Mahatma Gandhi advised us to be the change we want to see in the world. In the business world, some people feel the wheels of change are taking too long, and they must be given a push. To them, delay amounts to denial, and they opine it is up to them to grease the wheels that will facilitate the outcome they want. If you still do not know who these people are, they are called active investors. Let’s get into the details of active investing and its implications in a company.
Defining Activist investing
IMD defines active investors as shareholders in publicly traded companies who try to effect change by putting pressure on the board of directors through appealing to them and bypass the normal advisory process. Therefore, to become an activist investor, he must first ensure that he has a seat on the board. Activist investors want to influence the business’s direction in different ways, such as acquiring another firm or agreeing to a merger. They can be very aggressive in their approach; hence they have also come to be known as asset strippers, corporate raiders, or green mailers.
Types of Activist Investors
They come in different forms as detailed by the Corporate Finance Institute.
Individual Activist Investors
Of course, for a single person to have that much say, he must command respect, and usually, in the corporate world, it is measured in dollars. Therefore, individual activist investors are wealthy, influential people who determine the strategic direction a company takes. They ensure they have enough voting power to sway a board’s opinion by buying a significant proportion of the shares. A great example of an individual activist investor who resulted in a major board decision being undertaken by a company is Bill Ackman. According to Business Insider, Bob McDonald frustrated investors due to a trend of reduction in the profit forecasts. Ackman stepped into the scene with his $.1.8 billion in Proctor and Gamble. He said that McDonald had only two quarters to improve the company’s performance. Ackman continued putting pressure on the board to make the right decision saying that McDonald was wasting at least 25% of his time serving other boards. Finally, the activist investor got his wish when McDonald stepped down as the CEO.
These behave like hungry lions that have spotted prey; they hunt in packs and, with their immense wealth, target the under-performing companies using aggressive tactics. Around 40% of the time, they want to modify the company’s corporate governance structure, and at least 45% of the time, they are interested in pursuing a transaction-related event. Elliot Management ranks at the top of hedge fund activist investors due to the record it holds of targeting 64 companies since2017. As Mobile World Live explains, it has gained the reputation of buying large stakes in firms across various sectors. It pushes aggressively for change that can take the form of top management overhaul, restructuring, or a modification in strategies. Some of its major moves have been investing $1 billion in Twitter, $2.5 billion in SoftBank, and $3.2bilion in AT&T; no wonder it was speculated as being the most feared activist investor in the technology industry.
Private Equity Firms
These investors employ the strategy of using their buyout funds to control publicly traded companies and run them privately to implement their desired corporate governance changes or restructuring. Once through, they can choose to sell the firm to an interested investor or trade again as a publicly listed company. The buyout fund comes from a group of investors who do not mind investing large amounts of capital for a long time. Besides the leveraged buyouts, private equity firms also invest as venture capitalists or provide investment funds to companies about to declare bankruptcy. A great example of a private equity activist investor is once again Elliot Management’s arm, the Evergreen Coast Capital, started a few years ago. It was created with the sole aim of buying out companies.
What are the Benefits of Activist Investors?
Push for Change Can be Beneficial to the Target Company
Joe Cyriac discussed in a podcast interview by McKinsey how Elliot Management decision to target Cognizant was the best thing that could have happened to Cognizant. Elliot Management, as always, had a list of demands for their target company that included returning capital to shareholders and better operating performance. After reviewing the needs, Cognizant agreed to them, and the board also realized that they should be returning capital to shareholders after 15 successful years of operation. As a result, it started a share buy-back and dividend program.
Demand for Shares
A company struggling to raise capital can immediately see a rise in demand for its shares when an activist investor joins them. Usually, activists buy shares in bulk which causes an increase in the stock price, and the company makes quick profits.
Access to Capital
Private equity firms give hope to failing companies by providing the capital needed to continue being in business.
Does Active Investing Have a Downside?
Unfortunately, sometimes the interests of activist investors and shareholders are not aligned. While some shareholders are interested in their investment’s long-term profitability, activists could only be in it in the short term. As a result, they will only influence decisions that impact the short term leaving the long-term shareholders to deal with the mess created. Additionally, the demand for shares and increased stock price can only be beneficial in the short term; if it persists, the company will lose its value. Since people hold the misconception that activist investors are smarter than them, they can relax and leave their business in the activists’ hands. Sometimes, the activists are wealthy people who are only interested in pulling the blanket’s side that best covers them, not caring if they will leave the other people out in the cold. For this reason, activists could lead to the target company’s downfall.