Perhaps you’ve heard that Darden Restaurants, operators of Olive Garden, Red Lobster, and Capital Grille (among others), is going to be spinning Red Lobster off into a separate company. Perhaps you didn’t know Olive Garden and Red Lobster were owned by the same company. It’s a common activity for companies to operate multiple brands. It allows them to share operating resources like HR, marketing, inventory purchasing, technology and so on while using the brands to target different markets. The Olive Garden market is different than the Capital Grille market, and you don’t often see them in the same parts of town.

Darden Restaurants is far from unique in owning multiple brands. Many companies do this. Just look up Procter & Gamble. But sometimes all the brands just aren’t the best fit for the company anymore. The overarching management structure of the company could depress a brand. Perhaps there’s too much bureaucracy at the top, or Red Lobster isn’t able to market to the right audience because they have to use the same channels as Olive Garden. Or maybe they can’t offer too much steak so they don’t compete with Texas Longhorn, another Darden brand. For whatever the reason Red Lobster just doesn’t look great any more.

But the story of Red Lobster is more complicated than that. It’s become a red-headed stepchild for the company and shareholders. When you think of yourself as an investor, you may look for companies that are operating well. You buy shares in them because they’re going to outperform peers or the market. But not all investors think the same way. Activist investors, which are usually large hedge funds, buy up huge pieces of a company and start pestering the board of directors and management to make changes. So an activist investor buys stock because they think the price is depressed and there’s opportunity to make good returns if the company changes direction.

That’s what Darden is dealing with now. Activist investors bought enough shares to get a seat at the table. And they think that shareholders would benefit more if all of Darden were broken up into smaller pieces. Said another way, they don’t think the synergies from shared HR, marketing, technology, etc make up for the corporate bloat that Darden management has piled on to these companies. Darden management would see this as a direct insult to their job performance, and that’s exactly how they should see it.

Such shake-ups in the boardroom can be distracting for management. Instead of running the company they’re always have to take calls from investors and listen to their complaints. The shareholders own the company, so it’s their right no doubt. But it is a distraction from what a manager is hired to do for the owner. Darden management looked at their options and proposed dumping Red Lobster instead of breaking up the entire firm. That hasn’t impressed the activists however, so they’ll continue to make noise.

When we think about companies and shareholders, we don’t often think of the shareholders as having wildly differing views on what the company should be doing. But, for publicly traded companies a someone new can be a shareholder today and they weren’t yesterday. Activists are different than normal investors because they drive returns by shaking up the company. Understanding that this can happen makes us all more informed shareholders.

Image: Chelsea Gomez

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categories: business, investing