Activist Investors - Introduction
Updated: Feb 19, 2021
As the companies grow in size their aspirations to attain dominating market shares tend head northwards and why not? After all a company is a culmination of efforts of many people working towards focused product or service offerings over a period of multiple years.
The companies as we know grow through an organic or an inorganic route, through its own funds or external financing through debt and equity market and as they sprint on this path, they end up taking the correct decisions and at times dubious and questionable ones. Sometimes these questionable corporate decisions are done erroneously but at times due to vested interests of some of the key stakeholders in the company. These bad decisions impact the owners directly in case of privately owned companies as the promoters themselves have a lot of their own money in the company, but in case of publicly listed ones, it is the shareholders' money that these vested interests are playing around with for their own gains.
Activist investors are a set of investors which constantly track public companies which have under-performed consistently over a period of time. Under-performance can be in terms of bad operating results, extended or a "sticky" management tenure where a CEO or Chairman gifts himself a board seat for the next 10 decades (pun intended), a bad merger etc. These activists question the management of such companies for the reason for bad performance on a public domain.
Well known names in this area include Elliot Management, Icahn Investor, Cevian capital etc. They launch “campaigns” against a company which in their view isn’t functioning up to its potential. I shall be discussing the typical modus operandi and some famous cases where the company has been forced to accept an activists demands and such an event has been highly accepted by the shareholders of the company (witnessing a surge in the equity price).