Pandora’s biggest shareholder: Show us the money

In an aggressive regulatory filing by Pandora’s largest shareholder, which includes an open letter to Pandora’s board chairman, a battle has erupted for the future of the world’s largest and most influential internet radio company.

The shareholder is Corvex Management, and the letter is authored by its Managing Partner, Keith Meister. The purpose is to express discontent, throw cold water on Pandora’s ambitious business plans, and sharpen focus on the decline of Pandora’s stock price. The recommendation is to sell the company ASAP, or at least explore what the sale value would be.

All About “Value”

“Value” is a key word in all this. Corvex is a value-oriented investment firm that seeks substantial positions in companies whose stock is selling at “discount to intrinsic value” (in the words of the filing). The phrase “positive secular tailwinds” is invoked as a Corvex ideal.

While complimenting Pandora’s assets — market leader of its category, huge mobile audience, great data, increasing share against traditional radio — Keith Meister clearly thinks that Pandora’s innovation work is done, and now it’s time to provide a cash event for investors. He is not convinced by the company’s aggressive plan to build an on-demand service. “We believe the market is giving the company’s current strategy a vote of no confidence,” Meister writes, noting that P stock declined more than 10% immediately following 12 of the last 14 earnings releases.

A CEO Critique

He’s not keen on Tim Westergren as CEO, either. Meister (and the rest of the P-watching world) noticed that ex-CEO Brian McAndrews was succeeded by Westergren shortly after the company announced that it was working with an investment bank to explore a possible sale. The entrance of Westergren, who founded the company and helmed it until 2004, appeared to end speculation of an acquisition.

Keith Meister quotes some of Tim Westergren’s public statements, at least once seeming to deliberately insult him out of context: “Being CEO is like managing my band. It’s got all the same things. The chances of success are almost zero. It’s a creative endeavor with lots of artistic differences. You’re poor as s***. You’ve got financial stress. It’s the same thing.” Westergren was building a bridge to musicians while reviving a scrappy startup image for his company. Meister, advocating on behalf of institutional investors, is plainly not thrilled with “The chances of success are almost zero” — but it is arguably disingenuous to use an image-building quote in a sober discussion of how to value a multi-billion dollar company.

Financials

Keith Meister’s open letter is more detailed when it comes to financials. He lays out a three-year table of Pandora’s stock performance against basic ROI, market performance, and industry performance. All the numbers are red. This is Meister’s main point: He believes that the company’s primary objective should be building financial value for investors. His the-time-is-now attitude probably doesn’t speak for Pandora bulls, of which there are many.

Such is the life of a public company, which must always measure its long-term business plan against the quarterly drumbeat of reporting to investors. (“We find it difficult to reconcile Mr. Westergren’s idealism and music industry evangelism with the goal of maximizing risk-adjusted shareholder value and your responsibilities to investors.”) Strong leaders are able to maintain horizon goals against the undertow of quarterly scrutiny and demand for continual growth. We’ll see how Tim Westergren, Mike Herring, and the Pandora board weather the Keith Meister attack and the phone calls they are no doubt receiving.

The company did issue an unruffled response, as quoted in the New York Times: “We are confidently investing to fully capture the massive opportunity ahead of us. Our management team is in constant dialogue with shareholders about our business strategy and committed to delivering results and long-term value.”

In a Nutshell

In the meantime, here is Meister’s explicit request: “We urge the company to immediately engage an independent investment bank with a fresh perspective and no prior relationship with the company to advise on a value maximization process including a thorough sales process.” Translation: Show us the money.