Activist investor Elliott can plan how to support value creation at Pinterest

Activist investor Elliott can plan how to support value creation at Pinterest
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Banner for online image board Pinterest Inc. Pinterest hangs from the New York Stock Exchange on April 18, 2019, the morning of its initial public offering.

Spencer Platt | Getty Images

Company: Pinterest (PINS)

Business: Pinterest is a visual discovery engine that lets people find inspiration for their lives, including recipes, style and home inspiration, DIY and more. It also provides video, product and idea pins. Pinterest displays visual machine learning recommendations based on pinners’ tastes and interests

Stock Value: $13.5B ($20.40 per share)

Activist: Elliott Management

Ownership percentage: ~9.0%

Average price: hour

Comment from the activist: Elliott is a very successful and smart activist investor, especially in the technology sector. Their team includes analysts, engineers and operating partners from leading technology private equity firms. They also employ specialty and general management consultants, expert cost analysts, and industry experts when evaluating an investment. They often follow companies for many years before investing and have a broad stable of impressive board candidates.

What is happening?

Behind the scenes

Pinterest is a great business – it has an 80% gross profit margin, no equity, and $400 million in earnings before interest, taxes, depreciation and amortization, or EBITDA. The company also has $2.5 billion in net cash, 450 million users and an enterprise value of 15x cash flow. However, it is somewhat misunderstood by the market as it is often grouped with unprofitable, hyper-growth companies and unicorns. Thus, growth stocks have risen to highs (over $80 per share) over the last period and then bottomed out again. $19 IPO price when the growth sector explodes. It was probably valued at $80 per share, but more likely at $20 per share.

It operates in social media and e-commerce, two areas in which Elliott has significant past experience as a large, active Twitter and eBay shareholder, among others. However, unlike its peers, Pinterest is struggling to monetize its user base. But now it is at such a point that everything can change. Until the end of June, the company’s founder, Ben Silbermann, was its CEO. He effectively realized that he might not be the best person to run a large public company and resigned from the post of executive head, becomes the executive head. The company replaced him with Bill Ready, who has been Google’s president of commerce since 2020.

Elliott’s investment is a sign of confidence in Ready’s ability to capitalize on several opportunities to better monetize the company’s user base. One of those opportunities is increasing ad revenue in international markets, where companies like Snapchat and Twitter earn between 10 cents and 20 cents per user per month. A second opportunity to increase revenue is to better leverage e-commerce on its platform. Pinterest is partnering with Shopify in 2020, allows its users to purchase products found on its platform by clicking on a link to the merchant’s website. in June, Pinterest has acquired The Yes, an artificial intelligence platform that personalizes the fashion shopping experience for users. Finally, it could increase its user base with a large mix of male users, as is the case internationally, where users are more likely to use Pinterest for things like cars and sports.

Given their experience and history, we’d expect Elliott to seek a board seat here as well as at eBay and Twitter. Years ago – and under different circumstances – this would have been seen as an attempt at confrontation. But several things suggest this is an amicable engagement for Elliott. First, there is a new, experienced CEO that Elliott respects. Second, Ben Silbermann controls 37% of the voting stock through a dual share class structure that gives him 20 votes per share, so even though the firm is conflicted, Elliott won’t be involved. There’s reason to believe it’ll be Pinterest-friendly, too. Elliott has earned the respect of shareholders and directors in the sector since his time on the boards of Twitter and eBay, and the firm is much friendlier than it was 10 years ago.

While the primary goal here is transactional, when an active company is contacted, it often puts that company in a false position and attracts the attention of strategic investors and private equity. That will definitely be the case here. Last year there were rumors of both PayPal and Microsoft They were interested in bidding for Pinterest, and at the time the company was worth about $50 billion, compared to an enterprise value of about $9 billion today. Moreover, one of the reasons that potential suitors have historically not pursued Pinterest has been the perception that its founder will not sell. With Silbermann handing over the CEO role, that may no longer be the case. We could see additional interesting parties. While Elliott isn’t advocating a sale here as an economic animal with a fiduciary obligation, if it were to be proposed, they would certainly make sure the board is seriously considering an independent plan to determine what’s best for shareholder value. In fact, if that happens, we might even see Elliott’s private equity arm, Evergreen Coast Capital, team up with someone to evaluate a potential offer.

Elliott is reported to have about a 9% position on Pinterest, which we assume is 9.9% knowing Elliott. However, they are not 13D files. Based on its history and philosophy, it is likely that Elliott uses swaps and other derivatives to hedge its positions, and these types of securities are not currently required to be included in “beneficial ownership” for 13D filings. While that practice is currently the subject of a proposal from the Securities and Exchange Commission and could very well change soon, at least for now it sets the stage for an interesting shareholder juxtaposition: a founder with 6.6% economic wealth. An interest with 37% voting power against an activist with a 9.9% economic interest but potentially negligible voting power.

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving the ESG practices of portfolio companies.

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