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Wednesday, August 17, 2022

How activist investor Elliott may plan to support value creation at Pinterest

A banner for the online image board Pinterest Inc. hangs from the New York Stock Exchange on the morning that Pinterest makes its initial public offering on April 18, 2019.

Spencer Platt | Getty Images

Company: Pinterest (PINS)

Business: Pinterest is a visual discovery engine that allows people to find inspiration for their lives, including recipes, style and home inspiration, DIY, and others. It also provides video, product, and idea pins. Pinterest shows visual machine-learning recommendations based on pinners’ taste and interests

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

Activist: Elliott Management

Percentage Ownership: ~9.0%

Average Cost: n/a

Activist Commentary: Elliott is a very successful and astute activist investor, particularly in the technology sector. Their team includes analysts from leading tech private equity firms, engineers and operating partners. When evaluating an investment, they also hire specialty and general management consultants, expert cost analysts and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board candidates.

What’s Happening?

Behind the Scenes

Pinterest is a great business – it has an 80% gross profit margin, no capex, and $400 million of 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 marketplace as it is often grouped with unprofitable, hyper-growth companies and unicorns. As such, it soared to sky-high valuations (surpassing $80 per share) during the recent run on growth stocks and sunk back below its $19 IPO price when the growth sector imploded. It was likely overvalued at $80 per share but even more likely undervalued at $20 per share.

It operates in social media and e-commerce, two areas that Elliott has significant past experience in as large, active stockholders of Twitter and eBay, among others. Yet, unlike its peers, Pinterest has struggled to monetize its user base. But it is now at a point where that can all change. Until late June, the company’s founder, Ben Silbermann, was its CEO. He impressively realized that he may not be the best person to operate a large-cap public company and stepped down as chief executive, becoming executive chairman. The company named Bill Ready, who had been president of commerce at Google since 2020, as his replacement.

Elliott’s investment is a sign of confidence in Ready’s ability to pursue several opportunities to better monetize the company’s user base. One of those opportunities is to increase ad revenue in international markets where they are getting 10 cents to 20 cents per month per user, versus dollars per month per user for companies like Snapchat and Twitter. The second opportunity to increase revenue is through better use of e-commerce on its platform. Pinterest partnered with Shopify in 2020, giving its users the ability to purchase products they find on its platform by clicking on a link to a merchant’s website. In June, Pinterest acquired The Yes, an artificial-intelligence platform that customizes the fashion-shopping experience for users. Finally, it could grow its user base by having a large mix of male users, like they do internationally where users are more likely to use Pinterest for things like cars and sports.

Given their expertise and history, we would expect Elliott to look for a board seat here, like they did at eBay and Twitter. Years ago — and under different circumstances — this could have been viewed as a confrontational endeavor. But several things indicate that this is an amicable engagement for Elliott. First, there is a new, experienced CEO who Elliott appears to respect. Second, Ben Silbermann controls 37% of the voting shares through a dual share class structure that gives him 20 votes per share, so Elliott would not be engaging here if the firm though it would be confrontational. There is also reason to believe that this will be amicable from Pinterest’s side as well. Elliott has gained a lot of respect from shareholders and directors in this sector since their board stints at Twitter and eBay, and the firm is more likely to be amicably welcomed to the board than they would have been 10 years ago.

While the primary objective here is operational, when an activist engages with a company, it often puts that company in pseudo-play and gets the attention of strategic investors and private equity. That will definitely be the case here. Last year, there were rumors that both PayPal and Microsoft were interested in making bids for Pinterest, and that was when the company had an approximately $50 billion valuation compared to its roughly $9 billion enterprise value today. Moreover, one of the reasons why potential suitors have not historically pursued Pinterest has been because of the perception that its founder would not sell. With Silbermann handing over the CEO role, that may no longer be the case. We could see additional interested parties. While Elliott is not advocating for a sale here, as an economic animal with fiduciary duties, if an offer were made, they would certainly assure that the board was seriously considering it against a standalone plan to determine what is best for shareholder value. In fact, if it does come to that we could even see Elliott’s private equity arm, Evergreen Coast Capital, teaming up with someone to evaluate a potential bid.

It has been reported that Elliott has a roughly 9% position in Pinterest, which knowing Elliott we would assume is 9.9%. However, they are not a 13D filer. Based on their history and philosophy, that is likely because Elliott is using swaps and other derivatives to supplement their position and those types of securities are not required to be included in “beneficial ownership” for the purposes of 13D filings at this time. While that practice is currently the subject of a proposal from the Securities and Exchange Commission and could very well change in the short term, at least for now it sets the stage for an interesting juxtaposition of shareholders here: a founder who has a 6.6% economic interest with a 37% voting power versus 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 research service on shareholder activism, 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 ESG practices of portfolio companies.

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