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‘Shareholder activism works when activists understand something about the characteristics of a business that the board doesn’t,’ – co-founder of venture capitalist Andreessen Horowitz, Ben Horowitz, 2012.
Activists have a very simple mission: to stimulate change in a business in order to make profit.
Shareholder activism is showing no bounds, with investors finding new ways to hold company’s feet to the fire and flex their influence, track records and use vast amounts of capital to induce change at companies of all sizes, from blue-chips to penny stocks, around the world.
The influence and role of shareholder activism is growing. The amount of publicly-listed companies that came under fire from activists rose by 48% over the three years to 2016 before experiencing a drop in activity in 2017, when over 800 firms were subject to activist demands.
While fewer companies were targeted last year, activists paid more attention to the larger companies and with the likes of Procter & Gamble, General Electric, General Motors, Nestle and AkzoNobel all having to deal with activism last year, it is clear few companies can escape the activist’s radar. One in five of all activists’ targets carry a market cap of over $10 billion.
Activists may have a simple goal but they must navigate complex channels to achieve it, and the impact activism can have on companies, share prices and other investors means opinion is split. Are activist investors taking advantage of stock markets for their own gain or playing an integral role by holding companies to account and maximising value?
What is an activist investor?
An activist investor can be an individual or a group that makes a substantial investment in a company with the view of using its influence to seek change within the business. An activist can spring into action for several reasons, including if it thinks the business is poorly-structured, being mismanaged and underachieving, or if disagrees with the strategy or state of the balance sheet, for example.
In a nutshell, activist investors try to seek out flawed businesses to invest in, with the aim of improving them one way or another in the hope the company becomes more valuable as a result, allowing the activist to sell-up and book a profit.
There are some activist investors that are dedicated to the cause and only invest in companies with a view of seeking change, while some use it as a tool within a wider investment strategy. A hedge fund, for example, may primarily follow an investment strategy and only undertake shareholder activism when necessary, such as when its existing investments are under threat by mismanagement.
Shareholder activism tends to start at a fork in the road. When a shareholder looks to change something within the business, they have two choices – seek to negotiate with the company’s board and reach some form of agreement on the matter, or challenge a company by using its stake to call a meeting for all shareholders to vote on whether they back the activist’s proposals.
Negotiating is a significantly more successful strategy for investors, but many are willing to take their chances in a proxy fight in order to try to push their ideas. Look at the success of activists last year that sought to make changes to a company’s board – they won more than five times as many seats by negotiating with the company than they did through shareholder votes. When it did end up in a shareholder vote, the success of activists was more mixed, winning only slightly more battles than they lost.
In addition to activist investors, there is another group that look to short companies in the belief they are grossly overvalued. These short-selling activists find companies which they believe are worth considerably less than what the market has priced them at or (in many cases) nothing at all.
Learn more about short-selling
So what’s the major difference? While activist investors look for companies they believe they can squeeze more value by making changes, short-selling activists look for those that they believe will see a large-drop in value because they think the companies are fraudulent in some way. These two types of activism are very different to one another, and have a different impact on company share prices. Sometimes activist investors ploughing money into a business can be beneficial to share prices, whereas an activist shorting a stock is rarely good news for a stock’s value.
The main thing they both have in common however, is the ability to influence. Individual retail investors do not have the ability to push for change without pooling together, as they can rarely afford to take large enough positions on a stock to have any influence on their own. Activist investors and short sellers are both able to back their opinions up with both the cash needed to grab everyone else’s attention, and the track records needed to gain respect from the market. It’s worth noting that some use both methods of investing and shorting.
It is evident that there isn’t a company, regardless of size, that is immune from the threat of activists. Companies are now constantly looking over their shoulder to check if any activists are looming, and many now regard potential shareholder activism as a major risk. As a result, many have introduced measures to counter potential activism, such as improving shareholder engagement and governance practices, to prevent any wandering eyes from finding an excuse to make them their next target.
Activist investing: a global overview
‘Spurred by an increase in activism in recent years, boardrooms across the globe have begun pre-emptively taking a closer look at their companies’ performance, strategic direction, board composition, and governance practices. Nonetheless, activism shows no signs of slowing down,’ - The Activist Investing Annual Review 2018.
The annual review released by Activist Insight (AI) in association with Schulte Roth & Zabel paints a picture of how prevalent activist investors continue to be, and provides a look at what is driving activism in international stock markets:
Why do activist investors target companies?
Activist investors launch campaigns against companies for several reasons, whether to protect an existing investment or because it has invested specifically to push for change.
Companies, big or small, face the same pressure from activists, but the largest businesses, with their complex nature, are often targeted for governance issues surrounding issues like dual-class shareholder structures, use of the universal ballot, amending bylaws, or redeeming poison pills.
Large-caps are also challenged more on director pay than mid-cap and smaller stocks, which face more pressure to make changes to their board, and are questioned more about how they plan to generate growth leveraging their balance sheets and mergers and acquisitions (M&A) options.