Have you ever liked a company but wanted to boot its CEO?
Activist investing is the practice of buying a large amount of a company's stock with the goal of gaining influence and pressuring the leadership team to make a specific set of changes to the enterprise. Activist investors push for changes that would increase the company's share price or benefit the activist investor directly. Companies that are poorly managed, have inefficient operations, or face some other solvable problem are common targets of activist investors, who often specialize in only certain types of enterprises.
How does activist investing work?
Typically, activist investors operate hedge funds or private equity firms, or they are high-net-worth individuals. Activist investors typically also have professional analytical skills and substantial business expertise. They use these qualifications to identify companies with untapped value and develop and deliver to the companies themselves specific strategy recommendations to capture that value.
An activist investor's recommendations can range from strategic initiatives, such as restructuring the company, to changing the composition of the board of directors. An activist investor might demand a personal seat on a company's board or insist on the appointment of certain independent directors. The activist investor may even target specific directors for removal.
Activist investors' campaigns, while potentially very profitable, do not generally have high success rates. According to a Harvard Law School report, just 17% of activist investor campaigns in 2019 were successful. The majority of campaigns -- 56% -- either hadn't gained traction or were still ongoing when the report was published in mid-2020. That being said, this is how an activist investor usually operates:
1. Buy a large amount of shares of the target company.
Activist investors who acquire more than 5% of a company's outstanding shares are required to file Schedule 13D with the U.S. Securities and Exchange Commission (SEC). That filing is a clue for many investors that the company is of interest to an activist investor.
2. Publicly propose a specific set of changes for the company.
While activist investors directly engage with boards of directors to argue for their proposed changes, they also make their demands public. Many activist investors use the 13D filing to announce their demands, and they also use social media, press releases, media appearances, interviews, and published reports to gain broad shareholder support.
3. Negotiate with the board of directors.
Publicity and shareholder support strengthens the negotiating position of an activist investor, although a company may still strenuously resist the activist investor's demands.
4. Pursue additional measures as necessary to effect the desired changes.
Stalled negotiations between the activist investor and the company typically escalate into a proxy fight for control of the company's board of directors. An activist investor who successfully collaborates with other shareholders to win control of the board then has enough influence to ensure that his or her desired changes are made.
5. Sell all shares once the specific objectives are achieved.
While activist investors who also hold board seats may have restrictions on selling their stock holdings, they generally sell their shares once the company has implemented their recommendations.
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