In the world of investing, there’s a special breed of investor that tends to ruffle feathers, stir up boardrooms, and generally make life a little uncomfortable for company executives. We’re talking about activist investors—the corporate rebels who want to shake things up and force companies to change. But why would any investor willingly stir the pot when they could just sit back, relax, and let the money roll in? Let’s break down the world of activist investing from your perspective as a savvy investor.
What is an Activist Investor?
An activist investor is exactly what it sounds like: someone who takes an active role in the companies they invest in. Rather than simply buying shares and hoping for the best (like most passive investors), activist investors typically purchase a significant stake in a company with the aim of pushing for changes in management, corporate strategy, or even the company’s financial structure.
These investors often believe the company’s stock is undervalued or underperforming and can be more successful if some serious changes are made. Their ultimate goal is to unlock value for shareholders (including themselves), and they’re not shy about making noise to get there.
Why Would Investors Get Involved in Activist Investing?
So, what’s in it for you, the investor, if you’re considering taking on the role of an activist—or at least getting involved in activist investing? Here are a few reasons why some investors take this path:
1. Unlocking Hidden Value
An activist investor often sees potential in a company that others don’t. Maybe the company’s sitting on a pile of cash that could be better deployed, or perhaps it has underperforming assets that could be sold off. Activists believe these opportunities can lead to significant upside once the right changes are made. They want to unlock that hidden value—and they’re usually happy to make a fuss to do it.
For example, a company may have a valuable brand but is wasting its potential because of poor management decisions. An activist might push for new leadership or a strategic shift to unlock that value, which could result in higher stock prices for everyone involved.
2. Shareholder Value
Activist investors often claim they’re fighting for the little guy—the regular shareholders who don’t have the power or voice to make changes themselves. By pushing for corporate reforms, cost-cutting, or better capital allocation, activists believe they can create more value for all investors. So, while they might be shaking up the boardroom, the end goal is often to improve stock performance and return value to shareholders.
3. Influence and Control
If you’ve ever wanted to feel like a corporate insider—or, at least, pretend to be—activist investing is your chance to make some noise. Activist investors can gain significant control over a company by rallying other shareholders to their cause, sometimes even forcing a company to sell itself, restructure, or shift its business model. This power is what makes activism so appealing. And if you’ve ever sat in a board meeting, you know how heady it feels to have a say in how things are run.
What’s the Game Plan for an Activist Investor?
Okay, so you’re intrigued. You see the potential for change and a shot at higher returns. But what does an activist investor actually do to create all this disruption? Here’s a breakdown of some common strategies:
1. Engage with Management
The most straightforward way an activist gets involved is by engaging with the company’s management. They’ll often send letters, make phone calls, or even meet in person to propose changes. If management is receptive, the activist may be able to help guide the company toward improving its operations or making strategic shifts. If management resists, the activist investor might need to crank up the volume.
2. Push for Strategic Changes
Sometimes, the company might be doing just fine but could benefit from a strategic shift. An activist might push for changes in operations, such as selling off non-core businesses, making acquisitions, or cutting costs. For example, a company that owns multiple unprofitable subsidiaries could see the activist investor press for divestitures to focus on its most profitable areas.
3. Change the Board of Directors
One of the more dramatic moves an activist investor can make is to demand a change in leadership. This could mean replacing the CEO, shaking up the board of directors, or even calling for a complete restructuring. Activists are often willing to battle management to get their preferred candidates on the board, believing that the right team will steer the company toward higher returns.
4. Takeover or Sale of the Company
In extreme cases, an activist investor might see a company as undervalued and push for a sale or merger. If a company is sitting on a pile of cash, underperforming, or mismanaged, an activist may campaign for a sale to a competitor or a private equity firm, hoping to lock in a quick profit.
Risks of Activist Investing (It’s Not All Fun and Games)
Of course, it’s not all sunshine and rainbows when it comes to activist investing. If it were, everyone would be doing it. Here’s what you need to keep in mind if you’re thinking of jumping into the world of corporate activism:
1. Hostile Takeovers and Backlash
Activist investors often face resistance from the companies they target. Board members and executives don’t always appreciate being told how to run their business. In fact, many companies fight back, accusing activists of short-term thinking or damaging their brand. This resistance can result in a protracted battle, which can be costly and time-consuming for all involved.
2. Uncertain Outcomes
Even though activists might see themselves as the white knights coming to the rescue, their strategies don’t always work. Companies don’t always follow through on the changes activists propose, and even if they do, the stock price doesn’t always skyrocket. The road to shareholder value can be a bumpy one, with lots of ups and downs. Sometimes the stock price dips even further as the battle continues.
3. Reputation Risk
Activist investors can gain a reputation for being corporate bullies. If you take an activist stance, you’re playing with fire—especially if the company you’re targeting has a lot of loyal customers, employees, or investors who see things differently. If the activist investor oversteps, they can quickly tarnish their own reputation.
How Should Investors Approach Activist Investing?
If you’re considering getting involved in activist investing—or investing in funds that focus on this strategy—here are a few things to keep in mind:
1. Do Your Homework
Activist investing isn’t for the faint of heart. You’ve got to research the company, understand its management team, and get a solid grip on why the company isn’t performing as expected. Understand both the potential for change and the risks involved in pushing for those changes. Make sure the activist’s plan aligns with your own investment goals.
2. Look for Track Records of Success
Some activists have a proven track record of turning around companies or generating value for shareholders. Look for those who have been successful in the past, rather than just jumping in because they’re loud and opinionated (though that certainly helps).
3. Balance Risk and Reward
As with any investment strategy, you’ll want to balance the potential rewards with the risks. Activist investing can lead to higher returns, but it can also result in long-term underperformance if things don’t go as planned. Make sure you’re comfortable with the ups and downs.
The Bottom Line: Is Activist Investing for You?
As an investor, you’ve got to decide whether you’re the type who wants to be part of the action, push for change, and get in on the ground floor of a potential turnaround—or if you prefer a more passive, hands-off approach. Activist investing offers potential for high returns, but it’s a risky game that requires plenty of research, time, and possibly even some fierce negotiations.
At the end of the day, an activist investor is like a corporate whistleblower who wants to change the world, but with a vested interest in seeing some solid profits at the end of the day. If you’ve got the stomach for it and the patience to weather the storms, activist investing could be your next big adventure. Just don’t expect it to be all smooth sailing—after all, even the most passionate reformers hit a few speed bumps along the way.