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One was a well-known Wall Street “raider” whose massive investments and corporate maneuvering in airlines, casinos, software and other industries made him a billionaire. The other was a corporate-turnaround artist who invigorated convenience stores and the nation’s top taco chain. The shareholder activist and headstrong CEO had a blockbuster clash at, fittingly, Blockbuster—a fight that, ultimately, both lost.
Everyone is familiar with the once-ubiquitous video-store chain, which at its peak in the early 2000s had more than 9,000 stores and 84,000 employees. John Antioco was one of the reasons for the chain’s success. After successful stints at 7-Eleven and Taco Bell, he took over Blockbuster in 1997 and helped it nearly double its sales in seven years.
But Antioco didn’t think that was enough. By his account, he saw the potential threat from DVD-by-mail service Netflix. He also saw how technology could soon let a viewer order and watch movies without leaving the couch. To meet the challenge, Antioco moved to make existing customers happier—by eliminating late fees on videos—while also pouring money into a streaming service to attract new customers.
The moves were designed to pay off for the long term, but in the short term they clobbered Blockbuster’s finances and stock price. That’s where Carl Icahn, the noted and never-shy shareholder activist stepped in, boasting an enormous war chest.
In 2004, Icahn started buying up the company’s shares and complaining to other investors and the public that the company had a bad strategy (and that Antioco was overpaid). In early 2005, Icahn initiated a proxy fight, getting himself and two others elected to the firm’s board. After losing the proxy fight, Antioco finally met Icahn face-to-face. Over the next two years, Antioco never won over Icahn to his strategy, while Icahn kept accumulating more influence on the board.
Antioco stepped down in 2007, unable to execute the strategy that he felt the firm needed, and frustrated by a pay dispute. “I firmly believe that if our online strategy had not been essentially abandoned, Blockbuster Online would have 10 million subscribers today, and we’d be rivaling Netflix for the leadership position in the internet downloading business,” Antioco told the Harvard Business Review in 2011. (He didn’t respond to interview requests.) Says Barry Nalebuff, an entrepreneur who founded, among other companies, Honest Tea and who teaches at the Yale School of Management, “Blockbuster should have won.”
But, as most people know, it didn’t win. Blockbuster ended its online service and hemorrhaged business to Netflix and other digital rivals. The firm filed for bankruptcy in 2010 and its final store closed three years later. “Blockbuster turned out to be the worst investment I ever made,” Icahn said after the bankruptcy.
Whether Antioco’s vision would have succeeded had the fight with activist Icahn never happened is up for debate. Even before Icahn came along, the firm was losing customers. Blockbuster’s unit costs also were higher than its rivals, and the chain needed lots of employees to stock multiple copies of each movie at all of its stores; Netflix could store its movies in far fewer distribution warehouses, says Daniel McCarthy, an assistant professor of marketing at Emory University’s Goizueta Business School. (In one touch of irony that still shakes heads, Blockbuster passed on a chance to buy Netflix in 2000.)
In some ways, the struggle between Antioco’s long-term vision versus Icahn’s short-term push for profitability reverberates today, as activist investors are increasingly launching efforts against companies big and small. That effort has started to hit resistance from an unusual source: Wall Street, where today big investing firms are now telling companies and CEOs they are obligated to push not for quarterly gains but set and pursue long-term strategies.
But in the heyday of Blockbuster, farsighted investors of such size were rare indeed. The last company-owned store closed in the fall of 2013, albeit with some fanfare: According to numerous press reports, the final rental was for the Seth Rogan movie “This Is the End.”
Nearly half the boards surveyed by the National Association of Corporate Directors don’t have an official plan to respond to an activis tinvestor
challenge. Here are some moves that have helped.
Start doing homework about the activist’s prior history and tactics. A CEO should also try to meet with the activist to learn his or her intentions.
Step Into The Activist's Shoes
The activist may have some valid points, so have answers on whether the company’s costs are too high or structure too complex.
Listening to shareholders should be an ongoing responsibility, not only when an activist appears. If there is a proxy fight, smart CEOs and boards will be clear about the company’s strategy.