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Activist Investors: All You Need to Know

Activist Investors: All You Need to Know

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3 years ago

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Activist Investors

In recent years, large companies, such as Nestle, ThyssenKrupp and Barclays, have been under attack from activist investors. But what is an activist investor? What are their tactics? And why are they relevant to other traders and investors? In this post, we will answer these questions and a lot more!

What Is an Activist Investor?

Activist investors look to acquire a significant stake in a particular company, before using their position as a shareholder to agitate for change in that company.

The acquired stake does not have to be large, but just enough to ensure they are heard by the company and the other shareholders.

These types of investors can be aggressive and, as we will see below, many of their tactics attract a lot of attention from the press. Due to this, and the fact that people love to observe a good public fight, many activist investors have notorious reputations. CEOs of large companies are reputed to quiver at the sight of some of their names on the company share register and many of them prepare ahead in anticipation of such a situation.

Some people think that the dislocation caused by the Covid-19 crisis will lead to a surge in the number of public companies targeted by these activists.

Changes Requested By the Activists

Activist investors typically demand changes which they think will increase the value of the company or benefit shareholders in general. Often they are accused by the target company, and less frequently by shareholders, of being too focused on short-term gains and not enough on the long term health of the company.

As their stake is typically less than 10% of a company's shares, activist investors rely on support from other shareholders in order to be effective.

If they are thwarted on their initial demands, activist shareholders may turn on the existing managers of board members, sometimes even calling for their removal.

Frequent demands by activist investors include:

  • The return of money to shareholders through share repurchases (which typically make share prices increase) or special dividends
  • Increase debt, in order to leverage the company
  • Sale of a subsidiary or break up of the company
  • Merger or sale of the company
  • Reduction in Research and Development expenditure, to free up cash in the short-term
  • Removal of management or a change in their compensation
  • Removal of board members or a change in their compensation
  • A seat on the company board
  • A change of strategy for the company

What Tactics Are Used By Activist Shareholders?

The tactics employed by activist investors to get their way often start off being measured and constructive. However, if they are ignored or publicly contradicted, they tend to gradually increase their aggression and criticism towards the target company.

Here are some of their commonly used tactics, in ascending order of aggression:

  • Public disclosure of shareholding
  • Publication of "white paper" suggesting changes
  • Writing open letters to management and/or the company's board
  • Criticising a company's performance and making unfavourable comparisons with competitors
  • Calling on other shareholders to join them in expressing dissatisfaction
  • Criticising a company's management, board or strategy in press and television interviews
  • Publicly calling to be on the board
  • Publicly calling for shareholder votes
  • Trying to change individual managers or members of the board
  • Working with other activists to form a "wolf pack"
  • Partnering with potential acquirers
  • Hiring private investigators to research the management, board and key employees
  • Litigation

Even when the target company pretends to ignore activist shareholders or refutes their suggestions in public, they often meet in private to try and find common ground.

Is Activist Investment Good or Bad?

It's easy to dislike activist investors – they are loud, confrontational and often the subject of negative PR generated by their targets. Add to this the fact that many people dislike seeing rich people get richer and the bottom line is that activist investors are seen by many as the "bad boys" of the investment world.

Nevertheless, their proposals normally have some merit and increase the value of companies when implemented.

In addition, many commentators and academics believe that corporate management would tend to be more self-serving (paying themselves higher salaries and misusing company property like a corporate jet) more often were it not for the watchful eye of activist shareholders.

If polled, other shareholders would probably conclude that activist shareholders are a positive force for the markets but a little too focused on the short-term.

How Does Activist Investment Affect You?

Whether you invest for the long-term or trade short-term positions, you should keep an eye out for activist investors.

Often, as soon as an activist investor announces a holding in a particular company, the share price will see an increase. The bigger the reputation of the activist, the bigger the jump in the share price will tend to be.

Battles between activists and their targets usually last months and take place in public. The press tends to love these battles and provides plenty of coverage. Every article and utterance from both sides all tend to generate volatility in the stock, which can benefit traders.

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An Activist Shareholder Takes On Apple

Aged 80 at the time, Carl Icahn started to amass a shareholding in Apple in mid-2013. By the end of January 2014, he announced that he had bought 0.9% of the company at a total cost of $3.6bn.

Icahn is seen as one of the most ruthless corporate raiders, with a fearsome reputation going back to the 1980s. At the time of Icahn's acquisition, Apple was already the largest listed company in the world and regarded by many as the most successful company on the planet – so this was set to be an interesting confrontation.

On Twitter, television interviews and in at least eight open letters to other shareholders, Icahn was both complementary and aggressive towards Apple. He praised the company and its products and stated that he thought the stock was undervalued. But he also criticised Apple for holding too much cash on its balance sheet and asked for that cash to be returned to shareholders. At the time, Apple had around $150bn in cash on its balance sheet – so Icahn had a fair point.

Icahn also wrote several open letters to Apple CEO Tim Cook asking Apple to buy back $150bn of Apple shares. Buybacks like this typically increase the price of the remaining shares, thus benefiting shareholders.

Apple did not seem to pay too much attention to Icahn in public. However, Icahn and Tim Cook are rumoured to have spoken on the phone several times and to have met at least once and, eventually, the company did increase their buyback program.

By the time Icahn sold his stake in March 2016, Apple had bought, not the $150bn of shares that Icahn demanded, but "only" $116bn. The subsequent rise in share price meant that Icahn exited his position with a profit of around $2bn.

Famous Activist Investors

Carl Icahn

Icahn was a pioneer among activist investors and Apple is only one of dozens of companies to get his unwelcome attention.

As recently as March 2020, Icahn (now aged 84) clashed with Occidental Petroleum and was publicly calling for their CEO and Board of Directors to be removed.

This situation started last year when Occidental announced the takeover of Anandarko Petroleum and things escalated from there. In March 2020, Occidental announced a cut to dividends, blaming the global fall in oil prices. Icahn called for the CEO's removal.

In a good example of activist language, Icahn stated in a public filing that Occidental's "CEO and Board unanimously voted to roll the dice and bet the Company by risking stockholder money on a disastrous acquisition…They have egregiously failed [Occidental] stockholders and should be removed".

News of that filing, which also disclosed an increase in Icahn's holding from 2.5% to 9.9% helped Occidental's share price to increase by 24%.

Bill Ackman, Pershing Square Capital Management

In 2014, Ackman bought shares in pharmaceutical company Allergan and worked with fellow activist Valeant to push for a merger deal. Pershing Square and Valeant made about $2.6 billion in profits when Allergan sold itself to Actavis.

Christer Gardell, Cevian Capital

With about $15bn of assets under management, Cevian is Europe's largest activist investor and has the honour of being privately backed by Carl Icahn.

In June 2020, amidst global coronavirus lockdowns, Cevian Capital announced that it had taken a 5.4% stake in educational publisher Pearson. Shares in Pearson subsequently jumped more than 13 per cent to £5.80 after news of the Cevian stake emerged.

Daniel Loeb, Third Point

With about $15bn of assets under management, Third Point's is one of the world's largest and most successful activist funds.

Past targets include Yahoo, Sony and Sotheby's. The fund currently holds a position in UK Insurance giant Prudential and is putting pressure on the group to break itself up.

Paul Singer, Elliot Management

Elliot was the busiest activist investor fund in 2019, with 14 campaigns.

The firm, started by Paul Singer with $112m gathered from friends and family, now has a portfolio worth $8bn.

Past successes include Akzo-Nobel and BHP Billiton.

Conclusion

Now that you know more about activist investors, their tactics and the effects they can have on their targets; you may wish to keep an eye out for the more famous ones in the press.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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Fighting the Surveillance State Begins with the Individual

It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in…

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23 hours ago

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October 23, 2023

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It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in place, collecting data on the entire populace. This has been proven beyond a shadow of a doubt by people like Edward Snowden, a National Security Agency (NSA) whistleblower who exposed that the NSA was conducting mass surveillance on US citizens and the world as a whole. The NSA used applications like those from Prism Systems to piggyback on corporations and the data collection their users had agreed to in the terms of service. Google would scan all emails sent to a Gmail address to use for personalized advertising. The government then went to these companies and demanded the data, and this is what makes the surveillance state so interesting. Neo-Marxists like Shoshana Zuboff have dubbed this “surveillance capitalism.” In China, the mass surveillance is conducted at a loss. Setting up closed-circuit television cameras and hiring government workers to be a mandatory editorial staff for blogs and social media can get quite expensive. But if you parasitically leech off a profitable business practice it means that the surveillance state will turn a profit, which is a great asset and an even greater weakness for the system. You see, when that is what your surveillance state is predicated on you’ve effectively given your subjects an opt-out button. They stop using services that spy on them. There is software and online services that are called “open source,” which refers to software whose code is publicly available and can be viewed by anyone so that you can see exactly what that software does. The opposite of this, and what you’re likely already familiar with, is proprietary software. Open-source software generally markets itself as privacy respecting and doesn’t participate in data collection. Services like that can really undo the tricky situation we’ve found ourselves in. It’s a simple fact of life that when the government is given a power—whether that be to regulate, surveil, tax, or plunder—it is nigh impossible to wrestle it away from the state outside somehow disposing of the state entirely. This is why the issue of undoing mass surveillance is of the utmost importance. If the government has the power to spy on its populace, it will. There are people, like the creators of The Social Dilemma, who think that the solution to these privacy invasions isn’t less government but more government, arguing that data collection should be taxed to dissuade the practice or that regulation needs to be put into place to actively prevent abuses. This is silly to anyone who understands the effect regulations have and how the internet really works. You see, data collection is necessary. You can’t have email without some elements of data collection because it’s simply how the protocol functions. The issue is how that data is stored and used. A tax on data collection itself will simply become another cost of doing business. A large company like Google can afford to pay a tax. But a company like Proton Mail, a smaller, more privacy-respecting business, likely couldn’t. Proton Mail’s business model is based on paid subscriptions. If there were additional taxes imposed on them, it’s possible that they would not be able to afford the cost and would be forced out of the market. To reiterate, if one really cares about the destruction of the surveillance state, the first step is to personally make changes to how you interact with online services and to whom you choose to give your data.

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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next

A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.

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23 hours ago

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October 23, 2023

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Updated at 11:52 am EDT U.S. stocks turned higher Monday, heading into the busiest earnings week of the year on Wall Street, amid a pullback in Treasury bond yields that followed the first breach of 5% for 10-year notes since 2007. Investors, however, continue to track developments in Israel's war with Hamas, which launched its deadly attack from Gaza three weeks ago, as leaders around the region, and the wider world, work to contain the fighting and broker at least a form of cease-fire. Humanitarian aid is also making its way into Gaza, through the territory's border with Egypt, as officials continue to work for the release of more than 200 Israelis taken hostage by Hamas during the October 7 attack. Those diplomatic efforts eased some of the market's concern in overnight trading, but the lingering risk that regional adversaries such as Iran, or even Saudi Arabia, could be drawn into the conflict continues to blunt risk appetite. Still, the U.S. dollar index, which tracks the greenback against a basket of six global currencies and acts as the safe-haven benchmark in times of market turmoil, fell 0.37% in early New York trading 105.773, suggesting some modest moves into riskier assets. The Japanese yen, however, eased past the 150 mark in overnight dealing, a level that has some traders awaiting intervention from the Bank of Japan and which may have triggered small amounts of dollar sales and yen purchases. In the bond market, benchmark 10-year note yields breached the 5% mark in overnight trading, after briefly surpassing that level late last week for the first time since 2007, but were last seen trading at 4.867% ahead of $141 billion in 2-year, 5-year and 7-year note auctions later this week. Global oil prices were also lower, following two consecutive weekly gains that has take Brent crude, the global pricing benchmark, firmly past $90 a barrel amid supply disruption concerns tied to the middle east conflict. Brent contracts for December delivery were last seen $1.06 lower on the session at $91.07 per barrel while WTI futures contract for the same month fell $1.36 to $86.72 per barrel. Market volatility gauges were also active, with the CBOE Group's VIX index hitting a fresh seven-month high of $23.08 before easing to $20.18 later in the session. That level suggests traders are expecting ranges on the S&P 500 of around 1.26%, or 53 points, over the next month. A busy earnings week also indicates the likelihood of elevated trading volatility, with 158 S&P 500 companies reporting third quarter earnings over the next five days, including mega cap tech names such as Google parent Alphabet  (GOOGL) - Get Free Report, Microsoft  (MSFT) - Get Free Report, retail and cloud computing giant Amazon  (AMZN) - Get Free Report and Facebook owner Meta Platforms  (META) - Get Free Report. "It’s shaping up to be a big week for the market and it comes as the S&P 500 is testing a key level—the four-month low it set earlier this month," said Chris Larkin, managing director for trading and investing at E*TRADE from Morgan Stanley. "How the market responds to that test may hinge on sentiment, which often plays a larger-than-average role around this time of year," he added. "And right now, concerns about rising interest rates and geopolitical turmoil have the potential to exacerbate the market’s swings." Heading into the middle of the trading day on Wall Street, the S&P 500, which is down 8% from its early July peak, the highest of the year, was up 10 points, or 0.25%. The Dow Jones Industrial Average, which slumped into negative territory for the year last week, was marked 10 points lower while the Nasdaq, which fell 4.31% last week, was up 66 points, or 0.51%. In overseas markets, Europe's Stoxx 600 was marked 0.11% lower by the close of Frankfurt trading, with markets largely tracking U.S. stocks as well as the broader conflict in Israel. In Asia, a  slump in China stocks took the benchmark CSI 300 to a fresh 2019 low and pulled the region-wide MSCI ex-Japan 0.72% lower into the close of trading.
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iPhone Maker Foxconn Investigated By Chinese Authorities

Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple…

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1 day ago

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October 23, 2023

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Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple media reports. Foxconn’s business has been searched by Chinese authorities and China’s main tax authority has conducted inspections of Foxconn’s manufacturing operations in the Chinese provinces of Guangdong and Jiangsu. At the same time, China’s natural-resources department has begun onsite investigations into Foxconn’s land use in Henan and Hubei provinces within China. Foxconn has manufacturing facilities focused on Apple products in three of the Chinese provinces where authorities are carrying out searches. While headquartered in Taiwan, Foxconn has a huge manufacturing presence in China and is a large employer in the nation of 1.4 billion people. The investigations suggest that China is ramping up pressure on the company as Foxconn considers major investments in India, and as presidential elections approach in Taiwan. Foxconn founder Terry Gou said in August of this year that he intends to run for the Taiwanese presidency. He has resigned from the company’s board of directors but continues to hold a 12.5% stake in the company. Gou is currently in fourth place in the polls ahead of the election that is scheduled to be held in January 2024. The potential impact on Apple and its iPhone manufacturing comes amid rising political tensions between politicians in Washington, D.C. and Beijing. Apple’s stock has risen 16% over the last 12 months and currently trades at $172.88 U.S. per share.  

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