Focused specifically on increasing shareholder value, a “so-called” activist investor examines underperforming companies and identifies the issues holding them back. After purchasing a significant stake in these organizations, an activist investor implements changes with the intention to increase shareholder value.
The methods by which these types of investors accomplish the above mentioned goal depend largely on the nature of the issues hampering the company. In general, though, activist investors seek to redirect the management’s trajectory.
This can entail bringing in a new management team, allocating the company’s capital differently, deploying assets more efficiently or breaking up the company and selling off some of its assets or business lines. Alternatively, in instances in which a firm has an excess of cash on hand, an activist investor can push for a dividend increase, share buybacks and/or taking on more debt to achieve more operating leverage. .
As these examples suggest, the additional element for an activist investor is the “agency” – the willingness to actively steer a company’s course rather than relying on its existing one to harvest returns.
There is also a class of activist investors whose main goal is to incite systemic changes in a company’s board. These investors can demand seats, put forth their own picks and insist upon the removal of specific directors. Notable companies have been subjected to this type of activity, including ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Procter & Gamble (NYSE: PG), Hugo Boss (OTCMKTS: BOSSY) and Westpac Banking (OTCMKTS: WEBNF). Each of these firms has experienced board changes because of activist investor reactions to previous business decisions.
In most instances, activist investors operate hedge funds, private equity firms or are high-net worth individuals. Upon acquiring 5% or more of a company’s voting class shares, activist investors file a Schedule 13D with the Securities and Exchange Commission within 10 days of that acquisition in order to make their intentions known.
This filing is mandatory when the investor’s plan is to engage in mergers, acquisitions, or the sale of a significant portion of the targeted company’s assets. Other activities predicating the filing of a 13D include capitalization changes, dividend policy alterations and any other modifications to the way the company operates.
These can be efforts to reduce operational costs, or strategic moves to stimulate revenue increases. Selling off underperforming divisions and reorganizing the company into separate business units are other ways performance improvements can be accomplished. Capital structure changes in the form of share repurchases, as well as changes in the size and membership of the board of directors, are additional tools that must be reported.
Many people have made names for themselves as activist investors. Among them, Barry Rosenstein was instrumental in convincing Whole Foods to sell out to Amazon (NASDAQ:AMZN), a deal from which he netted $300 million for his hedge fund, Jana Partners.
One of the most famous activist investors of all time is Carl Icahn, who took over Trans World Airlines back in 1985. Now well into his 80s, Icahn still runs the publicly traded Icahn Enterprises (NASDAQ:IEP).
Bill Ackman has targeted Procter & Gamble (NYSE:PG), Canadian Pacific (NYSE:CP), and Fortune Brands (NYSE:FBHS) over the course of his career as an activist investor.
Ackman and Icahn got into an infamous war of words over their opposing involvement in Herbalife (NYSE:HLF) back in 2013. Ackman had shorted the company, while Icahn, in partnership with another activist investor, Daniel Loeb, went long. Eventually, Icahn and Loeb were proven right and made a billion dollars, while Ackman lost a similar amount.
High profile activist investors attract attention from financial media, which makes it difficult for the leadership of a company to ignore their concerns. This can goad a board into working harder to increase the company’s value for shareholders in general.
Activist attention can also trigger added demand for a company’s shares, which in turn can increase their price. Smaller investors, seeing the robust interest taken in the company by an activist, will often buy shares with the hope the changes imposed will increase their value. This can have an immediate short-term benefit for the company’s existing common shareholders. Potentially, everyone invested in the company can stand to benefit if the prescribed changes produce positive results.
However, there are some downsides to consider as well.
The intention of an activist investor is usually to generate profit for themselves. As a result, people on the “wrong side” of the investor’s activism can suffer. Chief among them, company employees could be adversely affected by operational changes. Downsizing, spinoffs, and mergers often result in layoffs.
Similarly, share prices can drop precipitously when an activist investor unwinds their position, which can damage smaller investors with limited time to react to the news.
Further, activist investors may make mistakes.
Their ideas do not always result in the changes expected. They could misjudge the company’s internal situation, or the time horizon for the value increase they seek might turn out to be too distant, leading them to close out their positions and cut their losses before their thesis materializes. Sometimes, smaller investors are turned off by the increased volatility – or cannot afford to wait out the storm – which leads to hasty selloffs.
It is critically important to consider these factors before following the buying activity of an activist investor.
With that said, investors seeking to profit from the initiatives of activist investors can purchase shares in mutual funds and the exchange traded funds that track them. One such opportunity, the 13D Activist Fund (NASDAQMUTFUND:DDDAX), follows their activities and invests based on the perception of the potential for a positive outcome.Similarly, the LeaderShares Activist Leaders ETF (NYSEMKT:ACTV) also provides activist investment opportunities.
The 13D Activist fund – for instance – boasted a 15% annual average return for the decade between 2011 and 2021.
Activist investing – even through passive products such as mutual funds or ETFs – can provide investors with exposure to a different investment theme, but it is typically not a differentiated play compared to traditional equity market long positioning.
Investing in private markets can offer an opportunity for additional differentiation, as it targets asset classes that can be less correlated to public equity and fixed income returns. Yieldstreet offers ample access to many alternative products, which gives investors the potential to differentiate not only from their public market exposure, but also within the alternative portion of their portfolio.
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