Activist investors have been scoring nonstop headlines of late, with CEOs stepping down and business changing operational models in the wake of activist investor pressure.
An activist investor is a person who or entity that takes big stakes in companies and uses their rights as shareholders to push for changes that could boost the share price of their investments and increase returns to all shareholders.
In recent years, the ranks of activist hedge funds have grown dramatically as funds pursuing activist strategies have generally outperformed their non-activist hedge fund peers. Hedge funds focused on activist strategies controlled assets worth a total of $121.9 billion as of the third quarter of 2015, up from $36.2 billion in 2009, according to hedge fund research company HFR. At the same time, the number of activist campaigns announced has surged, jumping to 349 in 2014 from 231 in 2009, according to FactSet.
Shareholder activists have been around for decades. Back in the 1980s, they were called corporate raiders. But unlike in years past, today’s activists aren’t seeking to acquire companies, rather they’re using the stakes they acquire to exert influence. And it seems now no company is too big to end up in activists’ crosshairs, with some recently targeting corporate giants such as Apple, General Electric and DuPont.
With activist shareholders increasingly influencing the direction of public companies, it’s worth brushing up on your knowledge of shareholder activism.
What Types of Changes Do Activists Seek?
Think of activists as organizations and people who want a say in the way executives run their companies.
“They have an idea they think will create value,” said John Laide, senior product manager at FactSet.
Some of the most common changes sought by activists include replacing board members, deploying cash for share buybacks or dividends, implementing changes in operating strategy, spinning off divisions into separate companies, or even selling a company.
What Types of Companies Become Targets?
Activist investors tend to target companies that have seen their stock underperform relative to industry peers or the market overall.
But a company might become a target for any number of reasons. For instance, if a company has a large cash reserve, an activist might feel that cash should be returned to shareholders.
Having long-standing leadership or board members might also push activists to take action.
What Kind of Tactics Do Activists Employ?
Activist campaigns can be friendly, or they can erupt into an all-out war.
While it’s common to hear about activist demands in the media, much goes on behind the scenes. Activists often first bring their recommendations quietly to management or to the board.
If that fails, activists will likely go public with their demands. They might write a public letter to the board, create a campaign website, or voice their recommendations on social media. Along the way, they might solicit the cooperation of other institutional investors.
In extreme cases, it may come down to a proxy fight where the activist shareholders put forward their own slate of board members ahead of a company’s annual meeting, where shareholders get to vote on such matters. They then try to convince their fellow shareholders to use their votes to support their proposal at that meeting.
Do Companies Targeted by Activists Outperform in The Long-Run?
The somewhat unsatisfying answer is: sometimes.
The Wall Street Journal recently looked at 71 campaigns against companies with market capitalizations of more than $5 billion dating back to 2009. A little more than half of the targeted companies outperformed their industry peers after the activist involved went public with their intentions. The median company beat its industry peers by about 5 percentage points, the Wall Street Journal survey found.
The bottom line: Shareholder activists employ a variety of strategies to influence company executives and directors with the goal of improving shareholder value. But it’s impossible to predict which companies will become targets of shareholder activists and there is no guarantee that the shares of a company that has become a target will go up.
Investors who find out that a company whose shares they own is the subject of an activist campaign should pay close attention to how the fight develops. They must decide whether they believe the measures being suggested stand to increase or decrease value and over what time frame.
Are activists pushing for changes that will make the company function better over the long term? Or are they merely agitating for measures that will increase shareholder profits in the short-term at the expense of long-term growth? The answers to these questions can make a big difference in a portfolio.