Memo to activist investors: Unless you understand tech, you'll do more harm than good
If the tech industry’s recent battles with activist investors accomplish anything, it should be to remind us of the danger of those who don’t understand technology and product development opining on either. Sadly, when you are a public company, you have to listen.
Recently, Twitter and Yahoo have found themselves unlikely bedfellows in being targeted by Wall Street agitators, in both cases leading to calls for changes in CEO. It’s a common refrain from activists who prioritize short-term profits over long-term value creation – and one that rarely results in a bigger and better company.
It’s not as if this is something new. Activists have been targeting what they view as undervauled or underperforming companies for decades, including recent tech skirmishes involving Apple, eBay (and PayPal), Netflix, and others. Remember: It was Dan Loeb’s battle with Yahoo that contributed to Marissa Mayer getting the CEO job.
Troublingly, the prevailing belief in Silicon Valley is that both Mayer and Costolo are doing pretty good jobs in their respective roles, and moreover that both Yahoo and Twitter would be far worse off following a leadership change, regardless of who were named their successors. It’s only Wall Street that seems to think differently. And really, to be fair, it’s only a portion of Wall Street: Those who make profits off of short term pressures and moves.
To be clear, Yahoo and Twitter are two very different companies at opposite ends of their respective corporate lifecycles. Yahoo is an aging giant that has cycled through a half-dozen CEOs in the last decade without showing much sign of life. But it remains one of the Web’s biggest properties and its most recognizeable names. Shareholders are desperate to see the company returned to former glory – a potentially impossible task that Mayer was hired to accomplish.
Twitter, on the other hand, is one of the most talked about companies of the social media era, and is the preferred playground of the world’s most famous and influential figures, including celebrities, revolutionaries, and members of the media. Twitter’s only sin is that it’s not growing at Facebook's pace, something that can be said of almost every other company in the world.
What Yahoo and Twitter share is that Wall Street evidently doesn’t understand either business, and thus how to evaluate the performance of its CEOs.
Many Valley insiders have spoken out on behalf of both CEOs. One notable example is angel investor and Inside.com and Engadget founder, Jason Calacanis. Of Mayer, Calacanis writes:
Marissa has accomplished a ton, and she should be judged after seven years & $10b in acquisitions—not 30 months and $2b. This piece was designed to sell books and get page views — it doesn’t match the reality of how hard these turnarounds are. ...
Yahoo was a complete disaster when MM joined: A half-dozen or so folks have tried to shepherd the company during the last decade and at no point has anyone succeeded at making the place in any way competitive at acquiring startups or talent. ...
To those morons calling for her ouster here’s a simple test: how did the last couple of CEOs with the job do? Oh yeah, they ran it into the ground! On Costolo, Calacanis similarly doesn’t mince words:
If you’re an activist investor and you think Dick isn’t doing an outstanding job you’re a total idiot. Growing a groundbreaking service like Twitter -- with the world’s most important people engaged -- takes time. Like years. ...
If Dick wanted to play games with Twitter he could spike the traffic. However, those games, like say putting weddings and Bar Mitzvah photos at the top of your feed, would alienate the power users who have defined the services relevant in the world.
This sh$%t is hard to get right and easy to get wrong. You want a hyper-considerate guy like Dick in charge of a service like Twitter -- not a desperate, traffic-mongering idiot.” Calacanis concludes with perhaps his best line, “Seriously, sometimes I think ‘Activist investor’ is French for ‘has no f-ing clue how complex this [email protected]#4t is.’”
It’s one thing to think that Yahoo or Twitter could be more innovative, show more leadership in product design, or monetize more effectively. But where Wall Street’s logic routinely falls short is in its focus on counterproductive strategies like shareholder dividends (e.g. Yahoo and Apple), spinoffs of strategic assets (e.g. eBay/PayPal), and counterproductive mergers (Yahoo and AOL).
It would be one thing if these were slow-growth businesses struggling to create meaningful shareholder value. But in tech, rarely is that the case (at least in theory). Shareholders in these businesses should be looking for them to create exponential growth and deliver orders of magnitude better products, not to limp along kicking off a nice coupon.
Twitter is a relatively young service that is still evolving and maturing its product offering and business. At the same time, the platform has never been more relevant as a place for real-time discussion, breaking news, and pop culture. Part of the reason Twitter isn’t growing faster is a relentless focus on real time conversation, while Facebook wants to be in everything social -- sometimes with competing offerings.
For Twitter, taking short term steps to juice traffic or new-user growth would be counterproductive to the long-term goal of creating the most valuable, sustainable, and defensible user experience possible. One needs only look as far as MySpace to understand the delicate balance between growth and a positive user experience. According to technology’s thought leaders, Costolo is doing precisely that.
Twitter's real albatross is not Costolo, but the fact that it is constantly being compared to Facebook, a once in a lifetime growth story. Absent Facebook as a comp, Twitter would be seen as a runaway success. And Costolo has something on his platform that even Mark Zuckerberg envies – celebrities and "thought leaders." Calacanis astutely notes that even some of Facebook’s own board members -- like Tweet-storm fav (Disclosure: and Pando investor) Marc Andreessen -- are more active on Twitter than the Facebook.
Yahoo, on the other hand, is in the midst of a massive turnaround, and while the results of Mayer’s efforts may not yet have impacted the bottom line, it’s hard to say that Yahoo isn’t a far better place today than it was when she arrived. Most notably: People can say they are taking a job at Yahoo or selling their company to them with a straight face.
That’s no small feat, but it is one that could be quickly undone with another leadership change. Mayer’s tenure has been far from perfect, and I’d be the first to say that her Yahoo needs more focus and a clearer vision. But think about this: The world was shocked when someone as A-list as Mayer took the job. Who the hell do shareholders think they’d get that would be any better?
What the current activist attacks on Yahoo and Twitter have in common is that they are being led by groups who don’t understand how to build successful technology, at either the product or the company level. And, given that lack of understanding, the only basis on which to evaluate these businesses is from a financial engineering perspective. It’s the same flawed logic that led an NYU professor to argue Uber was at most worth a mere $5.9 billion earlier this year.
Looking only at the stock price, Yahoo $50.23 price is up more than 215 percent since Mayer took over as CEO, when the stock was at $15.92 – this coming through factors both within and beyond her control: Yahoo’s stake in Alibaba. At $39 today, Twitter, on the other hand, remains up 50 percent from its November 2013 IPO price of $26, but is well off its all-time-high of $73 some six weeks later. Neither result is an indication that either CEO should be fired. What they do indicate, as Calacanis puts it, is that this shit is complex. And squeezing a few dollars of extra return out of the stock this year is a bad strategy for creating long-term shareholder value.
The truth is that Wall Street isn’t the only realm in which technical illiteracy is rampant among the powerful. Congress and the Supreme Court are other prime examples, and ones where the consequences of this disconnect are particularly troublesome. Take the ongoing Net Neutrality debate. Many Congressmen and members of the judiciary have openly stated (and celebrated) their lack of technical understanding, all the while writing and voting on pieces of legislation that could have profound impacts on the world we live in.
The same argument could be made for the legislators attempting to regulate Wall Street and exotic financial activities like high frequency trading and derivatives. The ineffectiveness in preventing the recent financial crisis, and the relative inaction in response are the predictable result of this lack of financial sophistication.
Late scientific author and astronomer Carl Sagan, who was a tireless advocate of skeptical inquiry, predicted nearly two decades ago that we were headed for this sort of world. In a 1996 interview with Charlie Rose, Sagan said:
We’ve arranged a society based on science on technology in which nobody understands anything about science and technology. And this combustable mixture of ignorance and power, sooner or later, is going to blow up in our faces. ...
Science is more than a body of knowledge. It’s a way of thinking. A way of skeptically interrogating the universe with a fine understanding of human fallability. If we are not able to ask skeptical questions, to interrogate those who tell us something is true, to be skeptical of those in positions of authority, then we’re up for grabs for the next charlatan political or religious who comes ambling along. In the case of activist investors, it’s not society that is up for grabs, but rather their investment returns. But digging a little deeper, this shareholder meddling is exacting a deeper toll on what should be the most innovative, and thus most impactful companies in the world.
I have no expectation that Starboard Value, Carl Icahn, Sea Breeze Partners, SunTrust, or anyone else on Wall Street might change their approach in any way based on consideration for the greater good. But for any shareholder asked to vote on the proposed ouster of Costolo or Mayer, or any members of the media blindly repeating assertions that they’re underperforming, I’d talk to people actually building companies in this space, at this kind of scale. The verdict from those who do know this stuff is that firing either would be a bad move.
Doctors take a Hippocratic Oath that begins with "do no harm." Maybe it's time that shareholders make a similar pledge.