Activist investing involves shareholders leveraging their stakes in a company to influence its management and operations. These investors aim to implement changes they believe will enhance the company’s performance and increase shareholder value. Strategies used by activist investors include public campaigns, proxy fights, private negotiations, strategic proposals, litigation, and engagement with other shareholders. Financial engineering, operational improvements, and governance reforms are also common approaches. The impact of activist investing can be profound, leading to enhanced corporate governance, improved operational efficiency, strategic realignments, and increased shareholder value.
Understanding Activist Investing
Activist investing involves shareholders leveraging their stakes in a company to influence its management and operations. Activist investors aim to bring about changes that they believe will improve the company’s performance and, consequently, increase shareholder value. These changes can range from operational adjustments to strategic shifts, governance reforms, and financial restructuring.
Key Strategies and Approaches of Activist Investors
Public Campaigns
Public campaigns are one of the most visible and impactful strategies used by activist investors. By publicly announcing their positions and goals, activists can garner attention and support from other shareholders, the media, and the public. This increased visibility puts pressure on the company’s management and board to address the issues raised.
Example: Carl Icahn‘s campaign against Apple in 2013, where he publicly called for a larger stock buyback program, drawing significant media attention and support from other investors.
Proxy Fights
Proxy fights involve activist investors soliciting votes from other shareholders to gain control of a company’s board of directors. By winning enough votes, activists can replace board members with candidates who support their proposed changes. Proxy fights can be costly and contentious but are effective in bringing about significant governance changes.
Example: In 2017, Trian Fund Management led a successful proxy fight to install Nelson Peltz on the board of Procter & Gamble, advocating for operational and strategic improvements.
Private Negotiations
Not all activist campaigns are conducted publicly. Many activists prefer to engage in private negotiations with the company’s management and board. This approach allows for more collaborative discussions and can lead to mutually agreeable solutions without the public scrutiny and conflict of a public campaign.
Example: Elliott Management’s private negotiations with AT&T in 2019, which resulted in the company agreeing to several strategic and operational changes.
Strategic Proposals
Activist investors often submit formal proposals to the company’s board or at shareholder meetings. These proposals can address various aspects of the company’s operations, governance, and strategy. By gaining shareholder approval for their proposals, activists can effect changes directly.
Example: Engine No. 1’s strategic proposals at ExxonMobil’s 2021 annual meeting, which focused on environmental sustainability and climate change initiatives. The proposals received significant shareholder support, leading to the election of new board members.
Litigation
In some cases, activist investors may resort to litigation to enforce their demands or challenge the actions of the company’s management and board. Legal action can be a powerful tool to compel companies to comply with regulatory standards or corporate governance practices.
Example: Pershing Square Capital Management’s litigation against Allergan in 2014, which pressured the company to engage in merger discussions with Actavis.
Engaging with Other Shareholders
Building coalitions with other large shareholders, such as institutional investors and mutual funds, can amplify the impact of an activist campaign. By aligning interests and coordinating actions, activists can create a united front that is more challenging for the company’s management to ignore.
Example: Activist hedge fund ValueAct Capital‘s collaboration with other institutional investors to push for changes at Microsoft in the early 2010s, resulting in significant strategic shifts and leadership changes.
Financial Engineering
Activist investors may advocate for financial restructuring to unlock shareholder value. This can include pushing for stock buybacks, special dividends, spin-offs, or divestitures of non-core assets. Financial engineering strategies aim to optimize the company’s capital structure and improve returns to shareholders.
Example: Starboard Value’s campaign at Darden Restaurants in 2014, which included advocating for the spin-off of real estate assets into a separate entity, ultimately leading to improved financial performance.
Operational Improvements
Activist investors often target operational inefficiencies and advocate for changes to enhance productivity and profitability. This can involve restructuring business units, cutting costs, improving supply chain management, or investing in technology and innovation.
Example: Jana Partners’ campaign at Whole Foods Market in 2017, which pushed for operational improvements and strategic changes, eventually leading to the acquisition by Amazon.
Governance Reforms
Improving corporate governance is a common goal for activist investors. This can include advocating for board independence, enhancing executive accountability, aligning executive compensation with performance, and increasing transparency in corporate decision-making.
Example: Third Point’s campaign at Yahoo! in 2012, which led to significant governance changes, including the appointment of new board members and a new CEO.
Impact of Activist Investing
Activist investing can have profound impacts on companies and their stakeholders. Here are some of the key effects:
Enhanced Corporate Governance
Activist investors often push for better corporate governance practices, such as improving board independence, aligning executive compensation with performance, and increasing transparency. These changes can lead to more accountable and effective management.
Improved Operational Efficiency
By identifying inefficiencies and advocating for operational changes, activist investors can help companies streamline their operations, reduce costs, and improve profitability.
Strategic Realignments
Activist investors may push for strategic shifts, such as divesting non-core assets, pursuing mergers or acquisitions, or entering new markets. These changes can unlock value and drive long-term growth.
Increased Shareholder Value
The ultimate goal of activist investing is to enhance shareholder value. Successful activist campaigns can lead to higher stock prices, better financial performance, and increased returns for investors.
Evolution of Activist Investing
Activist investing has evolved significantly over the years. Here are some key developments:
Early Beginnings
Activist investing traces its roots back to the early 20th century, with figures like Benjamin Graham advocating for changes in undervalued companies. However, it became more prominent in the latter half of the century.
Rise of Corporate Raiders
The 1960s and 1970s saw the rise of corporate raiders, such as Carl Icahn and T. Boone Pickens, who sought control of companies through hostile takeovers, often funded by junk bonds.
Institutional Investors and Shareholder Activism
In the 1990s, institutional investors like pension funds and mutual funds became more involved in shareholder activism, leveraging their substantial equity stakes to influence corporate governance.
Modern Activism
Today, activist investing is more sophisticated and widespread, with a diverse range of strategies and tools at activists’ disposal. The rise of social media and digital platforms has also enabled activists to reach broader audiences and garner public support.
Conclusion
Activist investing has evolved from its early beginnings to become a sophisticated and influential force in the corporate world. By employing a variety of strategies and tools, activist investors can drive significant changes within companies, leading to improved performance and increased shareholder value. Public campaigns, proxy fights, private negotiations, and strategic proposals are just some of the methods used to effect change. The impact of activist investing includes enhanced corporate governance, operational efficiency, and strategic realignments. As this form of investing continues to evolve, it remains a powerful mechanism for driving corporate accountability and value creation.