There are dozens of different investing models, ranging from the passive index investing model to the active day trader.
Perhaps the most interesting investing model, though, is that of activist investing.
This model uses capital, share accumulation, and power to steer a public company in the direction the activist wants it to go.
Below, we will explore activist investing, its tactics, and some of today’s most popular activist investors.
Contents
Defining Activist Investing
Activist investing is a strategy where an investor or group of investors acquire a significant stake in a publicly traded company to affect change in the firm’s operations, management, strategy, or governance.
Occasionally, the intention is to force a sale or a spinoff on a specific business unit.
These investors, often hedge funds or high-net-worth individuals, believe that the company is not operating at its peak efficiency and profitability because of one or many of the factors mentioned above.
By acquiring a large stake, activist investors can gain the leverage to influence the company’s decision-making process and steer it towards what they perceive as a more profitable direction.
How Does Activist Investing Work
Now that we have defined activist investing, let’s examine how it works in more detail.
The first step is to identify a target company.
This usually involves extensive research of a company’s financials, processes, market sectors, competitors, management team, and supply chain.
A team of analysts, either employed by the investor or through a firm specializing in company research, often does this.
Once a potential target is identified, the investor will start acquiring shares in the company.
This will happen through a mix of open market transactions, private purchases (also known as dark pools), and related party purchases.
The entire purpose here is to do it subtly as possible so the company does not get tipped off that an activist is acquiring a stake.
As their ownership stake grows, the investor may eventually be required to file a Schedule 13D with the Securities and Exchange Commission (SEC), disclosing their holdings and intentions.
When this is issued, the position is usually large enough to create the desired pressure.
With a significant ownership position established, the activist investor will then engage with the company’s management and board of directors to discuss possible changes to improve shareholder value.
If the company’s management is receptive to the investor’s proposals, a collaborative relationship usually develops, leading to the implementation of some or all of the suggested changes.
If the company resists the investor’s initiatives, the situation can continue to escalate and become more contentious and rash, and each side will struggle for power and control.
However, it happens when an activist investor gets involved, and some form of change usually occurs.
What Tactics Are Used By Activist Investors
Activist investors use many tactics to attempt to achieve their end goal.
These tactics range from the civilized and diplomatic to the aggressive and decisive.
Below, we will go through some of them.
Diplomacy:
The first and most civilized tactic is diplomacy.
This often includes public letters to the board and management expressing grievances and suggestions for improvements to fix them.
If management is receptive, this often leads to closed-door meetings and moves the activists’ involvement in the company through an almost consultant-like role.
Board Exposure:
This is the next level up on the aggression scale.
Often still not particularly contentious, the activist seeks a seat on the board of directors to exert more direct control and influence over the company.
When things proceed amicably, this is achieved through a negotiation and agreement about how much power the activist will have and what changes are expected.
When this does not go amicably, then a proxy battle can ensue.
At this point, the activist starts to nominate their people for board seats, and it gets voted on at the annual meetings.
This can be difficult as it requires broader support, but it also has the potential to give the activist more influence.
Public Criticism/Social Campaigns:
Next are public criticism and social campaigns to exert an external force on the company to change its ways.
This can be either through social media, which is now a prominent force in the market, or through advertising or news appearances.
This is the next level of aggression due to the contentious nature of some of the ads/media campaigns to force change.
Once this happens, there is usually only a winner and loser, and cordial communication breaks down.
Hostile Takeover:
This is less common now with the size of some of the publicly traded companies, but the last level on the scale is a hostile takeover (sometimes called a leveraged buyout when it involves debt).
This occurs when the activist cannot communicate or affect change and continues to buy shares until they are the majority stakeholder.
Once they are the majority, they can force a vote and move the company in the direction they see fit.
One thing to note about the hostile takeover is that it is usually a last resort because it is possible to be the majority stakeholder (sometimes as small as 5% of the float) and still lose shareholder votes.
So, it’s always better to resolve these issues in the most diplomatic way possible.
Many other tactics can be used, and some of the more popular ones are listed above.
Others include shareholder resolutions/proposals, calling for special shareholder meetings, or even initiating litigation against the company or its directors.
Ultimately, the tactics an activist investor uses depend on several factors.
First is the receptiveness of the company and the board of directors.
Second is the scale and scope of the changes that the activist wants to see, and finally, it’s the resources and risk tolerance that the investor has.
Examples of Activist Investors
Having seen what activist investing is and how it’s pulled off, let’s look at a few of the more notable activist investors in today’s markets.
1. Carl Icahn: Known as one of the most prominent activist investors, Carl Icahn has a long history of activist investing. He has targeted numerous companies across various industries, including Apple, Yahoo!, and Herbalife. Icahn’s approach often involves acquiring a significant stake in a company and pushing for changes such as board representation, share buybacks, or the sale of underperforming assets. His campaigns have generated significant returns for his investors and landed him on the Forbes billionaire list.
2. Bill Ackman: Founder and CEO of Pershing Square Capital Management, Bill Ackman is another well-known activist investor. He is famous for his high-profile short position in Herbalife, which he accused of being a pyramid scheme. One of Ackman’s other notable campaigns was his involvement with the Canadian Pacific Railway. He successfully replaced the CEO and several board members, turning the company around and returning a lot of value to its shareholders. (Image courtesy of the WSJ.)
3. Nelson Peltz: Co-founder and CEO of Trian Fund Management, Nelson Peltz has a track record of investing in and influencing large consumer companies. He has targeted firms such as PepsiCo, Mondelez International, and Procter & Gamble, advocating for operational improvements, cost-cutting measures, and strategic shifts. Peltz usually aims to work collaboratively with management by working with the board and CEO to affect change. He almost always looks for board representation to help make changes happen.
Conclusion
Activist investing can be a powerful force for change in a company.
These changes can return value to the shareholders and turn entire companies around if they lack profitability.
Once a significant number of shares has been accumulated, activists will have an entire toolbox of tactics and strategies to effect change.
While most prefer diplomacy, many oppose using aggressive tactics to force change in a company.
We hope you enjoyed this article on what is activist investing.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
