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EDITORIAL: Activists are mixed blessing

August 29, 2015

Angie’s List Inc. is the latest Indianapolis company to have to contend with an activist investor—an outside shareholder with its own ideas of how to run the business and with demands for a voice at the boardroom table.

It’s the new reality for businesses nationwide. Even small-fry public companies like Ameriana Bancorp and Noble Roman’s Inc. have caught the attention of investment firms that specialize in stirring the pot in hopes of scoring a quick profit.

That description sums up the mixed feelings these interlopers create. Often, they push for stock buybacks or other moves that could boost the stock price in the short term, but might consume cash that firms could better deploy toward building long-term value. Larry Fink, CEO of the investment behemoth BlackRock, sounded an alarm in a letter to S&P 500 CEOs this spring, warning of “the acute pressure, growing every quarter, for companies to meet short-term financial goals at the expense of building long-term value.”

He added: “This pressure originates from a number of sources—the proliferation of activist shareholders seeking immediate returns, the ever-increasing velocity of capital, the media landscape defined by the 24/7 news cycle and a shrinking attention span, and public policy that fails to truly encourage long-term investment.”

Yet the pressure these outsiders apply also often causes underperforming companies to shape up.

Take Noble Roman’s Inc., which has attracted two activist investors, one of which received a board seat in April. The firm has a sleepy history, with the stock spending most of the past decade below $2, even as the top two executives—Paul Mobley and his son Scott—collectively received well over $700,000 a year in compensation.

With activists in the wings, the pair has suddenly ramped up expansion ambitions, hiring new executives to accelerate sales of its pizza-and-sub franchises, open more take-and-bake pizza shops, and sell more take-and-bake pizzas through groceries.

The activist upping the pressure on Angie’s List is New York-based TCS Capital, which has amassed a 9-percent stake and said Aug. 24 that it wants three board seats and a fourth for a non-TCS representative.

Naperville, Illinois-based PL Capital Group secured a board seat at Ameriana Bancorp in 2013 after pushing the company to improve performance and consider a merger—a wish it got in June of this year, when Muncie-based First Merchants Corp. announced it was buying the New Castle-based institution for $69 million.

When activists start stirring things up, one of the biggest risks is that they will propel a company into play, potentially causing the elimination of another locally based public company. That risk should weigh on the minds of executives of companies where activists haven’t yet come calling. If performance lags, they almost surely will.•

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To comment on this editorial, write to ibjedit@ibj.com.

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