The Curious Case Of Elliott Advisors And GSK: Are Activist Investors What They Used To Be?

MARCH 02, IRVINE, UNITED KINGDOM: Following an explosion on March 2, 2006 in Irvine, Scotland, the Glaxo Smith Kline sign can be seen outside their factory… [+]. Following the incident at the plant this morning, four persons were brought to Crosshouse Hospital. (Photo courtesy of Getty Images/Jeff J Mitchell)
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Elliott Advisors (UK) Limited published a letter to Sir Jonathan Symonds and members of GSK’s Board of Directors, including Chief Executive Dame Emma Walmsley, on July 1, 2021. The letter contained an examination of GSK’s previous performance, proposals to separate the Consumer Health (CH) business from the medicines and vaccines business (“New GSK”), and five suggestions. This nine-page letter, which included an equal number of pages in appendices, sparked a frenzy of coverage in the British press. It was also a bit perplexing. “It roars out a fire and brimstone sermon,” Jim Armitage wrote in the Evening Standard, calling it “an excoriating open letter to investors” the next day. The New York Times’ Alistair Osborne was less thrilled, calling it a “damp squib” and lamenting that “for a hedge fund with a bullying reputation, Elliott’s email was almost delicate.” The Guardian’s Nils Pratley expressed disappointment, saying, “Aren’t activist investors supposed to sound angry?” “When did activism become so passive?” wondered Bryce Elder of the Financial Times. This is a strange case.
Many of the headlines focused on Elliott’s initial advice, which was that a new GSK board establish a thorough procedure for appointing CEOs at both New GSK and CH. The majority of the press was outraged, with Matt Oliver of the Daily Mail calling it a “assault on Walmsley” and Elliott declaring “war on” her. The Daily Mail’s Alex Brummer implied that “activist investors’ behavior is intrinsically wrong,” claiming that Elliott and another activist investor, Sweden-based Cevian Capital, which is focused on Aviva (Chief Executive is Amanda Blanc), were picking “fights with respected female chief executives.” Meanwhile, Elliott has appointed six directors to the boards of public companies in the United States this year (Alkermes, Evergy, Principal Financial Group, and Public Storage). There are five of them who are female. ‘ It’s a strange case, to say the least.
I’ll return to the Walmsley case later, but first a little comparison analysis is in order. I’ll then go into more detail regarding the Elliott/GSK scenario before concluding with some comments on activist investors.
My comparative analysis will begin with a rhetorical question: What do ExxonMobil, a Houston-based oil and gas corporation, and GSK, a London-based healthcare company, have in common? There are four factors to consider: (1) a decade of financial underperformance compared to peers as a result of (2) poor strategy and capital allocation decisions, exacerbated by (3) poor communications with shareholders, resulting in (4) activist investor attention.
ADDITIONAL INFORMATION FOR YOU

Elliott Advisors compares the stock price performance of GSK over a ten-year period.

The activist investor’s focus, on the other hand, has been entirely different. In the instance of ExxonMobil, a new activist investor, Engine No. 1, conducted an aggressive proxy campaign with a small $40 million position that resulted in the appointment of three new directors to the ExxonMobil board. Many people regard this as a watershed moment in the oil and gas business in support of the energy transition. In this situation, the activist investor is viewed as a hero and a staunch supporter of environmental protection. “Are activist investors what they used to be?” wonders the thoughtful woman.
Many praised Engine No. 1’s full-frontal assault as a well-deserved forceful punch in the face of a firm that has long been known for its climate denial, arrogance, and failure to communicate with its shareholders. My Oxford colleague Professor Colin Mayer and I wrote in the Harvard Business Review in the early phases of the campaign that we were bullish about their chances. In a series of five entries for my column, I chronicled the campaign, the most recent of which is this one.
Elliott’s and GSK’s dynamics are significantly different. Elliott is one of the oldest hedge funds, having been founded in 1977. Elliott currently manages $42 billion in assets, which it deploys in a variety of scenarios around the world. Elliott spent millions of dollars on research and due diligence before making a multi-billion-pound investment in GSK, a business with a widely dispersed shareholder, as previously reported. The fund applauds GSK for separating the two businesses in its letter, claiming that the overall valuation after the break-up may be >45 percent of GSK’s present market cap. Note to reader: The board and management took this important restructuring decision three years ago, without any pressure from Elliott.
The Elliott letter is more of a “arm around the shoulders with some kind advise” than a punch in the face, compared to Engine No. 1’s necessary tough approach with ExxonMobil. “Our strong conviction that GSK could and should be a better business for patients, doctors, employees, and shareholders,” the second phrase of the letter reads. GSK plays an essential role in global health, according to the letter, because it “provides lifelines to the world’s most vulnerable people.” At the same time, the letter reminds out that the corporation has a lengthy history of poor execution, with evidence to back up the assertions. As a result, it has plummeted from third largest to eleventh largest pharmaceutical firm in the world. “Our investigation provided us with the strong belief that GSK is a corporation with world-class potential, solid assets, and infinite opportunities,” the letter says. It doesn’t strike me as a UFC takedown letter from a rogue corporate raider. “Are activist investors what they used to be?” wonders a wise man.
Incentivize stronger performance and greater ambition, improve profitability while investing more in R&D, show openness to value-maximizing pathways (e.g., sale of CH to a strategic buyer or private equity group or IPO), and preserve vaccines and pharma’s nimbleness appear to be the last four recommendations to improve the company’s performance (and not try to overly integrate them). These suggestions are even dismissed by Pratley as “gentle utterances of the bleedin’ obvious.”
“Elliott calls on the Board to confirm that, prior to the separation from CH, GSK will appoint non-executive directors with deep biopharma and CH expertise, and that the new, fit-for-purpose GSK board will then run robust processes for selecting the best executive leadership for New GSK and CH, considering both internal and external cannons,” says the first recommendation. If the entire letter is as boring and prosaic as some suggest, Elliott doesn’t seem to want to play Queen Elizabeth to Dame Walmsley’s Mary Queen of Scots. Although The Guardian’s Julia Kollowe did not call it a beheading, she claimed that Elliott was “in effect insisting Walmsley reapply for the post before the consumer healthcare division’s demerger next year.”

Glaxosmithkline Plc’s chief executive officer, Emma Walmsley, smiles for a selfie after a… [+] On Wednesday, December 19, 2018, Bloomberg Television conducted an interview at Glaxo’s offices in the Brentford region of London, United Kingdom. GlaxoSmithKline prepared the way for a separation by agreeing to form a consumer-health joint venture with Pfizer Inc., which the pharma behemoths aim to list on the public exchange. (C) 2018 Bloomberg Finance LP Photographer: Luke MacGregor/Bloomberg
Now is the time to take a deep breath and contemplate. GSK decided to split into two new businesses: a pure-play pharmaceutical firm and a consumer health company, transforming from a mini-conglomerate. The skillsets needed to lead a conglomerate are plainly different from those needed to lead each new enterprise. In the midst of such transformational upheaval, it’s a legitimate and appropriate question to revisit the leadership question. This “telling the obvious” point about government and leadership does not strike me as part of Elliott’s personal vendetta as an Oxford graduate with an MA in Classics and Modern Languages.
Dame Emma has had a successful career. She became CEO of GSK Consumer Healthcare, a joint venture between GSK and Novartis, in March 2015. She joined GSK in 2010 as head of Europe for the Consumer Healthcare division, and became CEO of GSK Consumer Healthcare, a joint venture between GSK and Novartis, in March 2015. Prior to joining GSK, she worked for L’Oreal for 17 years, gaining extensive international experience in London, New York, Paris, and Shanghai. It’s just a fact that she doesn’t have a lot of experience working in the pharmaceutical industry. According to Elliott’s research, the CEOs of GSK’s top 11 competitors have an average of 25 years in the pharmaceutical industry and six have a science degree. This is hardly surprising, as numerous studies have demonstrated the impact of background and experience. Choosing the correct CEO is, without a doubt, a critical decision. Spencer Stuart, an executive search firm, has conducted studies that demonstrate the cost of hiring the wrong person, the importance of the board of directors leading the process and the CEO not taking it personally, and the critical importance of context—a great CEO in one context may not be so in another.
“The Board strongly feels Emma Walmsley is the correct leader of New GSK and fully supports the steps being taken by her and the management team, all of whom are subject to rigorous performance assessments,” according to GSK’s viewpoint. The Board fully expects this team to achieve a step-change in performance and long-term shareholder value generation under Emma’s leadership./nRead More