a potential block to large M&A. Well-known DLCs have been collapsed in recent years, often under pressure from activist investors. Rio Tinto (RTNTF), a nearly three decade-long DLC devotee, is under fire from Palliser Capital to follow suit by unifying its corporate structure in Australia and shifting its primary listing to Sydney. Palliser this week upped a campaign it began in May, claiming Rio's complex structure had been an “unmitigated failure.” Palliser's argument are compelling. Most DLCs came into being decades ago. It's difficult to see companies making the same choice today. Rio's London-listed shares trade at a big discount to those of Sydney-listed Rio Tinto Limited — about 19%. This could complicate any mining megadeals, given these are generally all-share affairs. Technically stock-based acquisitions should be possible with DLC structures. But Palliser claims Rio's near-exclusive use of cash for M&A highlights the complexity of doing so in reality. This is an old debate. And Rio's chief executive Jakob Stausholm says he has considered the merits of simplifying. But the company and its advisers came up with different answers on several key points. In particular, the tax costs. Rio claims these would amount to “mid-single-digit billions of dollars”; Palliser insists they would be closer to $400 million. There is also disagreement over the level at which the shares of a unified company would trade. This has echoes of the fight between rival miner BHP Plc (BHP) and Elliott Advisors when the latter campaigned for BHP to dump its DLC structure. BHP was always more Australian than British anyway. And boss Mike Henry was more motivated to invest time and money in gearing up the company for a return to big dealmaking. So far, Rio is living up to its more conservative reputation. Its biggest deal since 2007 is its recent $6.7 billion swoop for Arcadium Lithium (ALTM). In the summer, Stausholm warned of the “big risk” associated with mega M&A. "This won't be the last of anti-DLC campaigning," the commentary concludes. "But it will take more than peer pressure to make Rio ditch this well-worn style."

Read the article

12/6/2024

Opinion: A Honeywell Guidance Cut Is Actually Good News

Bloomberg (12/06/24) Black, Thomas

Bloomberg columnist Thomas Black notes that normally, a cut to a financial target spells trouble for a company. "Not so much for Honeywell Aerospace, which produces an array of aircraft products and services," he suggests. Honeywell International Inc. (HON), which owns other businesses in energy and automation, said on Monday that it would take a $400 million hit on both sales and operating cash flow to its 2024 financial target. The earnings drag is coming from a Honeywell Aerospace agreement to supply satellite internet, avionics, and jet engines to the Canadian private jet maker Bombardier Inc. (BDRBF). Over the life of the agreement, the value is about $17 billion, the two companies said in a statement. Investors did not handle the initial news well, and Honeywell’s shares fell 1.3% on Tuesday. Honeywell tried to convince as many analysts and investors as it could about how a $17 billion agreement would end up hurting the short-term finances of the aerospace business, the conglomerate’s largest and most profitable unit, but was a long-term investment for the future. The agreement includes upfront incentive payments to make Honeywell’s equipment exclusive to a Bombardier plane under development, a cost that Honeywell will recover over time. "This is the complexity that activist investor Elliott Investment Management points to as an argument for Kapur to carve out the aerospace business as a separate company," notes Black. "If it were a pure-play entity, shareholders would likely know the quirks of the aerospace industry in which suppliers enter contracts that lose money upfront on new aircraft development but have long payoff periods down the road. In other words, aircraft manufacturers share both the capital needs and risks with large suppliers." Elliott believes that Honeywell Aerospace would be valued higher if not tucked in a group that requires investors to understand a multitude of disparate industry trends such as the oil and gas market, commercial real estate and warehouse demand. Confusion over how the market should react to the news "wasn’t helped by Honeywell’s failure to explain the forecast cut until the ninth paragraph of the release," says Black. "What also muddied the waters was one sentence: 'Additionally, all legacy pending litigation between the companies has been resolved.'" At first blush, it would be easy to link the $400 million hit to sales and profit to the settlement of a lawsuit brought by Bombardier that was claiming more than $300 million of damages from overcharges on Honeywell’s HTF7000 jet engine from 2012 through 2017. Bombardier was clearly winning the case on its home turf: A Superior Court Judge in Quebec ordered in January that Honeywell provide a wide range of customer information and sales record to an independent expert to resolve the dispute. While Honeywell isn’t saying what it had to pay, if anything, to prod Bombardier to drop its claim of being overcharged, the settlement would be recorded as a cost and would not impact sales, so it’s not the source of the guidance cut. Bombardier was the first customer for the HTF7000 and says that it locked in guarantees that the engine wouldn’t be sold to competitors for less than Bombardier pays. The settlement is likely wrapped into the value of the new supply agreement, and investors may never know what Honeywell had to give to make the lawsuit go away. "The good news is that Honeywell and Bombardier have moved past their differences, and the two have plans for using a 'next-generation model' of the HTF7000 engine for future aircraft, according to Black. The HTF7000 engine now powers Bombardier’s popular midsize Challenger 3500 business jet. As usual, any plans for an upgrade to the Challenger are a closely held secret. Planemakers are reluctant to weaken sales of their existing models by flaunting a new, improved aircraft that’s coming. Of this $17 billion value that Honeywell discussed, most of it will likely come from the HTF7000 engine, which Honeywell is calling the HTF7K, just because that’s the most expensive component of an aircraft. The other bit of good news is that the agreement includes Honeywell’s new avionics product called Anthem. This is a victory for Honeywell because the Challenger 3500 and other Bombardier aircraft are usually equipped with cockpit controls made by competitor Collins Aerospace, which is owned by RTX Corp. The two companies said the agreement involved “collaborative research and development,” so it’s unclear how much inroad Honeywell will make on avionics on Bombardier aircraft. "Just as Elliott has argued that a spinoff makes sense based on the quirks of the aerospace market, Honeywell has responded that its aerospace unit works well as part of a larger company," Black concludes. "The incentive payments aren’t a prominent topic for investors because as a larger company with sales estimated at as much as $38.4 billion this year, it can absorb more easily the drag from the investment needed to reap the benefit of a long-term aerospace agreement. Under either argument, Honeywell’s earnings guidance cut is a good sign that it is investing now for the future of its aerospace business."

Read the article

12/6/2024

Battle for 7-Eleven Could Be Tipping Point for Japanese M&A

Wall Street Journal (12/06/24) Fujikawa, Megumi

The multibillion takeover battle for the Japanese owner of 7-Eleven is unfolding against a backdrop of heightened deal activity involving foreign bidders, fanned by a weak yen, undervaluation, and a profitability gap at many big Japanese firms compared with their international peers. Canada’s Alimentation Couche-Tard (ATD) has made a $47 billion offer for Seven & i (3382), triggering a promised refocus on profitability by Seven & i management. A scion of the founding family has also proposed taking the company private in a leveraged buyout, though details have not been made public. Seven & i said it is considering all options on the table, but hasn’t provided a timeline for a decision. The moves come amid a flurry of foreign-driven mergers-and-acquisition activity in Japan. The number of foreign acquisitions of Japanese companies increased by 19.1% between January and November compared with the same period a year earlier, according to Recofdata, an M&A database provider. Statistics compiled by the firm for the past decade show a broad uptrend in dealmaking—including a bump during the pandemic years. The number of M&A deals rose 66.5% in 2023 compared with 2014. A big part of that has been driven by Japanese companies selling off more noncore assets as they look to become more lean and efficient. A weaker yen offers another catalyst for dealmaking. The currency has fallen some 30% versus the U.S. dollar since the beginning of 2022, making Japanese acquisition targets more attractive. “It will be a great opportunity to acquire Japanese technology and services at a discount,” said Hidenori Yoshikawa, a consultant at the Daiwa Institute of Research think tank. He sees scope for more investment banks to approach overseas companies with M&A ideas. Another factor is the profitability gap between Japanese companies and their peers overseas. “The fact that a company as big as Seven & i, in market cap terms, can find itself in the M&A crosshairs might come as a shock, but its profitability does pale in comparison with Couche-Tard,” SMBC Nikko Securities quantitative analyst Keiichi Ito said in a research note. The five-year average of Seven & i’s return on equity was around 7.5%, compared with 23% for Couche-Tard, according to data provider FactSet. Analysts are already compiling lists of Japanese companies that could become prey to foreign bidders. Jefferies analysts have name-checked brewer Asahi Group (2502), machinery maker Kubota (6326), and household-equipment manufacturer Lixil (5938). “With a multitude of undervalued, fragmented and inefficiently managed businesses, Japan could become the most attractive M&A market globally,” said Shrikant Kale, a quantitative strategist at Jefferies. Kubota said, as a listed company, it is aware of the risk of being an acquisition target. “The current share price has not reached the level we would like to see,” a Kubota representative said. “We will fully disclose our efforts to stakeholders and strive to improve our corporate value.” Despite its attractiveness, foreign firms have long struggled to break into the Japanese market, especially when going after iconic companies like Seven & i. They often face resistance from Japanese corporate boards that are largely made up of lifetime employees who typically don’t welcome radical changes like foreign acquisitions. At Japanese companies, shareholder profit isn’t necessarily the priority, said Yoshikawa, the Daiwa Institute of Research consultant. Japanese corporate culture is more about community, with companies viewed as family-like institutions, he said. That differs from the U.S. where they are seen more as purely corporate entities. In the United States, “directors feel it’s their duty to sell to the highest bidder even if they offer one yen more,” he said. Successive governments and the country’s main exchange operator have tried to change this over years, pushing boards to be more sensitive to governance and shareholder concerns. Officials believe such reform can improve companies’ profitability and productivity, which would eventually help accelerate innovation. Senior executives of large Japanese companies often include people who have spent their entire professional lives at the same company. That can create what critics say is an entrenched leadership that feels it has a personal stake in changes of ownership. “It’s like a family for these people in the lifetime-employment system,” Yoshikawa said. When faced with a takeover bid or pressured to get rid of unprofitable businesses, “there’s a sense of, ‘Are we really going to throw that away?’” Seven & i’s chief executive, Ryuichi Isaka, joined 7-Eleven Japan in 1980 right out of college and has worked there ever since. In October, Isaka announced a plan to split off some businesses and focus on convenience stores. The fate of the world’s largest convenience chain now depends on whether the founder of 7-Eleven’s parent and his fellows will be able to secure the cash needed to make the proposed management buyout. No matter which way it goes, the tide on foreign acquisitions may not be reversed. “With the Seven & ?i deal, Japan’s M&A cycle has finally ?crossed the Rubicon,” Jefferies’s Kale said.

Read the article

12/5/2024

BreakingViews: Japan’s Virtuous M&A Circle Starts with 7-Eleven

Reuters (12/05/24) Lockett, Hudson

The battle for control of Japan’s Seven & i (SVNDY) is being cheered in Tokyo as evidence of improving efficiencies of the world’s third-largest economy. Officials can hasten a virtuous circle of dealmaking if they make the right next moves. In response to the largest-ever foreign takeover bid from Canada’s Alimentation Couche-Tard (ANCTF), the Ito family behind the $45 billion operator of 7-Eleven convenience stores has emerged with a competing offer, backed by trading giant Itochu (8001), the owner of rival corner store chain FamilyMart. Neither of the takeover proposals are binding, and Japan Inc is effectively riding to the rescue of one of its own with a giant leveraged buyout. But that doesn’t matter: shares of the bloated conglomerate have never been higher. That Japan's financial elite would prefer to see a domestic buyer who won’t mess with 7-Eleven’s best-in-class onigiri rice balls is pure happy coincidence. “We used to have too much of a grey zone in M&A — now there’s less,” says the head of capital markets for one Wall Street lender. He points to the independent committee weighing up bids under the watchful eye of the company’s top outside director Stephen Dacus, and the fact that Couche-Tard’s approach wasn’t dismissed outright. So the hot question in Japan isn’t whether a Seven & i deal will happen, but who will find themselves in foreign investors’ crosshairs next. The two biggest factors will be the same ones that made Seven & i a viable target, namely a strongly independent board and minimal cross-shareholdings. These qualities are encouraged by Japan’s corporate governance code and fair M&A guidelines. Absent these protections, Japan Inc is exposed to activist and strategic investors — in a word, naked. Yet, aside from Seven & i, only a dozen other stocks out of the 1,600-odd listings on the Tokyo Stock Exchange’s Prime Board have strongly independent boards, per an analysis led by Nicholas Smith, Oliver Matthew and Nicholas Benes for CLSA’s Blue Books. At these companies, 40% of directors meet the Tokyo Stock Exchange’s independence criteria and virtually no assets are tied up in allegiant or friendly shareholdings. Other names on the list include Takeda Pharmaceutical (4502), Zozo (3092), and Fuji Soft (9749), itself the subject of a recent bidding war between private equity firms Bain and KKR (KKR). Though few in number, this clutch of companies, the trio note, enjoy an average price-to-book ratio of 3.7 and average annualized shareholder returns of 16.7% over the past decade — more than double the Prime market average on both counts. Zuhair Khan, a hedge fund strategist at UBP who goes long on listed companies with good governance while shorting corporate improvement refuseniks, breaks it down further. He says that out of Japan’s 500 biggest stocks only about 100 — firms such as Sony (6758), Hitachi (6501), and Asics (7936) — are actively seeking to improve governance. Roughly 250 “reactive” companies respond to prodding but take little initiative. The remainder — Toyota (7203), Fujifilm (4901), and Canon (7751), for instance — have “no interest in change.” He estimates only about a quarter of these top stocks are vulnerable to outside investors. The rest can mostly block irksome shareholder motions thanks to the prevalence of companies, institutions, or families on the register with ties to management. Seven & i, Khan says, is a good example of a company that's both reactive and vulnerable. “This is beautiful,” he notes of the tussle for control. “It shows Japanese companies that eventually they are all vulnerable if they don't get their stock price up.” There is still a long way to go, however, as cross-shareholdings between companies still account for about 30% of the total traded shares in Tokyo, per Nomura. One banker at a western lender in Japan estimates untangling this skein of unproductive investments could drive an average of 6 trillion yen, about $40 billion, of equity deals every year for the next decade. Nicholas Benes, director at The Board Director Training Institute of Japan, says that in contrast to a flurry of abortive action from foreign activist investors in the early 2000s, the current trend has legs. But he adds that the economic and fiscal pressures Japan faces make the case for Japan Exchange Group head Hiromi Yamaji to speed up the value push he’s become known for since taking the helm two years ago. To shift up a gear, Japan Exchange ought to require a majority of directors be fully independent, for companies to make corporate governance disclosures machine readable, and to clarify the meaning of corporate value. That might ruffle feathers in Japan Inc but Yamaji has a convincing case study from Seven & i showing the power of market forces when properly harnessed. This is only the beginning — if Japan plays its cards right.

Read the article

12/5/2024

Nissan Boss Uchida Races to Save the Automaker — and His Job

Reuters (12/05/24) Shirouzu, Norihiko; Dolan, David; Shiraki, Maki

In early October, Nissan Motor (7201) managers dialed in for a regular online meeting with boss Makoto Uchida only to hear a grim message: business was worse than expected and the Japanese car maker had to cut jobs and production. They listened as the 58-year-old chief executive described a deteriorating financial situation that he put down largely to weak sales and profitability in North America and China, according to three people with knowledge of the matter. In the Q&A, some of the few hundred managers peppered Uchida with questions about responsibility for the decline of a company that five years ago had the world's top EV model by lifetime sales. Why didn't Nissan offer gasoline-electric hybrids in the U.S., where customers were now clamoring to buy them? Why hadn't the company hedged its bet on EVs by making hybrids available in the U.S., its biggest market, as it had done for years in Japan? Who was responsible for the latest crisis? Those questions loom large as Uchida scrambles to repair the automaker - and keep his job. Announcing dismal results last month, the former China head pledged to cut 9,000 employees, 20% of global production capacity and $2.6 billion of costs. He also promised to forfeit half his pay. Uchida is under pressure to deliver a turnaround, according to three others with knowledge of Nissan's thinking. The next few months will be critical for him and for Nissan's future, one said. Activist shareholders have quietly built up stakes in the automaker. Donald Trump's election adds to the uncertainty. The incoming U.S. president has promised to impose 25% across-the-board tariffs on Mexico, a vital, low-cost production hub for Nissan and others. For Uchida, Trump represents a wild card at the worst possible time, as hefty tariffs could force Nissan to cut output in Mexico, two people said. Uchida's tenure has coincided with a tectonic shift in the automotive landscape, as new EV makers challenge decades-old manufacturers. The industry's biggest names aren't immune. Volkswagen (VWAGY) is threatening to close German plants for the first time and Stellantis (STLAM) Chief Executive Carlos Tavares resigned abruptly on Sunday. The Jeep maker lost market share as Tavares focused on margins - making its cars too expensive for some. Uchida, meanwhile, bet on an EV future. When post-pandemic revenge spending cooled, Nissan had no hybrids in the U.S. and had to offer incentives to move cars off lots. "What we have today at Nissan is a man-made disaster. While it's true that there has been a tremendous amount of uncertainty and disruption in the industry itself, this is basically a case of a failure of management strategy," said Seiji Sugiura, senior analyst at Tokai Tokyo Intelligence Laboratory. "What Mr. Uchida has to do now is hand the baton over to a new management team." This account of Nissan's missteps and the tough choices now facing Uchida includes previously unreported information, such as the October call, details of the missed hybrid opportunity and Nissan's reasoning on output cuts. It is based on interviews with a dozen people with knowledge of Nissan's thinking, who spoke on condition of anonymity because they weren't authorized to talk publicly. Nissan told Reuters it wouldn't comment on internal meetings or on speculation about its recovery plan or Uchida's future. It said it was premature to comment on tariffs, but was monitoring the situation. "The CEO has acknowledged management responsibility for our current situation," it said, adding Uchida was working to make Nissan leaner and more resilient while bolstering competitiveness. It said the global industry faced unparalleled challenges, including Chinese competition and shifting customer demand. After five years and a series of business plans, Uchida hasn't been able to reverse the decline sparked by the 2018 arrest of Nissan's former chairman, Carlos Ghosn, on allegations of financial misconduct. Ghosn, who fled Japan a year later, remains a fugitive in his native Lebanon and denies the charges. Nissan has been rocked by turmoil since: Ghosn's successor, Hiroto Saikawa, stepped down in 2019 after admitting he received excess pay; Chief Operations Officer Ashwani Gupta left last year, as did two outside directors. Nissan later investigated claims Uchida put Gupta under surveillance. Nissan declined to comment on the investigation's outcome. CFO Stephen Ma is expected to step down, Bloomberg News reported over the weekend. As Tesla (TSLA) and China's BYD (002594) gobbled up market share, Nissan was bogged down in talks to restructure an alliance with France's Renault (RENA). Nissan sold 3.3 million vehicles last year, down around 40% from 2017. The stock has plunged 70% in under a decade, wiping out around $30 billion in value. Nissan, which introduced the first mass-market EV with the Leaf in 2010, is today better known for discounts than eye-catching cars, said Christopher Richter, of brokerage CLSA. It lost a once-enviable position in China because it couldn't keep up with the fast-changing market, a problem rivals also faced. One model, the e-Power Sylphy hybrid, fell flat because it looked like the gasoline version and Chinese consumers prefer edgy, futuristic-looking hybrids, one of the people said. Nissan wanted to go "all in" on EVs in the U.S. and didn't see the need for hybrids there, two of the people told Reuters. That proved a misstep when demand for hybrids surged due to high EV prices and limited charging networks. Even after Nissan became aware of demand for hybrids, it didn't think the trend would last long enough to warrant a strategy change, one of them said. "It's an excuse, but up until this time last year, we weren't able to foresee the rapid rise in demand for hybrids," Uchida said at the earnings press conference in November. Nissan has set up a dedicated project team to execute its recovery plan, with members hunkered down looking for areas to cut, Ma told analysts and investors at a closed-door briefing last month, according to two of the people. Some 1,000 U.S. employees have accepted early retirement, Nissan said last month. It is also considering job cuts in Thailand, Reuters has reported. Chinese capacity, already reduced, will need further cuts, three people said. Two more factories in China may need to be shut, said one of the people, adding that Britain's Sunderland plant won't face cuts because it was recently upgraded. In response to questions on China, Nissan said it would cut costs by closing plants and reducing lines. Sunderland was a strategic plant, it said. One option is to idle older assembly lines in North America and concentrate production on newer lines, two of the people said. Nissan is considering reducing the number of shifts on some lines, they added. After years of slow sales of the small cars it produces for both Nissan and Mercedes, the plant makes around 50,000 vehicles annually compared with capacity of 230,000, according to Sam Fiorani of AutoForecast Solutions. Its closure is "almost a foregone conclusion," Fiorani said. Mercedes said it continually reviewed its products and portfolio given changing customer requirements. Nissan said it, too, was constantly "reviewing and adapting" to ensure the COMPAS plant remained competitive. Weakness in the yen has made Japan a lower-cost manufacturing base and therefore a lower priority for cuts, three of the people said. Nevertheless, Japanese managers were examining factory workloads for potential cuts, two of the people said. Activist investors are circling. Singapore-based Effissimo Capital Management took a 2.5% stake in Nissan by the end of September, a filing showed. Hong Kong's Oasis Management has also taken a stake, two people said, although the timing wasn't clear. Oasis held around 1.5%, one said. Nissan is looking for a long-term investor and wouldn't rule out Honda, the Financial Times recently reported. Both automakers declined to comment on the report. Honda added there was no change in its agreement to work with Nissan. So far, Uchida has given every sign he intends to stay. "I am determined and committed to fulfill my duty as CEO," he said at the earnings press conference. The October meeting with managers was not the first time Uchida has faced questions about Nissan's direction. Analysts had been asking if the strategy was sound for more than a year, Sugiura said. "We'd ask 'Are you going to be ok in the U.S. and China?' and 'What about the lack of hybrids?' And they'd say 'Yeah, we're fine'," he said. "They completely misread the business environment and didn't do what they needed to."

Read the article

12/5/2024

Tech Nvidia Tangos with Starboard Value: An Excerpt from Tae Kim’s New Book on the Tech Giant

CNBC (12/05/24) Kim, Tae

In an excerpt from the book “The Nvidia Way: Jensen Huang and the Making of a Tech Giant,” author Tae Kim recounts that early in 2013, Nvidia’s (NVDA) shareholders were getting restless. The stock price had been roughly flat for four years, and the financial performance was mixed. In its latest quarter ending in January, sales were up 7% year-over-year, but earnings were down 2%. Its growth rate was only in the single digits, which resulted in a price-to-earnings (P/E) multiple of just 14 times earnings. After backing out Nvidia’s cash on hand, Starboard Value believed that the company was severely undervalued, and its core assets had far more room to grow. The fund pounced: according to SEC 13F filings, the hedge fund accumulated a stake of 4.4 million shares in Nvidia, worth about $62 million, during the quarter ending in June of 2013. Some executives at Nvidia weren’t excited about having Starboard as an investor. One senior Nvidia executive said the company’s board was very worried that the activist fund would force a reorganization of the company, and install its own board. Another Nvidia executive said Starboard wanted a board seat, but the board had pushed back. Still, the relationship never became too antagonistic. “I don’t think it ever got to what I would call a crisis stage. You know DEFCON 1?” one Nvidia executive said, referring to the alert system used by the U.S. military for nuclear war. DEFCON 5 indicates peace, while DEFCON 1 means nuclear war is imminent. “It got to DEFCON 3.” The Starboard team met several times with Jensen and other Nvidia leaders to discuss strategy. Looking back on the investment years later, Smith said that Starboard primarily advocated for an aggressive stock buyback program and a de-emphasis on non-GPU projects such as phone processors. Starboard refrained from applying additional pressure after the meetings. The hedge fund eventually got its wish on the buybacks. In November 2013, Nvidia made two announcements: a commitment to buy back $1 billion of stock by fiscal 2015 and the authorization of an additional $1 billion stock buyback. The stock price rallied about 20% in the ensuing few months, and Starboard sold its position in Nvidia by March the following year. Far from a contentious relationship, Nvidia and Starboard seemed to work well together in this brief period. “We were incredibly impressed with Jensen,” said Smith. A company called Mellanox (MLNX) was founded in 1999 by several Israeli technology executives, led by Eyal Waldman, who became its CEO. Mellanox provided high-speed networking products for data centers and supercomputers under the “InfiniBand” standard and soon became an industry leader. It had impressive revenue growth, going from $500 million in 2012 to $858 million in 2016. However, its high research and development spend left it with very thin profit margins. In January 2017, Starboard bought an 11% stake in Mellanox. It sent a letter criticizing Waldman and his team for their disappointing performance over the prior five years. Mellanox’s share price had fallen even though the semiconductor industry index had risen in value by 470%. Its operating margins were half of the average of its peer companies. “Mellanox has been one of the worst performing semiconductor companies for an extended period of time,” read Starboard’s letter. “The time for fringe changes and marginal improvements has long passed.” After a long series of discussions with the board, Starboard and Mellanox reached a compromise in June 2018. Mellanox would appoint three Starboard-approved members to its board and give the hedge fund additional future rights if Mellanox didn’t meet certain undisclosed financial targets. Even with those concessions in hand, Starboard retained the option of waging a proxy fight to replace Waldman. Alternatively, Mellanox could choose to sell itself to a company that could generate better returns on its assets than it could as an independent company. The groundwork was laid for what would be one of the most consequential transactions in the history of the chip industry. In September 2018, Mellanox received a nonbinding purchase offer from an outside company at $102 per share—a premium of almost a third over its current stock price of $76.90. Mellanox was now fully in play. It solicited an investment bank to seek other bidders and eventually expanded its list of potential buyers to seven in total. Jensen wasn’t thinking about acquiring Mellanox when it became available, according to another Nvidia executive. But he quickly saw the strategic importance of the asset, decided Nvidia had to win the auction, and joined the hunt in October. Nvidia won the bidding war on March 7, 2019, for an all-cash offer of $6.9 billion. Days later, Nvidia and Mellanox made the deal public and held a conference call with analysts and investors. “Let me tell you why this makes sense for Nvidia and why I’m excited about it,” Jensen said. He talked about how the demand for high-performance computing would rise—how workloads including AI, scientific computing, and data analytics required enormous performance increases, which could only be attained through accelerated computing with GPUs and better networking. He explained how AI applications would eventually require tens of thousands of servers connected to one another and working together in concert, and the market-leading networking technology from Mellanox would be critical to make that possible. “Emerging AI and data-analytics workloads demand data-center-scale optimization,” he said. Jensen was predicting that computing would move beyond one device—that the entire data center would become the computer. Jensen’s vision came true just a few years later. In May 2024, Nvidia disclosed that the portion of the company that was formerly Mellanox had generated $3.2 billion in quarterly revenue, up more than seven times from the final quarter in early 2020 in which Mellanox reported as a public company. After just four years, the former Mellanox business, which had cost Nvidia a one-time fee of $6.9 billion, was generating more than $12 billion in annualized revenue and growing at triple-digit rates. “Mellanox was frankly a wonderful thing thrown in our lap by activists,” a senior Nvidia executive said. “If you talk to AI start-ups today, InfiniBand, Mellanox’s networking technology, is incredibly important to scale the computing power and make everything work.” After seeing Nvidia achieve all that is has over the past decade, Jeff Smith of Starboard Value had one summarizing thought, too. “We never should have exited the position.”

Read the article