Activist investors can bring a lot to the table in terms of financial and investing expertise, as well as demanding a fair deal on behalf of all shareholders.
In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and Evan Niu, CFA, discuss the benefits of having a major activist investor hoping to enact change at a company in your portfolio.
A full transcript follows the video.
This podcast was recorded on Oct. 21, 2016.
Dylan Lewis: Activist investors get kind of a bad rep. Do you want to maybe play devil's advocate and provide some pros here?
Evan Niu: What we touched on earlier, I think the big piece is: Activist investors spend all day thinking about investing, and the deep financing of it, whereas management spends all day thinking about how to run the business operationally, and actually growing the business in whatever the company does. To the extent that the investor knows more about some of the financial aspects, it can really bring a lot to the table in terms of, if there's something that needs to be improved, if you have too much debt and they're pushing for you to pay down your debt, all these different things where a company CFO generally handles those kind of decisions. Depending on the CFO and how experienced they are and how cognizant they are -- because, companies have a wide range of how much they value their investors. A lot of companies really value their investors, they really value their input, they really want to deliver return. Other companies don't care as much because there's so many stakeholders in any company...
Lewis: Yeah, you have investors, you have consumers, you have employees.
Niu: And management, and the board. You have all these people. And, of course, every company is different in terms of how they view and value each of these stakeholders. And, obviously, there are companies that are very bad about respecting their shareholders. They just kind of do what they want, or they enrich themselves. There's plenty of cases of companies that don't really treat investors with a lot of respect, generally speaking. So if you get an activist investor that gets in there, it kind of forces them to respect the shareholder base, in some ways.
Lewis: Yeah. To bring it back to the idea of, how should shareholders feel if they see this going on in a company that they're invested in? I think the hypothetical where you're happy about an activist investor hopping in is, maybe you love the core business and the market that it reaches, and some of the growth potential there, but you see management really mishandling things on the financial side.
Niu: Exactly. And it's hard to know when that's happening, but if an activist comes in there -- even though it can be distracting for management to have to deal with spending a lot of time catering to whatever this person wants and needs -- most of the time, I think they do want to be helpful. Particularly from the perspective of a public investor, most of the time I think it's probably OK. They're trying to help shareholders, in general.
Lewis: Yeah, it might just be that their horizon is a little bit different.