Topline
Activist investors, who purchase minority stakes in companies to change them for a number of possible reasons—though usually to eventually make a profit—are on the rise, reigniting discussion about who they are, what they do and whether they should be regulated.
The front facade of the New York Stock Exchange on July 21, 2009 in New York City. (Photo by … [+]
Key Facts
Activist investors, sometimes called shareholder activists, usually try to make money by investing in underperforming companies, trying to improve their performance and then selling their shares for profit.
Activists buy minority stakes in companies and run campaigns to convince shareholders and managers to implement their changes (contrasting with corporate raiders, who are known for purchasing majority stakes in companies, taking over their boards, and selling them to the highest bidder).
News Peg:
Four big companies–Disney, software giants Salesforce and Splunk, and toy-maker Hasbro–are each engaged with multiple activist investors, the Wall Street Journal reported Wednesday. This phenomenon is called “swarming,” and it’s on the rise–jumping from 7 companies in 2020 with multiple activists to 17 in 2022. Indian billionaire Gautum Adani lost $64.7 billion in the last ten days after activist investor Hindenburg Research published a report accusing Adani’s Adani Group of being “engaged in brazen stock manipulation and accounting fraud scheme over the course of decades.” Meanwhile, Nordstrom’s stock increased over 20% following activist investor Ryan Cohen reported big buy-in.
How Do Activists Exercise Control?
Activists announce their campaign by filing a document, a 13D, with the Securities and Exchange Commission that lets the board and other shareholders know when someone has purchased 5% or more of the company’s stock. They try to assert control by running campaigns to persuade other shareholders of their vision. If executives are resistant to changes, the activists may start a PR campaign to convince shareholders of their position. The most aggressive step an activist can take, short of corporate raiding, is nominating a new candidate for a board position and asking shareholders to vote out the incumbent at the annual shareholder meeting in a proxy fight. One way to measure the success of an activists’ campaign is how many board seats they win, but investors aren’t limited to changing the board. Activists can try to change everything from the company’s spending and investment to their stance on social responsibility, as long as they are backed by shareholder support.
Key Background
Today’s activist investing grew out of the aggressive corporate raiding common in the 1970’s and 80’s. Some of today’s most prolific activists, like hedge-fund managers Carl Icahn and Nelson Peltz (who’s engaged in a campaign with Disney), started as corporate raiders in the 80’s. Investors started pursuing minority stakes and change beyond the boardroom in the 1990’s.
What to Watch For
In 2022, the SEC proposed new filing regulations that would effectively make it more difficult for activists to run campaigns. Experts disagree whether activist investing should be more tightly regulated. A 2022 article published in the Yale Law Journal argues activists are prone to making unprofitable errors, and should be regulated like corporate raiders. Bloomberg’s Matt Levine counters the threat of activism–being campaigned against and voted out at a proxy fight–forces executives to make companies as profitable as possible.
Further Reading
Barbarians Inside the Gates: Raiders, Activists, and the Risk of Mistargeting (Yale Law Journal)
The SEC Wants to Stop Activism (Bloomberg)
Disney, Salesforces and Others Draw Activist ‘Swarm’ After Share Decline (WSJ)
Source: https://www.forbes.com/sites/emilywashburn/2023/02/03/whats-an-activist-investorand-how-do-they-exercise-so-much-control/