Activist investor aims (or activist alternative investors) to identify a publicly traded company that is trading below its intrinsic value and buy a stake in the company. The company could be traded at a discount for a variety of reasons. However, activist investors enter the deal with a vision to improve the financials of the company by changing the capital structure, changing the management, declaring dividends or buying back stocks among other tactics.
Previously activist investing had a negative image in the corporate industry. Active investors such as Carl Icahn were labeled as corporate raiders and corporates shunned the idea of having such an investor as a shareholder. However, the stigma has changed recently to a more or less positive image. Mary Jo white, Chair of the Securities and Exchange Commission, noted that companies have been increasing their engagement with their shareholders including activist ones, a positive trend.
The targeted companies most likely would have a) good operating performance but undervalued, and b) the activist perceives that there are hidden capital with the potential to increase the shareholder’s value through some changes.
A report by Citi on activism investing found that the targeted companies trading at low multiples than their industry peers, more than 33% of companies targeted by activist investors experienced stock price appreciation.
The process usually is followed by a proxy contest where activist investors try to bring the majority of the shareholders to their side and vote on the competing proposals.
A recent whitepaper published by Alternative Investment Management Association on alternative activist investments to investigate the impact of such activism found the following interesting observations including:
Activist Insight defines “follower return” as provides investors with an idea of the potential gains if they jump in after an activist. The following table shows the annualised follower return for the top activist investor for 2014.
Source: SRZ Activist Investing Annual Review 2014
Activist hedge funds experienced 269% growth, almost $120 billion, from 2009 to 2014. 237 publicly traded companies targeted by investors worldwide in 2013. US companies accounted for 71% of all companies publicly targeted by activists in 2013. European companies rose from 14% of the total to 19%. Canada was accounted for around 6%.
In Australia, Goldman Sachs’ local head of investment banking, Christian Johnson, recently wrote of shareholder activism, “It’s in its early stages and we don’t know how it will evolve, but we definitely anticipate it will impact Australia; the only question is what form it takes... As such, we are recommending that our clients prepare to respond to potential activism.”
On a final note, Warren Buffet avoided this kind of investing for most of his career as he likes to invest differently and I quote "Charlie and I have found that making silk purses out of silk is the best that we can do"