January 25, 2019
As with most things in life this is a yes and a no depending on the situation. Activist investors seek to radically change a company’s existing business to ramp up profits and return shareholder value. They take large positions in publicly traded companies and bring the board to the negotiating table. They can be a headache for management teams to deal with and often will try to remove some high-ranking executives to cut back on costs.
This approach can increase or decrease the company’s stock price in the near and long term. It depends on how the market perceives the activist investor and their plans to revamp the company’s strategic objectives. Common examples of activist investors are hedge funds, private equity companies, and wealthy individuals.
A recent example of an activist investor taking a position in a company was Third Point LLC’s Dan Loeb taking a +1% stake in Nestle (Tii:NSRGY). He also released an online presentation outlining the steps he believes Nestle should be taking to enhance shareholder value. In his presentation, he asserts Nestle should better clarify the company strategy, divest their 15% stake in Loreal (Tii:LRLCY), and split the company into three divisions centered around their key categories. This is a common example of an activist shareholder methods to facilitate organic change in a company.
A more prominent activist investor is Carl Icahn of Icahn Capital Management. In 2006, Icahn led a group of individuals to change Time Warner (Tii:T) strategic initiatives. This effort came in the wake of Time Warner’s merger with AOL, which is notorious for being one of the, if not the, worst mergers of all time. The group called for a break up of Time Warner, cost reduction efforts and a $20 billion stock buyback program. These requested concessions were won and resulted in a new board of directors, the full $20 billion stock buyback program and $1 billion in cost cutting measures.
So, while not all activist investors are bad not all activist investors are good either. There are a lot of criticisms against activist investors being greedy or having no regard for the legacy or image that a company has built and only being concerned with selling the company for parts. In the 1980’s they were commonly referred to as “corporate raiders” thought to exemplify some of the worst qualities of Wall Street. Activists have their names and firm’s reputation on the line when they undertake a position to overhaul a corporation’s strategy and it isn’t something that they take lightly. Monitoring past companies that the activist has successfully integrated should serve as a starting point for your research on concerns that you may have.
As Gordon Gekko would say “The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right. Greed works.” Sometimes companies mature and are too complacent or lack a clear vision for growth and returning shareholder value. When the board/ managements vision is misaligned with public shareholders activist investors can fill the gap towards making meaningful change within organizations for the better.
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