What Is Activist Investing, Exactly?

Mahatma Gandhi advised us to become the change we want to see in the world. In the business world, some people feel that the wheel of change lasts too long and needs to be driven. To them procrastination equates to denial, and they assume that lubricating the wheels will facilitate the outcome they want. If you don’t know who these people are, they are called active investors. Let’s see how positive investing is and its impact in a business.

Definition Active-Investors
IMD defines active investors as shareholders of publicly traded companies who attempt to create change by lobbying management, engaging them and leaving them out through the usual consultation process. Therefore, to become an active investor, one must first ensure that he has a seat on the board of directors. Active investors want to influence the direction of the company in different ways, for example by acquiring another company or by agreeing to a merger. They can be very aggressive in their approach; hence, they are also known as exploiters, corporate bandits or green postmen. dollars. As a result, individual activist investors are the wealthy and influential people who determine the strategic direction of a company.

Types of Activist Investors

Individual Activist Investors

They ensure that they have enough voting power to influence the opinion of the board of directors by purchasing a substantial portion of the shares. Bill Ackman is a prime example of an individual activist investor leading to an important board decision of a company. According to Business Insider, Bob McDonald has disappointed investors with earnings forecasts that have trended downward. Ackman enters the field with $1.8 billion in Proctor and Gamble. He said McDonald’s only had two quarters to improve its business. Ackman continued to pressure the board to make the right decision, saying McDonald’s was wasting at least 25% of its time serving other boards. Finally, the activist investor got his wish when McDonald’s stepped down as CEO.

Hedge Funds
They behaved like hungry lions stalking their prey; they hunt in packs and with their vast fortunes, targeting underperforming companies using aggressive tactics. About 40% of the time they want to change the corporate governance structure of the company and at least 45% of the time they are interested in pursuing an event related to a transaction. Elliot Management is the # 1 active hedge fund investor due to its record targeting of 64 companies in 2017. As Mobile World Live explains, it has built a reputation for buying large holdings in large companies in various fields. It’s a powerful impetus for change, be it in the form of a management overhaul, restructuring, or a change of strategy. Some of its key moves are investing $1 billion in Twitter, $2.5 billion in SoftBank, and $3.2 billion in AT&T; no wonder it was speculated as being the most feared activist investor in the technology industry.

Private Equity

These investors use their buyout fund strategy to control publicly traded companies and manage them privately to make desired corporate governance changes or restructurings. Once adopted, they can choose to sell the business to an interested investor or re-trade it as a publicly-traded company. The buyout fund comes from a group of investors who are not afraid to invest large sums of capital for the long term. Besides debt buyouts, private equity firms also invest as venture capitalists or provide investment funds to companies that are on the verge of bankruptcy. Evergreen Coast, a subsidiary of Elliot Management, is again a prime example of an activist private equity investor.

What are the advantages of activist investors?

Push for Change May Benefit Target Company

Joe Cyriac explained in an interview with the McKinsey podcast that Elliot Management’s decision to target Cognizant was for the best. could have happened in Cognizant. Elliot Management, as always, has a list of requirements for its target company, including the return of capital to shareholders and better performance. After reviewing the needs, Cognizant agreed with them, and the board also realized that they should return capital to shareholders after 15 years of successful operation. As a result, it launches a share buyback and dividend program Usually, activists buy stocks in large quantities, which drives up the stock price and the company makes a quick profit.

Access to capital
Private equity firms give bankrupt companies hope by providing the capital they need to stay in business.

Does Active Investing Have a Downside?

Unfortunately, the interests of investors and activist shareholders are sometimes not identical. If some shareholders are interested in the long-term return of their investment, activists can only get involved in the short term. As a result, they will only influence decisions that will have a short-term impact, leaving long-term shareholders to deal with the mess created. In addition, the demand for the stock and the increase in the share price can only be beneficial in the short term; if it lasts, the business will lose value. Since people have the misconception that activist investors are smarter than they are, they can relax and leave their business to activists. Sometimes activists are wealthy people who only care about pulling the blanket that covers the best, not bothering to leave others out in the cold. For this reason, activists can lead to the downfall of the target company.

Original Article by Allen Lee.

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