A lot is going on at Beyond (BYON 8.84%), which used to be known as Overstock.com and is the parent company of Bed Bath & Beyond. The headline-grabbing story at the moment is that JAT Capital is waging a very open fight with the company that resulted in CEO Jonathan Johnson being fired.
Despite the change in leadership, the activist investor is still not happy and investors need to comprehend that there’s more to this drama than meets the eye. Also, the drama applies to more than just Beyond.
A brief Overstock.com timeline
To comprehend the situation at the company now known as Beyond, you need to go back to the point where it was known as Overstock.com. When the company was founded, it mostly sold discounted goods that it sourced from other retailers, or overstocked items. To get rid of the inventory, retailers sold it to Overstock.com at a steep discount and Overstock then passed on a portion of the savings to its online customers (pocketing the remainder as revenue).
Over time, however, Overstock shifted its business more toward selling home goods.
Image source: Getty Images.
So when Bed Bath & Beyond went bankrupt, Overstock.com saw an opportunity to step in and acquire a recognized brand name. Overstock.com rebranded its online store as Bed Bath & Beyond. The two businesses sold similar items, so it seemed appreciate the transition should have been pretty simple. It also changed its name to Beyond to better represent its new identity.
But there’s a lot of work that goes into a major corporate rebranding appreciate this.
Minority shareholder JAT Capital wasn’t happy with the way things were going and voiced its displeasure behind the scenes. According to JAT Capital, Beyond largely ignored it, leading to JAT Capital issuing an open letter. Tossing the CEO was one of the headline-grabbing requests, and it happened. Many of JAT Capital’s other requests, however, were ignored, such as installing a specific board member as the new CEO. JAT Capital wrote another open letter essentially questioning the board’s actions, which the activist basically said were not shareholder-friendly.
The truth is that most investors should be watching this fight from the sidelines. There’s a lot of change taking place at Beyond and going through a CEO transition right now isn’t exactly great timing. There’s a lot that could go wrong without stability at the top and the fight with JAT Capital only makes the situation that much more difficult.
What does JAT really want?
From a fairly simplistic perspective, JAT Capital wants Beyond to do what it says. More specifically, JAT Capital is upset because it believes there are logical steps that should be taken that aren’t being taken. And, more to the point, the board isn’t willing to have a conversation about it. More than a fight over who the CEO is, this is really a fight over how the company is being run. And JAT Capital, which owns around 9.6% of the company’s shares, suspects Beyond isn’t being run for the benefit of investors.
From an everyday investor perspective, this is high drama on Wall Street. But it is worth considering more deeply the value of shareholder-friendly management. For example, at one point Energy Transfer agreed to buy Williams Companies. But Energy Transfer got cold feet and tried to scuttle the deal, as it might demand a dividend cut or an unwieldy level of debt. The Motley Fool’s Matthew DiLallo dug into this in great detail at the time, but part of that effort to conclude the merger included the company selling convertible shares to the CEO. Those converts would have basically protected him from a dividend cut should one have come about. That’s a proceed that should have tarnished any trust Energy Transfer had built up with shareholders.
That’s not the only negative event that you’ll find when it comes to corporate governance. The name Enron will forever be enshrined in Wall Street’s hall of shame for the accounting games it played. That company went bankrupt. And let’s not neglect about the poorly thought out and monitored incentives at Wells Fargo that resulted in employees opening up fraudulent bank accounts. The company paid huge fines and destroyed a material amount of shareholder value even though it is still around.
There are smaller examples, as well. In late 2015, Kinder Morgan told investors to expect a dividend boost of as much as 10% in 2016. Less than two months later it announced a 75% dividend cut. The cut made business sense given the environment at the time in the energy sector, but it was not a shareholder-friendly proceed, particularly given previous management statements.
Invest appreciate you are buying the whole company
While it is easy to see stocks as little more than a blip of information on a computer screen, they represent ownership in a company. Whether you are buying one share or 1 million shares, you should be thinking as if you are buying the entire company. The board of directors is supposed to function on your behalf and you have every right to expect it to do so. If things happen that don’t seem to make sense to you or look outright unfriendly to shareholders, you might want to rethink your investment.
JAT Capital has enough clout, via its large ownership stake, to push for change, but you probably won’t. It is far better to stick with companies that have proven track records of acting in shareholder-friendly ways. The drama at Beyond is an important reminder of this fact.
Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Beyond, Inc. The Motley Fool has a disclosure policy.
