Accelerating Goodyear? A bird’s-eye view of Elliott’s challenging investor letter

In its letter to the Goodyear Board, Elliott Investment Management L.P. requests engagement on Board Enhancement, monetising Goodyear’s retail platform, and forming an Operational Review Committee.

At the receiving end of Elliott’s open letter are Goodyear CEO Rich Kramer and the current board of directors. Elliot’s declaration that “we believe Elliott’s strength is in catalysing change” can be read as a promise to dissatisfied Goodyear shareholders and a threat to Goodyear’s current leadership team.

Goodyear quickly responded by issuing a statement asserting that “we value input from our shareholders and regularly engage with them. We are reviewing Elliott’s recommendations, and we intend to meet with them to discuss their views in more detail.”

A scathing indictment

While the exchange of messages appears to be civil in tone, the “open letter” and its supporting analysis represent a scathing indictment of Goodyear’s senior leadership and the company’s board of directors.

Activist investors like Elliott seek to unlock “trapped” value for shareholders. They buy a material stake in a company, mobilise other influential investors for their campaign, and then seek to enforce their own goals for the company.

The levers pushed to achieve such aims include winning seats on the board of directors to advance their own agenda during boardroom discussions, pushing for a new executive team, asking the new team to implement cost savings and/or deliver substantial margin improvements as well as corporate restructuring or the sale of underperforming business units.

Elliott’s proposal checks all the above boxes. Moreover, the accompanying analysis is thoroughly researched and well-documented. While one does not need to agree with the analysis in its entirety much less support all of Elliott’s conclusions and recommendations, it is evident that the offered evaluation identifies a number of Goodyear’s weaknesses and potential causes for its inconsistent performance.

Underperforming stock & lost credibility

Undeniably, Goodyear stock has underperformed for too long. Goodyear also lost credibility with many, but likely not all, institutional investors. Goodyear’s history of making promises to Wall Street and subsequently failing to meet those heightened expectations is also well documented.

Elliott’s analysis completely shreds Goodyear’s North American distribution strategy in its assessment of TireHub. In my view, TireHub’s foundation represented a bold move by Goodyear to stop the bleeding in its independent dealer channel. ATD’s agnostic brand approach had resulted in alarming share losses with dealers using ATD as their primary distributor. Regaining control of the distribution of the Goodyear brand was deemed mission-critical to reverse this trend.

Michelin also formed its own wholesale distribution JV to respond to ATD’s growth, but, as Elliott points out correctly, took a “less hostile” approach towards ATD than Goodyear. Whether a “less hostile” approach towards ATD would have been possible or desirable for Goodyear (at least in hindsight) is certainly open for debate.

TireHub JV delivered mixed results

How close TireHub has come to fulfilling the ambitious objectives set by Goodyear only the current leadership can truly answer. The TireHub JV represents Goodyear’s attempt to catalyse change – with arguably mixed results.

Elliott now concludes that “Goodyear should pursue a new relationship with a large national distributor or a combination of TireHub with a strategic distribution partner.” Aside from TireHub, Goodyear is already using wholesalers of varying sizes. US Autoforce, for example, is certainly growing thanks to its recent acquisitions and is poised to become a “true” national distributor.

Is it completely inconceivable that Goodyear would consider mending fences with ATD to improve its overall North American distribution strategy? Nothing is impossible. However, given that the current leadership team in North America has made its bed with TireHub’s creation (and received generous bonuses for putting it in play), a rapprochement with ATD appears far-fetched.

One thing is certain, Elliott’s analysis and interpretation of the ATD/ TireHub affair will be mandatory and soothing reading for ATD veterans in Huntersville, North Carolina. Revenge, as the saying goes, is a dish best served cold.

Excessive bonuses hit morale

Executive compensation is always a controversial topic and can become “red hot” when shareholders feel they are not participating in the party.

Rich Kramer made Fortune’s list of “most overpaid CEOs” in 2021. Various other publications issue such lists, using different methodologies. Their usefulness is highly debatable, but they certainly provide entertaining reading for water cooler talk.

But make no mistake, excessive executive bonuses often anger individual and institutional shareholders and can have detrimental, sometimes even demoralising effects on a company’s rank and file.

In 2002 then Goodyear CEO Sam Gibara received a US$1.25 million bonus for meeting cash flow and earnings targets but asked that the bonus be reduced in the light of the company’s overall performance. Gibara ultimately received “just” $930,000. Critics, like columnist Diane Evans from the Akron Beacon Journal, criticised Gibara for “trying to play down the fact that he is getting a bonus at all” given what she described as “Goodyear’s miserable financial performance during 2001.”

While current executive pay and bonus packages at Goodyear may not be as extreme as the Gibara example mentioned earlier, they still paint an unfavourable picture considering Goodyear’s inconsistent performance.

Unlocking “trapped value” via retail sale

Apart from enhancing leadership and initiating an operational review to enhance margins, Elliott proposes to unlock “trapped value” through the sale of Goodyear’s company-owned retail stores. Whether a manufacturer is a competent operator of a retail chain has long been debated. Different Goodyear leadership teams have given different answers over time. Sometimes supporting their own stores more, sometimes less.

In sharp contrast to its rival Bridgestone, which made significant investments in expanding its chain of Firestone company-owned stores in the US, Goodyear neither had the financial means nor the gumption to significantly invest in the growth of its retail chain. Goodyear’s company-owned stores thus remained the “red-headed stepchild” for the majority of their existence.

The idea of selling off Goodyear’s retail stores is not without logic. Such a sale would indeed improve Goodyear’s balance sheet, enhance financial flexibility and allow Goodyear to invest in improvements of its manufacturing network, its supply chain as well as make more consistent investments in its marketing and brand portfolio.

Elliott proposes to unlock “trapped value” through the sale of Goodyear’s company-owned retail stores (Photo: Goodyear)

But the suggestion of selling company-owned stores isn’t new, it has been explored by Goodyear before.

One major stumbling block of completing a sale was the tendency of potential suitors to “cherry-pick” and make offers only for those parts of the chain that performed reasonably well. It is hard to conceive that Goodyear could accept such cherry-picking and still realise the type of proceeds Elliott has in mind.

In addition, it appears unlikely, although not impossible, that a suitor will make a play for the entire chain.

Hard evaluation of management team

Elliott further claims that Goodyear needs leaders with highly relevant manufacturing experience, a “roll-up-your-sleeves” approach to management, an entrepreneurial spirit, and an “ownership” mentality that properly aligns incentives for all employees. By insinuating that Rich Kramer and his entire team are flat-out incompetent and severely deficient on all these attributes, Elliott may be taking it too far.

Many of the current Goodyear leaders were battle-tested in the 2000s when Goodyear was on the verge of bankruptcy, and they have managed to keep the company afloat – albeit in fits and starts.
However, one could argue that the proclaimed Goodyear turnaround was never completely and sustainably accomplished. Goodyear remained cash-strapped and always prone to severe budget cuts to react to the ups and downs of the business cycle.

A downswing caused competitors to be mildly congested. Goodyear, on the other hand, often was running a fever in those situations. Performance ebbed and flowed, and high performance was not achieved consistently.

Opening salvo fired

Activist campaigns have had varying degrees of success in the past. Elliott has fired the opening salvo in the battle to reshape Goodyear’s future.

However, not all may be lost for Mr Kramer. But he will only survive if he can shore up support from crucial institutional investors to reject Elliott’s proposals.

The battle lines have now been drawn. In the upcoming weeks, we will witness how both parties navigate the battlefield.