An activist investor is a person, or a hedge fund, who buys a significant stake in a publicly traded company to change how it is run and managed.
An activist investor is someone who believes a company has potential and sees an opportunity to increase that company’s share price.
When activist investors identify a target, they buy a substantial stake in the company’s equity, which signals to the market that changes are on the way.
A company’s share price can rise due to the news that an activist firm has become a shareholder.
A shareholder activist will then push for changes they believe are in the company’s best interests. These changes often include:
- Strategic redirection
- Changes in operational decisions
- Capital restructuring
- Selling non-core divisions and subsidiaries
- Changes in management
- Changes in corporate governance, i.e. a refreshed board of directors
Activist investors are different to private equity firms
Activist investing is about creating shareholder value by causing change.
Activist investors often advise company management, force a restructuring, or replace the board of directors, depending on their goals.
In contrast to private equity firms, activist investors rarely acquire majority or total stakes in companies to profit from their sales.
They use public communications and private discussions to win over other shareholders and company leaders.
If such efforts fail, an activist investor may choose to run a proxy contest to elect new board members and directors.
Do activist investors help or hurt companies?
There have been instances when activist investors have successfully resolved the old problem faced by shareholders whose interests don’t always align with those of chronic management teams.
There’s no doubt they’ve created value for themselves and other shareholders.
The effectiveness of activist investing, however, can’t be easily categorised.
Activists will always look out for themselves, and if they are successful, they will always make money.
However, rather than making long-term investments, activist investors tend to focus on short-term strategies like dividends and share buybacks that boost the share price.
Here are the names of some well-known activist investors
A well-known activist investor is billionaire Carl Icahn. Icahn famously purchased a 1% stake in Apple Inc. in 2013 and urged the company to increase share buybacks. And in 2021, Apple spent $85.5 billion on buybacks.
Paul Singer founded Elliott Management Corp., which manages $51 billion in activist investments. The company is known for its aggressive activism, including a public attempt to oust Jack Dorsey as CEO of Twitter in 2020. Elliott was given a board seat and a $2 billion share buyback program, and Dorsey resigned from the CEO position in November 2021.
Other famous activist investors include David Einhorn, Ryan Cohen, Starboard Value, ValueAct Capital, Trian Partners, and Third Point Partners.
Watch this video explaining how Paul Singer, the activist investor, made his money.
How activist investors can do good
Activist investors can be helpful catalysts for change in stagnant or mismanaged companies. They can replace bad managers and unlock value via corporate restructuring.
Share prices often rise significantly after an activist investor announces a stake in a company.
A company’s management is much less likely to ignore shareholder proposals if activist investors are involved.
Activist investors often bring new ideas and a fresh perspective to a stagnant company with great potential.
How activist investors can cause damage
The long-term outlook isn’t always crucial to activist investors. Such short-term thinking can be harmful.
A company’s long-term vision may be derailed by activist investor pressure to implement immediate improvements to drive shareholder value.
The short-term impact of share buybacks and dividends is often positive, but investing that cash in the company may be wiser over time.
There is often no guarantee that the ideas for change proposed by activist investors will succeed, as they may not be experts in the company’s particular industry.
When activist investors eventually sell their large stakes in the public market, they can cause downward pressure on stock prices.