An activist investor or an activist shareholder is an investor or investors who acquire an equity stake in a company and use that stake to influence the company's management. An activist investor's influence can be used to pressure management into replacing board members, change business practices, increase profits as well as other things.
Activist investors tend to be professional investors that have more financial resources than the average investor. To an activist investor a good company underperforming the market and it's peers stands out like a sore thumb. Once they notice the underperforming company the next step is to discuss their concerns with the companies management. This is where activist investor helps out the average investor.
The Good
One way an investor becomes an activist investor is by accumulating a large amounts of shares in a company. A large shareholder gains influence and can get access to a company's CEO easier than a regular investor can. An activist investor with a direct line of contact to a CEO can advise the company on opportunities being missed in their business. When there is an open and cordial dialogue between activist investor and CEO, the average investor can benefit when the company performs better from the activist investors involvement. Investors may also experience higher stock prices from the accumulation of shares by the activist investor(s). When activist investors begin to accumulate shares word spreads throughout Wall Street, and other investors, hedge funds, and mutual funds also begin to accumulate shares in the company.
The Bad
There are times when the activist investor(s) and the company's management do not see eye to eye. When this occurs the activist investor may decide that pushing their agenda on the company isn't worth the time, effort, or money and will sell their shares and move on. When large shareholders sell large amounts of shares in the market this puts negative pressure on the share price.
The Ugly
Not all activist investor to CEO communications are cordial and not all of the time do activist investors walk away when they can't get their way. There can be very contentious times between activist investors and a company's management. There are times when a company's CEO believes the activist investor is not proposing ideas that are best for the company or all of the company's investors. For instance an activist investor may want a seat on the board of directors to have more say in the companies direction or may want to take the company private or break the company up to unlock potential value. When this happens a war of words in the media occurs. The activist investor speaks badly about the company and the direction it is headed in; the company's CEO reassures investors and speaks badly about the activist investors intentions. When events like this occur both side will look to rally the average investor to their cause in hopes of getting the votes that support their agenda.
Summary
Depending on who is speaking, activist investors can seem self serving, but try not to let someone's opinion about an activist investor dictate your thoughts. Their have been times when activist investors made a mess trying to force a deal or acquisition, yet they - the activist investor(s) - still made out like bandits and the average investor was left holding the bag. Also, there have been activist investors that have really helped companies unlock value and increase share prices, all of which benefited the activist investor and the average investor.
Like everything else, there is good and bad when it comes to activist investors, and at times things can get ugly. If you're invested in a company that is the target of activist investors be sure to do your homework on their agenda and their previous activism work.