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Activist Investor

Updated on May 15, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Activist Investor

An activist investor is an investor that purchases large stakes in companies to take control or get board seat/s with a view to bringing about significant changes in the company to reduce costs, increase sales, and improve efficiency.

Activist-Investor

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Thus, it helps to maximize profits and shareholders’ wealth, generally entering the company when the existing management is inefficiently managing the business. As a result, there exists an enormous scope for improvement. As a result, there is a possibility of an increase in profits and, as a result, a rise in the shareholder’s value.

Key Takeaways

  • Activist investors purchase large stakes in companies to take control or gain board seats to make significant changes to the company’s operations to increase profitability and shareholder value.
  • They typically target mismanaged companies and devise plans to prune losses, improve efficiency, and identify new revenue streams to turn around the company’s fortunes.
  • Notable activist investors include Carl Icahn, Bill Ackman, Daniel Loeb, and Barry Rosenstein, who have successfully turned around businesses and created shareholder wealth through their activist campaigns.

How Do Activist Investors Work?

Activist investors have been around for centuries and have gained popularity in the investor community and media for bringing about desired changes in the functioning of companies. They run campaigns, try sophisticated ways to get their way, and force management to pursue their agenda.

It is necessary to understand how to become an activist investor.  An activist investor hunts for mismanaged companies, and the investor believes that bringing about radical changes in how the company operates can turn the company’s fortunes. So these investors – typically wealthy individuals, hedge funds, or private equity players – pick up shares of such companies from the open market and bring their stakes to a level where they are entitled to a board seat.

Generally, the markets know about these acquisitions when these investors make necessary regulatory disclosures after acquiring a meaningful stake in the organization. For example, in the U.S., investors file SEC Form 3D when they receive more than 5% in a company. Shareholder activism takes many forms, including proxy fights, shareholder resolution, and litigations.

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Strategy

An activist investor’s role is to develop ideas to prune losses or improve the company’s profitability. In addition, these activist investor targets, plan, and persuade other board members and shareholders to further their agendas on the future direction of the investee company.

When a company does not have a single significant majority shareholder and is run inefficiently by the professional managers, the business starts losing out due to high costs, lack of new revenue streams, declining existing revenue streams, and many other issues which might lead to the ultimate demise of the business.

In such cases, they play an important role in bringing back life to the company. They take over board seats, bring the necessary changes, and significantly enhance shareholder value.

Example

Most activist investor targets excesses in a company. For example, one of the most common targets is the companies sitting on a large pile of cash. Suppose they think the company only requires a little cash and there is a possibility of large distribution. Suppose the investor can convince the other stakeholders. In that case, he will start building ownership in the company to achieve his objective of sitting amongst the board members and implementing his plan, which could be a large dividend distribution or a buyback.

There could be other issues that the investor may think of fixing like high top management salaries, non-performing business units, an under-productive workforce, or non-focused management. An activist investor ensures that the business becomes free from such inefficiencies and gets on the path of increased profitability. Through this example it is possible to understand how to become an activist investor and role they play.

List Of Notable Activist Investors

Below is the activist investor list who created a name for turning around businesses and creating shareholder wealth.

#1 – Carl Icahn

Carl Icahn is the founder and controlling shareholder of Icahn Enterprises, an investment holding company. Icahn has invested in notable companies, including Apple, Yahoo, and Netflix. Carl’s net worth was $17.5 billion in 2019, and he was America’s 4th richest hedge fund manager. He is very important among activist investor examples.

#2 – Bill Ackman

Bill is the founder and CEO of the hedge fund Pershing Square Capital Management. He is known for his short in Herbalife and his soured bet in troubled pharmaceutical firm Valeant Pharmaceuticals. Ackman’s successful bets in many companies over his investment career have helped him shore up a net worth of $1.7 billion in October 2019.

#3 – Daniel Loeb

Daniel is the founder and CEO of Third Point, a hedge fund with around $11 billion in assets under management. Loeb started Third Point in 1995. His notable investments include Sony, Yahoo, Sotheby’s, and Nestle. Daniel’s net worth was $3.2 billion in 2018.

#4 – Barry Rosenstein

Barry is the founder of JANA Partners LLC, an activist hedge fund firm. Barry had a net worth of $1.3 billion in 2008 and is known for his bet in Whole Foods, in which he, along with other investors, owned 8.8%. He sold his investment for $300 million when Whole Foods merged with Amazon.

Thus, the above are the names of some well known activist investor list who have successfully managed to turn around companies and increased the shareholder value.

Advantages

From the activist investor examples, we come to know of certain benefits as given below:

  • Fear of activist investors instills discipline and focus in the management teams.
  • Their interest shores up the demand for shares of the target company.
  • Activism often leads to the greater good of shareholders.
  • They bring new ideas to the table.

Disadvantages

Along with the benefits the limitations are also to be noted. They are as mentioned below:

  • Activist investors look out for themselves first, and there have been instances when they exit at outsized profits due to their arrangement with the other board of directors and management. These outsized profits are often elusive to other shareholders.
  • Activism does not result in the greater good, as activist investors are sometimes wrong. Instead, they bring about radical changes in the business to realize that those changes were not required, leaving the company in a bigger mess than before.
  • They can be short-sighted, harming the company for the long term while getting short-term benefits for themselves.
  • Selling from active investors might lead to huge price breaks, leading to significant losses to other investors.

Activist Investor Vs Private Equity

Let us look at the basic differences between the two types of investors in the community who play an important role in their own fields.

  • The former aims to buy a huge chunk of stock of a particular company in order to influence the management and operations, whereas the latter is an investment firm that contributes fund in exchange of stocks.
  • The goal of the former is to bring about an improvement or a positive change in the company whereas the goal of the latter is to buy underperforming entities, bring improvement and sell them later at a profit.
  • The fromer publicly tries to influence the management through campaigns, proxy fights etc, whereas the latter adopts a private approach.
  • The former normally targets publicly traded firms whereas the latter normally targets private firms that are not publicly traded.

The investment horizon of activist investors is shorter than private equity players. This is because they focus on increasing the company’s profitability soon. But private equity players have a longer investment horizon.

Thus, even though they have different approach, both of them play an essential role in the market. While the benefits of activism are debatable, and results have been mixed, the success of shareholder activism largely depends on the philosophy of the activist investor. A long-term value-investing philosophy generally benefits all the parties involved. Conversely, a selfish, short-sighted philosophy usually does more harm than good.

Frequently Asked Questions

1. What distinguishes an activist investor from a value investor? 

Activist value investors are determined to increase an undervalued company’s worth more quickly by demanding specific interventions, in contrast to traditional or passive value investors who believe the share price of an undervalued company will naturally and gradually increase to reflect the company’s true worth.

2. What is activist investor vs. private equity?

An activist investor is an individual or group that acquires a significant ownership stake in a company intending to influence its management or operations to create changes that will increase shareholder value. On the other hand, private equity refers to funds or investment firms that invest in private companies with the aim of providing capital, strategic guidance, and operational expertise to help grow and improve the company’s value, often with the intention of eventually selling the company for a profit.

3. Who was the first activist investor?

The concept of activist investing originated with Benjamin Graham and David Dodd, who advocated for an active approach to investing and engaging with companies in the 1930s. In comparison, the term “activist investor,” as commonly used today, emerged in the 1980s with investors like Carl Icahn and T. Boone Pickens.

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