“Activist Investors”
“Investor-activists” — they are being talked about more and more often in the stock market lately. Consider who they are and what they do. Let’s figure out whether the average investor needs to worry if his portfolio contains shares of companies that have become the target of activists.
1) A bit of theory
An activist investor is an individual or organization that has received a significant stake in a public company in order to influence its management decisions.
Ways of influence can be different. One of the most common is joining the board of directors of the company. In practice, activist investors target companies with high costs, inefficient management, and other problems. Activists believe that the company can be managed better — then financial results will improve and stocks will rise.
In the US market, a sign that such an investor has emerged is the filing of Form 13D with the SEC: disclosure is required when buying 5% or more of a company.
2) What exactly do activist investors do?
An activist investor invests in the purchase of shares with his own funds or attracted, for example, through a hedge fund. He acquires a stake in the company and becomes an activist shareholder, exercising his rights to influence the business.
Example. The agricultural company has 10,000 tractors. At the same time, part of the machines or land is not involved in the work. Small investors cannot influence the situation in any way. Then an investor-activist gets down to business. He buys a stake in the company and begins to promote his proposals on the board of directors: he proposes to expand the area of cultivated land or sell idle assets, and increase dividends from the profits received.
An activist investor can engage in dialogue with management, propose re-election of the board of directors, make formal proposals for a general vote of shareholders, create pressure from the media, and sometimes initiate litigation.
3) Is it good or bad?
The main goal of the activist is corporate change. In practice, they can be both positive and negative. In the best scenario, activists will fight for the future of the company, solve pressing problems and provoke a growth in shares that is beneficial to all shareholders. At worst, activists seize control for personal gain, and their actions can cause long-term harm. As a result, there is a short-term benefit for the activist and a deterioration in the company’s prospects.
Some see activists as “evil” to the company, undermining the economy and harmful to work. Others, on the contrary, see such investors as a “lifeboat”.
The strategy of the typical retail investor is to buy low and sell high. And the strategy of activist investors is to provoke a market movement. The goal is the same — profit, methods and opportunities are different.
In October 2015, The Wall Street Journal analyzed 71 companies with activist investors. Conclusion: Shares of large companies with activist support more often outperformed the market. There were also sad stories, for example, the bankruptcy of the energy company Walter Energy.
4) Real stories
Carl Icahn is one of the most famous activist investors, who has been dubbed the “corporate raider”. From 1978, he began to hold important and sometimes top positions in companies through his firm. Among his targets were well-known companies such as Western Union, Viacom, Yahoo, Motorola, eBay, Apple and others.
In 2015, Icahn urged Apple CEO Tim Cook to increase its share buyback, which the company did.
One of the most sensational actions of the investor turned with Trans World Airlines, one of the four largest airlines in the United States. In 1978, the Airline Deregulation Act was passed, which helped launch acquisitions. TWA was spun off from the holding company in 1984. Aikan bought it in 1985 and took it into private ownership three years later after a debt buyout. In 2001, TWA filed for a third and final bankruptcy filing and was bought by American Airlines.
Joseph Ugurlian does not consider himself an activist. By his definition, he is an “active manager”. In 2014, Ugurlian secured the departure of the CEO of Nexans, participated in the restructuring of the debt of Solocal and the division of shares in Parmalat. In 2019, Ugurlian asked Suez to rethink its strategy and sell its Spanish subsidiary. In 2020, he led a media campaign against Arnaud Lagardère, blaming management for the group’s mismanagement.
Fresh story: Elliott Investment Management sought to remove Twitter CEO Jack Dorsey — and succeeded on Nov. 29, 2021. How good these actions are for the company, time will tell.
In mid-November, Mantle Ridge disclosed its stake in Dollar Tree. The activist company plans to boost stocks and improve the operation of the Family Dollar retail chain, sources said.
5) Conclusions for investors
• Activist investors have the same goal as you — making a profit. Due to large investments and obtaining a large share, they have more opportunities to influence the company.
• The actions of activists can lead to both positive and negative changes. If you find out that activists have started up in a company whose shares are in your portfolio, you should keep your ears open. Volatility and speculative component may increase. An activist can just as quickly sell his shares, which will provoke even bigger moves.
• Hasty conclusions should not be made. Activist proposals should be considered: they can bring benefits through increased dividends and share buyback programs or provide impetus for development.
• It is worth studying both the plans put forward and the personality of the activist investor himself. Understanding his philosophy will help to draw the right conclusions.
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