An activist investor, also called an activist shareholder, is an individual or group that holds a considerable number of shares in a publicly-listed company with the aim of applying pressure on its management so that their decisions are influenced.
The activist investor’s goals may range from financial, such as increasing shareholder value by altering corporate policy, cost cutting, etc., to non-financial, such as trying to force the company to adopt greener policies or stop doing business in particular nations.
To become a shareholder activist you do not need to become a majority stockholder. With 10% (or even less) of outstanding shares a successful campaign can be launched. This is much cheaper than trying to completely acquire a company.
According to Stephen Gandel of Fortune magazine, activist investors had a banner year of publicity in 2014. But when it came to investment returns, the results were just okay.
A business may become activist investors’ target if it has excessive costs, has been mismanaged, or could be better run as a private company.
Activist investor may be a person or firm
Very wealthy individuals, hedge funds, and private equity firms are types of entities that may choose to act as activist shareholders.
American business magnate, Carl Icahn, who according to Forbes has a net worth of $21.3 billion, is a well-known activist investor. He has tried to bring about major changes at RJR Nabisco, Time Warner, Blockbuster, Yahoo, and several other companies.
Other well-known activist shareholders include Nelson Peltz, Bill Ackman, Eddie Lampert and Daniel Loeb.
In the US, the SEC Form 13D must be filed when a shareholder owns at least 5% of a company’s outstanding shares. Searching though SEC files is one way to look out for possible new activist investors.
Once despised as corporate raiders (entities that buy companies, break them up and sell them bit by bit), investor activism today has gained popularity among the media and general public, especially since executive pay has rocketed.
When fat-cat executives are targeted and exposed for their excessive incomes by activist investors, the rest of the world applauds.
Bill Ackman and Canadian Pacific Railway
Bill Ackman, founder of hedge fund Pershing Square Capital Management LP, was head of a proxy fight against Canadian Pacific Railway. In an SEC 13D filing in 28 October 2011, Pershing Square indicated that it owned 12.2% of Canadian Pacific. Its stake eventually rose to 14.2%, making it the company’s largest shareholder.
Mr. Ackman took control of the board of directors, got rid of the management, and managed to double the company’s share price for himself and other stockholders.
According to Nasdaq, an activist investor is:
“A minority shareholder who seeks to influence decision making at a company by voicing concerns, engaging in a dialogue with management, or lobbying other shareholders for support. The demands could relate to changes in management, representation on the board, acquisitions or divestitures, salaries, bonus payments, use of retained earnings etc.”
Video – Activist hedge fund investors
This New York Times video talks about how activist investors flocked to Wall Street and confronted some big corporate names.