The most recent development at Tim Hortons exemplifies a problem in the finance industry today. An activist investment firm decided that after making a 1.5% investment in Tim Hortons (owned for less than a year), it should be able to tell the company what to do.
We see nothing wrong with investors pushing for change when 1) it is warranted due to poor performance; 2) change is in the best interests of the company over the long term, and 3) you have a meaningful economic interest. There have been cases in which activists were justified in shaking up a poorly performing company with a sleepy board. Tim Hortons does not fall into this bucket.
The problem with this situation is that it is being driven by all the wrong reasons – an activist investor looking to make a quick buck. Tim Hortons is a very well-run company. You can debate the stock or the current valuation, but it is hard to argue with its long-term track record of execution. There is also nothing wrong with running the business conservatively and prudently, particularly at a time when Canadian consumers are facing increasing pressure and competition is intensifying. Piling on debt and buying back stock may drive the share price higher in the short term, but it also creates risk. We have seen what happens when companies dial up the risk to appease short-term investors. These investors are quick to move on to the next short-term opportunity and the company is left living with the consequences.
This investor should stop distracting management. Tim Hortons is doing a fine job and there is nothing wrong with running the business intelligently and prudently for the long term. If more businesses acted this way, we would live in a better and much less volatile world.