What is an Activist Investor?
An Activist Investor seeks to be the catalyst of a turnaround of an underperforming publicly-traded company to profit from share price appreciation.
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How Does Activist Investing Work
In activist investing, the catalyst for change and turnaround is, in fact, the entrance of an activist investor.
Activist investing is an investment strategy where an investor pursues poorly run companies with share prices that have declined in recent times.
The activist investor identifies a target and then obtains a sizeable stake in the company’s equity, which often signals to the market that changes are soon to come.
Hence, after the news gets around that an activist firm has become a shareholder, the company’s share price can rise in anticipation of a turnaround.
The activist investor can soon be expected to push for changes that they believe are in the best interests of the company’s shareholders post-investment to cause share price appreciation.
- Strategic Redirection and Changes in Operational Decisions
- Capital Structure Restructuring (i.e. Sub-Par Capital Allocation)
- Divestitures of Non-Core Divisions and Spin-Offs
- Changes in Management Practices
- Corporate Governance “Shake-Up” (e.g. Management Team Replacement)
What is the Strategy of an Activist Investor?
From a high-level, the aim of an activist investor is to be the catalyst for change that can create more shareholder value within the target (and share price appreciation).
In the U.S., activist investors such as hedge funds must disclose their stake by filing a Schedule 13D with the U.S. Securities and Exchange Commission (SEC).
The filing requirement is conditional on acquiring an ownership stake exceeding a 5% threshold in voting class shares.
The equity ownership of activist investors is typically not a controlling stake, so part of their strategy is to gain the support of other investors, especially the more influential institutional investors with larger stakes (and more shareholder votes).
Still, despite having a minority stake, activist investors can impact the company’s trajectory and exert influence over an underperforming (and vulnerable) company.
Certain management teams, upon learning about an activist investor’s stake, decide to cater to the investor and express their openness to their recommendations — whereas others see them as threats, occasionally resulting in a proxy fight.
Value-Add Theses of Activist Investors (Source: Bain)