5 Things to Know About Activist Investors
Graphic by The Seville Report
Are you invested in a company being targeted by activist investors? You may have received a letter or email from a hedge fund CEO explaining why they've targeted the company you're invested in; or you may have received a news notice from your broker about the activity surrounding your investment. If you don't know what an activist investor is that's okay. We'll explain 5 things you should know about activist investors starting with what an activist investor is.
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, changing business practices, cutting expenses, increasing profits, spinning off divisions of a company, as well as other things.
First and foremost activist investors act out of their own self interest. The letters they send shareholders and the media campaigns they create may talk about doing what's best for the company, but actually they are doing what's best for themselves as shareholders.
Many activist activities cause short term stock price increases, which the activist investor will take advantage of by selling their shares at a profit. Selling shares at a profit isn't wrong, but making a stir about an agenda that isn't pursued is self serving, and many activist have done this in the past.
There are times when activist investors create an agenda, follow through with their agenda, improve the company, and unlock value for shareholders.
In 2014 Darden Restaurants (DRI) owners of Olive Garden, LongHorn Steakhouse, The Capital Grille, and several other restaurants was a value trap for investors. The company's stock had been stagnant and trading in the $40 range. After an activist campaign by Jeff Smith's Starboard Value LP where he replaced Darden's board, Darden's revenue and the stock price increased. The stock saw a $67 per share high right before Jeff Smith resigned from the Darden board in April 2016. As of this writing Darden shares are trading at $110.
While many investors tend to believe a hedge fund CEO has business wisdom greater than the ordinary investor, that isn't always true. Many activist agendas turn out to be the wrong move causing lost value for investors and sometimes putting companies out of business.
In 2010 Bill Ackman began acquiring shares of JC Penny and was able to place him self on the board and replace the company's CEO with his own choice. Ackman had big plans for Pennys even though he himself had never run a retail operation. Things didnt go as planned and in 2013 Ackman liquidated his JC Penny holdings for an almost $500 million loss.
Another epic activist failure is Carl Ichan's investment in Blockbuster Video. While Blockbuster did have it's problems before the time of Carl Ichan's investment, Ichan was responsible for replacing the company's CEO with his own pick and then exterminating the company's plans to go digital. I think we all know what happened afterwards, Netflix rose, Blockbuster fell, and Ichan along with many investors lost a ton of money.
When activist investors give markets notice of their intentions stock prices can make wild swings. Investors at times buy in to companies on an activist investors announcement as a way to align their investment with the activist investors. A 2008 study of activist campaigns from 2001 to 2006 found that stock prices of the targeted companies increased as well as profitability and operating performance.
These are the five things to know about activist investors. Like all investors activist care most about their investment. There are times when serving their own self interest benefits the company and other shareholders. While activist investors are smarter and/or more experienced than the average investor they aren't always right. With that said investors can benefit from short term stock price increases from activist involvement.
Activist investors are just another player in the markets along with passive investors, traders, short sellers, and small investors. Now that you understand what activist investors are those emails and stock alerts should make a little more sense.
If you had the power to influence a company what company would it be, and what would you suggest to make the company better or more profitable?
P.S. If you want to find out what activist investors are investing in you can learn more at 13DMonitor.com. A 13D is the form investors must file when they purchase more than 5% of a company's stock.