Activist Investors: All You Need to Know
In recent years, large companies, such as Nestle, ThyssenKrupp and Barclays, have been under attack from activist investors. But what is an activist investor? What are their tactics? And why are they relevant to other traders and investors? In this post, we will answer these questions and a lot more!
What Is an Activist Investor?
Activist investors look to acquire a significant stake in a particular company, before using their position as a shareholder to agitate for change in that company.
The acquired stake does not have to be large, but just enough to ensure they are heard by the company and the other shareholders.
These types of investors can be aggressive and, as we will see below, many of their tactics attract a lot of attention from the press. Due to this, and the fact that people love to observe a good public fight, many activist investors have notorious reputations. CEOs of large companies are reputed to quiver at the sight of some of their names on the company share register and many of them prepare ahead in anticipation of such a situation.
Some people think that the dislocation caused by the Covid-19 crisis will lead to a surge in the number of public companies targeted by these activists.
Changes Requested By the Activists
Activist investors typically demand changes which they think will increase the value of the company or benefit shareholders in general. Often they are accused by the target company, and less frequently by shareholders, of being too focused on short-term gains and not enough on the long term health of the company.
As their stake is typically less than 10% of a company's shares, activist investors rely on support from other shareholders in order to be effective.
If they are thwarted on their initial demands, activist shareholders may turn on the existing managers of board members, sometimes even calling for their removal.
Frequent demands by activist investors include:
- The return of money to shareholders through share repurchases (which typically make share prices increase) or special dividends
- Increase debt, in order to leverage the company
- Sale of a subsidiary or break up of the company
- Merger or sale of the company
- Reduction in Research and Development expenditure, to free up cash in the short-term
- Removal of management or a change in their compensation
- Removal of board members or a change in their compensation
- A seat on the company board
- A change of strategy for the company
What Tactics Are Used By Activist Shareholders?
The tactics employed by activist investors to get their way often start off being measured and constructive. However, if they are ignored or publicly contradicted, they tend to gradually increase their aggression and criticism towards the target company.
Here are some of their commonly used tactics, in ascending order of aggression:
- Public disclosure of shareholding
- Publication of "white paper" suggesting changes
- Writing open letters to management and/or the company's board
- Criticising a company's performance and making unfavourable comparisons with competitors
- Calling on other shareholders to join them in expressing dissatisfaction
- Criticising a company's management, board or strategy in press and television interviews
- Publicly calling to be on the board
- Publicly calling for shareholder votes
- Trying to change individual managers or members of the board
- Working with other activists to form a "wolf pack"
- Partnering with potential acquirers
- Hiring private investigators to research the management, board and key employees
Even when the target company pretends to ignore activist shareholders or refutes their suggestions in public, they often meet in private to try and find common ground.
Is Activist Investment Good or Bad?
It's easy to dislike activist investors – they are loud, confrontational and often the subject of negative PR generated by their targets. Add to this the fact that many people dislike seeing rich people get richer and the bottom line is that activist investors are seen by many as the "bad boys" of the investment world.
Nevertheless, their proposals normally have some merit and increase the value of companies when implemented.
In addition, many commentators and academics believe that corporate management would tend to be more self-serving (paying themselves higher salaries and misusing company property like a corporate jet) more often were it not for the watchful eye of activist shareholders.
If polled, other shareholders would probably conclude that activist shareholders are a positive force for the markets but a little too focused on the short-term.
How Does Activist Investment Affect You?
Whether you invest for the long-term or trade short-term positions, you should keep an eye out for activist investors.
Often, as soon as an activist investor announces a holding in a particular company, the share price will see an increase. The bigger the reputation of the activist, the bigger the jump in the share price will tend to be.
Battles between activists and their targets usually last months and take place in public. The press tends to love these battles and provides plenty of coverage. Every article and utterance from both sides all tend to generate volatility in the stock, which can benefit traders.
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An Activist Shareholder Takes On Apple
Aged 80 at the time, Carl Icahn started to amass a shareholding in Apple in mid-2013. By the end of January 2014, he announced that he had bought 0.9% of the company at a total cost of $3.6bn.
Icahn is seen as one of the most ruthless corporate raiders, with a fearsome reputation going back to the 1980s. At the time of Icahn's acquisition, Apple was already the largest listed company in the world and regarded by many as the most successful company on the planet – so this was set to be an interesting confrontation.
On Twitter, television interviews and in at least eight open letters to other shareholders, Icahn was both complementary and aggressive towards Apple. He praised the company and its products and stated that he thought the stock was undervalued. But he also criticised Apple for holding too much cash on its balance sheet and asked for that cash to be returned to shareholders. At the time, Apple had around $150bn in cash on its balance sheet – so Icahn had a fair point.
Icahn also wrote several open letters to Apple CEO Tim Cook asking Apple to buy back $150bn of Apple shares. Buybacks like this typically increase the price of the remaining shares, thus benefiting shareholders.
Apple did not seem to pay too much attention to Icahn in public. However, Icahn and Tim Cook are rumoured to have spoken on the phone several times and to have met at least once and, eventually, the company did increase their buyback program.
By the time Icahn sold his stake in March 2016, Apple had bought, not the $150bn of shares that Icahn demanded, but "only" $116bn. The subsequent rise in share price meant that Icahn exited his position with a profit of around $2bn.
Famous Activist Investors
Icahn was a pioneer among activist investors and Apple is only one of dozens of companies to get his unwelcome attention.
As recently as March 2020, Icahn (now aged 84) clashed with Occidental Petroleum and was publicly calling for their CEO and Board of Directors to be removed.
This situation started last year when Occidental announced the takeover of Anandarko Petroleum and things escalated from there. In March 2020, Occidental announced a cut to dividends, blaming the global fall in oil prices. Icahn called for the CEO's removal.
In a good example of activist language, Icahn stated in a public filing that Occidental's "CEO and Board unanimously voted to roll the dice and bet the Company by risking stockholder money on a disastrous acquisition…They have egregiously failed [Occidental] stockholders and should be removed".
News of that filing, which also disclosed an increase in Icahn's holding from 2.5% to 9.9% helped Occidental's share price to increase by 24%.
Bill Ackman, Pershing Square Capital Management
In 2014, Ackman bought shares in pharmaceutical company Allergan and worked with fellow activist Valeant to push for a merger deal. Pershing Square and Valeant made about $2.6 billion in profits when Allergan sold itself to Actavis.
Christer Gardell, Cevian Capital
With about $15bn of assets under management, Cevian is Europe's largest activist investor and has the honour of being privately backed by Carl Icahn.
In June 2020, amidst global coronavirus lockdowns, Cevian Capital announced that it had taken a 5.4% stake in educational publisher Pearson. Shares in Pearson subsequently jumped more than 13 per cent to £5.80 after news of the Cevian stake emerged.
Daniel Loeb, Third Point
With about $15bn of assets under management, Third Point's is one of the world's largest and most successful activist funds.
Past targets include Yahoo, Sony and Sotheby's. The fund currently holds a position in UK Insurance giant Prudential and is putting pressure on the group to break itself up.
Paul Singer, Elliot Management
Elliot was the busiest activist investor fund in 2019, with 14 campaigns.
The firm, started by Paul Singer with $112m gathered from friends and family, now has a portfolio worth $8bn.
Past successes include Akzo-Nobel and BHP Billiton.
Now that you know more about activist investors, their tactics and the effects they can have on their targets; you may wish to keep an eye out for the more famous ones in the press.
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