Could Elliott Management help drive the GlaxoSmithKline (GSK) share price up?

US activist fund Elliott Management has built a stake in GlaxoSmithKline. Christopher Ruane assesses what that might mean for the GSK share price.

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A GlaxoSmithKline scientist uses a microscope

Image: GlaxoSmithKline

Pharmaceutical giant GlaxoSmithKline (LSE: GSK) has a noisy shareholder. Activist firm Elliott Management has built a multibillion pound stake in the company. Could this be good news for the GSK share price?

I think it could. 

GSK share price weakness

While I like the yield of almost 6%, I find it hard to get excited about the GSK share price. It is down 2% this year, and 21% over the past 12 months. That is hardly the performance of shareholder dreams.

Moreover, even the dividend level might not last. That is a risk for all dividends. But it is specifically a risk for GSK, which plans to split into two entities. It has previously signalled that it expects the combined payout after the split might not add up to as much as the current dividend.

GSK is a blue-chip stock and constituent of the FTSE 100 index. Seeing its recent price weakness has definitely made me wonder whether now is the time to buy the stock.

Enter Elliott

Apparently I am not alone in that thought.

Elliott is a US-based fund manager. It is what is known as an activist fund. In layman’s terms, that means that it does not always just buy shares and quietly wait for the postman to drop dividends through its door. Instead, it seeks to increase the value of some of the companies in which it buys stakes. For example, this can be through putting pressure on management to improve performance or change strategy.

GSK strikes me as a classic target for activist managers right now. The share price has languished. There are concerns about its future pipeline of new drugs not being large enough. But it boasts assets like strong brands, a talented workforce of researchers and an existing distribution network. 

Even just having Elliott on board will likely be good for the GSK share price, in my view. The size of its investment suggests that it means business. 

Where next for the GSK share price

Breaking into two businesses already offered the prospect of revaluation of GSK. I think its attractive stable of consumer brands such as Sensodyne and Panadol may be valued more highly when freed from the corporate structure of a legacy pharmaceutical company.

Elliott’s involvement could also be helping to bolster the share price. And if it does manage to focus management attention and fix the pharma pipeline, I think that will improve the GSK business. That should be positive for the GSK share price further down the line.

Risks

However, there are risks. An antagonistic shareholder can be a distraction for management from running the business. The demerger may not go smoothly, and so destroy instead of create value. The challenge with the pipeline could persist despite investor activism, reducing future revenue streams.

Short-term cost cuts in response to activist pressure can damage companies too. I’ll be keeping an eye on GSK to see exactly what Elliott plans to do with its investment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

christopherruane has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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