How Elliott’s monthslong Starbucks campaign got it a better deal than it asked for

In May, it was a $2.5 billion stake in Texas Instruments and a $1 billion-plus position at Johnson Controls. In June came a $2 billion stake in Southwest Airlines and an equally large investment in Japanese conglomerate SoftBank.

For a $69.7 billion hedge fund — even by the standards it has set — Elliott Management has operated at a scale and frequency this summer that’s given even the most seasoned activism defense advisors pause.

But its biggest win this year was at Starbucks, beginning with private discussions over Elliott’s multibillion-dollar stake and ending with a CEO change that investors and activists cheered.

It wasn’t just the replacement of a deeply unpopular CEO in favor of a food-industry legend, nor the nearly unprecedented stock price surge that drove Starbucks shares to their best day in more than 20 years. It was that Elliott’s monthslong push at the company resulted in an outcome that thrilled shareholders and pleased chairman emeritus Howard Schultz and the board itself.

It set the company on a “transformational” path through a deal, said one advisor who has worked with both activists and companies, that pleased just about everyone involved at Starbucks except former CEO Laxman Narasimhan.

By June, Elliott had amassed a Starbucks position that was worth some $1.9 billion and had begun conversations with the company, according to people familiar with the matter, who requested anonymity to discuss private matters freely. The activist investor’s green-and-white letterhead has come to command the attention of directors and the media, who expect that the firm’s plans will likely include the firing of an underperforming CEO. Narasimhan, who until Tuesday was the coffee chain’s chief, seemed to fit that bill.

Starbucks stock had dipped about 24% since Narasimhan took the helm in March 2023. The company struggled with declining same-store sales in the U.S., where traffic fell 6% during the third quarter, and in China, the company’s second-largest market outside of North America, where same-store sales plunged 14%.

Elliott met separately with Narasimhan and then-Chair Mellody Hobson in late June, the people said. The company was still reeling from its disastrous earnings report and slowing worldwide demand. The activist’s representatives underscored in both meetings that immediate action was needed, the people said.

But Elliott didn’t ask Starbucks to fire Narasimhan, CNBC has previously reported.

Rather, in early July, it laid out a detailed presentation to Starbucks’ board that focused on a strategy overhaul, with a particular focus on Starbucks’ lagging China business and board changes, said the people familiar with the matter.

And unlike some of its other campaigns — Southwest and Texas Instruments, for example — it kept those conversations private.

Elliott felt the talks were constructive, but it made clear that significant changes were warranted, lest Starbucks’ underperformance become so drastic that public action — through one of Elliott’s vaunted letters, possibly — be required, the people said.

News of the activist’s position at the company nonetheless broke in The Wall Street Journal on July 19, setting off a flurry of attention and scrutiny. Reporting in the following days focused on the lingering influence of Schultz, including a Financial Times story that the founder of the company was opposed to the deal Elliott had offered.

Negotiations continued, and the activist’s representatives met with roughly three-quarters of the company’s board in more informal settings through July and into August, the people said. But the conversations played out against the backdrop of persistent leaks that people familiar with the deal said could only be coming from the boardroom.

Elliott had not expressed any explicit desire to bring on a new CEO, but those involved in the discussions feel certain the board would not have pursued Chipotle’s Brian Niccol as a CEO replacement without pressure from Elliott.

Hobson, who stepped down as chair to become lead independent director concurrently with Niccol’s appointment, said on CNBC’s “Squawk Box” that the company didn’t have any discussions with Elliott about Niccol’s appointment.

“We look forward to engaging with all our shareholders about this new development,” the Ariel Investments co-CEO told CNBC on Tuesday.

But those close to Elliott acknowledge that while Narasimhan’s departure came as a surprise to the activist, Starbucks’ landing on Niccol was better than anything they were asking for.

The former Chipotle CEO was responsible for a dramatic turnaround and modernization of the company, driving a stock price gain of more than 770% since 2018.

He also revamped how the company handles mobile orders, an important pain point for Starbucks, which has struggled with a deluge of mobile orders at its stores.

Narasimhan learned he was being ousted on Sunday, The Wall Street Journal reported. Starbucks shares surged 25% when the news hit Tuesday, notching their best day since the company’s 1992 IPO. And despite Elliott never calling for Narasimhan’s ouster, there probably weren’t any complaints in West Palm Beach or midtown Manhattan, where the firm keeps two of its offices.

Niccol’s appointment was “a transformational step forward” for Starbucks, said Elliott managing partner Jesse Cohn and partner Marc Steinberg. “We look forward to continuing our engagement with the Board as it works toward the realization of Starbucks’ full potential.”

Representatives for Starbucks did not immediately respond to CNBC’s request for comment. Representatives for Narasimhan did not immediately comment for this story.