ACTIVIST INVESTORS- NEEDED OR GREEDED??

Alot of people die fighting tyranny, what we can do is vote against them. But there are few, who can take action against them and stand for us, and they are known as ACTIVIST INVESTORS. Before proceeding I would like to brief about who are referred to as activist investors.

Activist investor is an individual or a group that holds large number of shares in a public company and tries to obtain seat on the board and bring changes within the corporation.They use their equity stake to put pressure on the management which is ultimately in the best interest of the shareholders. These changes range from environmental concerns to governance or profit distribution to the internal culture and business model of a company. They also employ a variety of offensive tactics to force changes. For example, they might make strategic use of media channels in order to publicize their demands and prompt greater pressure from other shareholders. They may also threaten companies with lawsuits if they are not allowed to have their say.

In a nutshell, activist investors try to seek out flawed businesses to invest in, with the aim of improving them one way or another in the hope the company becomes more valuable as a result, allowing the activist to sell-up and book a profit.

In addition to activist investors, there is another group that look to short companies in the belief they are grossly overvalued. These short-selling activists find companies which they believe are worth considerably less than what the market has priced them at or (in many cases) nothing at all.

So what’s the major difference??

While activist investors look for companies they believe they can squeeze more value by making changes, short-selling activists look for those that they believe will see a large-drop in value because they think the companies are fraudulent in some way.

activist investor

Now I would like to introduce some of the famous activist shareholders of the financial industry are Carl Icahn, Bill Ackman, David Inhorn,Nelson Peltz, Dan Loeb;and many more. Also little briefing about some of the most renowned activist investors is discussed.

CARL ICAHN– He is the founder of Icahn Enterprises, a diversified holding company that owns many of the investments that Icahn makes. In the past, Icahn has taken positions in companies such as Yahoo Inc., Netflix Inc., and the Clorox Company.

BILL ACKMAN– He is the founder and chief executive officer (CEO) of the Pershing Capital hedge fund. Pershing has taken positions in Target Corporation and Wendy’s Company. Ackman’s more well-known moves include a short position in Herbalife Ltd. and his big bet on troubled drug company Valeant Pharmaceuticals International Inc.

Herbalife Battle between Bill Ackman and Carl Icahn

There was a outrageous battle for 5 years between the two famous investors related to Herbalife deal.  Mr. Ackman first alleged Herbalife, which sells through a network of distributors, was an illegal pyramid scheme and should be shut down by the government. He took a short position in this company of $1 bn betting against the company predicting it would fall to zero. He disclosed this while giving the presentation in front of investors which was being opposed by Icahn by investing huge amount in that company. And from then the battle began. They both started accusing each other on television while giving interviews. But even after all this the stock plunges more than 65% over 12 months. At the same time Carl Icahn was very bullish on this company and he ended up buying over 26% of Herbalife.  Carl Icahn finally wins over this battle as Bill Ackman closes out his short selling position bearing huge losses.

Should all companies beware of activist investors?

Your company needs to be prepared to be an activists’ target. Their rise is associated with a stronger focus on shareholder value. What’s the best way to prevent their attack? By maintaining strong company performance. Make sure that you maximize value across all of your businesses and, if you are a conglomerate, then there are solid synergies between your different enterprises.

So it is best summed up by Warren Buffet who said: “If every company were well managed, there would be no reason for activists. The truth is, at some companies, the managers forget who they’re working for.”

Potential Good Activist: Norwegian Sovereign Wealth Fund

Norway’s sovereign wealth fund, which has $870 billion in assets and has long been passive, recently announced that it plans to start putting pressure on companies that have excessive executive compensation.

Having such a massive fund take a stand against poor compensation practices could have a big impact. Norway’s fund will not only look at the size of executive compensation, but also the structure. We would like to see it push for executive compensation plans that reward Return on invested capital and long-term value creation.

Bad Activist Example: Carl Icahn

While we like the activists above, they tend to be in the minority. Much more common are activists such as Icahn that make a lot of noise in the press, push for either buybacks or an acquisition, and then get out right away.

Take Icahn’s investment in Apple. He accquired stake in 2013, saying that the company was a great long-term value and that it would “dominate” new product categories such as TV’s and automobiles. However, instead of pushing for more investment in these new categories, he did the opposite, by driving for more stock buybacks and dividends. Now, after the first sign of bad news from China and a quarterly earnings decline, Icahn is out of the stock entirely. He made himself some good money, but he did little to improve Apple’s business. We think his goal was simply to create a short-term bump in the stock.

ACTIVIST INVESTORS- BOON OR A CURSE

According to me, they can be both, Boon and Curse. Activist investors usually buy large quantities of stock in a short time. And, it has been seen that others also try to copy the moves by activist investors to benefit. Butsuch massive buying in the stock pushes the demand and also the price of the stock up. However, when the investor decides to exit, it may put downward pressure on the share price.

Often it has been seen that such investors bring fresh ideas with them to enhance shareholder value. It is not mandatory for management to listen to these ideas, but it is always good to have more options. They convince other shareholders and the media that they are working in the best interest of the shareholders. However, it may be that they are only concerned about themselves.

Having an activist engaged in a stock you own may be a good thing or a bad thing depending upon the situation. Perhaps the most important things to understand is that these activist investors are concerned about the investor community as a whole and is striving towards increasing value of company.

With the rise of shareholder activism in India, companies are required to maintain good corporate governance standards and ensure a high level of shareholder engagement. Greater participation of shareholders in companies and implementation of best practices adopted by companies will assist in maintaining shareholder credibility.

(Source – Forbes articles, CNBC, CFA institute material)

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