The goals of the activist investor can be as modest as advising the management of the company or as ambitious as forcing the sale of the company, disposals or the restructuring, or the replacement of the board of directors.
Contrary to private equity firms who buy and restructure companies in order to profit when they are resold, activist investors rarely acquire full or controlling shares. Instead, they use public communications and private discussions to convince other shareholders and company insiders. When these efforts fail, an activist investor can pursue a proxy contest to elect new directors in order to force the company to respond to their demands.
Key points to remember
- Activist investors buy minority stakes in public companies to change their management style.
- If they fail to convince company executives, they may lead a proxy contest for board seats.
- Some hedge funds specialize in activist investing while institutional investors may engage in it from time to time.
- Investor activism can focus on maximizing shareholder value or on corporate social responsibilities.
- The SEC has proposed tougher disclosure rules for activist investors that critics say could make activism unprofitable.
Understanding Activist Investors
Activist investors are sometimes referred to as activist shareholders, a term also used to describe companies that pressure companies to improve the working conditions of their contractors’ foreign employees, or supporters of a dissenting board list board elected to fight climate change.
However, many activist investor campaigns seek only to maximize shareholder valueand most of them are the work of hedge funds that specialize in the unique mix of public pressure, behind-the-scenes lobbying and requisite business expertise.
Unlike public pension funds and mutual funds which also sometimes engage in activism, activist hedge funds can hold highly concentrated holdings and supplement them with additional holdings. leverage of derivative products such as stock options to offset the considerable cost of these campaigns. In contrast with institutional investors who sometimes turn to activism after holding a disappointing investment for years, activist hedge funds typically buy a stake in an underperforming company shortly before calling for change, and hope to profit from the turnaround and the downturn. resulting price appreciation.
Unlike institutional investors, activist hedge funds are also more willing to use confrontational tactics, from poison letters to management and unflattering public reports to proxy contests aimed at ousting incumbent directors.
The rise of activist investors has been described as an effective market response to the agency problemwhich occurs when the agents (in this case the management of companies) have the possibility and the means of enriching themselves at the expense of the customers (in this case the shareholders—a diffuse group with limited powers to safeguard its ownership interests.)
How Activist Investors Make Their Case
Activist investors often advertise their campaigns by filing a Annex 13D train with usa Securities and Exchange Commission (SEC). An investor or group of investors must file a Schedule 13D within 10 calendar days of acquiring 5% or more of the voting shares of a corporation.
Qualified institutional investors and passive investors, i.e. those who are not trying to acquire or influence control of the company, may instead file a simplified application Annex 13G with less stringent disclosure requirements and thresholds.
Schedule 13D filers must disclose, among other facts, the reasons for their acquisition of the interest and any plans they may have for the business in terms of mergers and acquisitions, asset disposals, capitalization or dividends, or other policies.
The initial 13D filing gives the activist investor a golden opportunity to make their case for change in the targeted company. At the same time, the filing limits the activist’s ability to change their stake and plans for the company out of public view. Any changes to the facts disclosed on a Schedule 13D must be reported in a “promptly” amended filing, in accordance with current SEC rules.
Activist investors can use the filings in Amended Schedule 13D to comment on a company’s response to their proposals. For example, when Netflix, Inc. (NFLX) adopted a poison pill after funds affiliated with Carl Icahn reported a nearly 10% stake in the video streaming company, the funds filed an amended disclosure calling the poison pill “an example of poor corporate governance.”
Activist investors can also write letters to incumbent executives, issue press releases advocating their cause to other shareholders, or privately lobby institutional investors to join.
Whatever tactic is used, it must be persuasive, because the only way to overcome opposition from entrenched corporate management, unless one Hostile takeover is to persuade a sufficient number of other shareholders to replace the board in a proxy contest, or at least to be able to credibly threaten to do so.
The end of shareholder activism?
“Activism is dying,” Icahn said in May 2022, quoted by The Economist, contrasting the legendary investor’s light-hearted approach with the softer tone that has prevailed more recently. Some have argued that changes to Schedule 13D disclosure requirements proposed by the SEC in 2022 pose a more pressing threat, with Elliott Investment Management saying in a public comment letter that the proposed rules will “virtually end activism.” “.
In February 2022, the SEC proposed to shorten the initial Schedule 13 filing deadline from 10 calendar days to 5, with amendments due within a day of a material change rather than “quickly” as currently. The proposal would also require activist investors filing a 13D to specify holdings of derivatives such as options that provide an economic interest in the company without the shareholder rights associated with an equity position. Perhaps most controversially, the proposed rules would no longer require investors to agree to act in concert to be designated as a group by the SEC for Schedule 13D reporting purposes.
SEC Chairman Gary Gensler argued that the proposed enhanced requirements would address “an information asymmetry” between activist investors and other shareholders. Critics countered that the proposed rules would make activism unprofitable by making it harder and more expensive for activist investors to accumulate large stakes, while preventing communication among shareholders.
Do activist investors ever make deals with companies?
Yes, because activist investing is not a zero sum game. Since activist investors and incumbent managers share an interest in the success of the company, they can sometimes agree to a mutually agreeable compromise. Such agreements typically grant the activist investor representation on the company’s board of directors in exchange for a commitment to support the company’s management and director nominees for a specified term. Agreements may also specify actions that management will take at the request of activist investors, while including stop provisions preventing the activist from increasing his stake in the company or obliging him to maintain a specified minimum stake.
Is shareholder activism dying?
Not if we judge by the 73 militant campaigns initiated in Q1 2022, a quarterly record. The 126 activist investor engagements initiated in the first half of 2022 increased 34% year over year to the highest total in the first half in four years.
Do activist investors create value?
Activist investors have sometimes been effective in solving the agency problem faced by shareholders whose interests do not always coincide with those of well-established management teams. They have certainly created value for themselves and for other shareholders. Activist investing cannot be easily pigeonholed as Good or bad, Nevertheless. Activist investors look out for themselves and realize the lion’s share of the value they unlock. Their relatively short-term focus on strategies with the potential to drive up the stock price, such as return of capital to shareholders in the form of dividends Where share buybackscan prevent companies from making the necessary long-term investments.
Which Activist Investor Generates the Biggest Initial Share Price Gains?
According to Elliott Investment Management, among activist investors with more than one activist campaign between 2017 and 2021, it’s Elliott with an average pop of 8% for the target company’s stock on the day the firm went public with its stake. . According to the company, its 47 activist engagements over that five-year period increased the market value of targeted companies by a total of nearly $30 billion on the day of their announcement.
When activist investors use their large, but still relatively small, minority stakes to push for change in publicly traded companies, they often have to fully exercise their shareholder rights to get the attention of incumbent management and persuade others. shareholders. The discipline they impose also fosters shareholder-friendly policies in other companies. But they are not always right, and any public benefit they provide is incidental to their pursuit of profit for themselves and their customers.
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