Activist Investing

Activist investors typically buy meaningful, but minority, stock positions in publicly traded companies, after having identified internal problems with a company’s governance policies, finances, capital allocations, leadership and management, plans for growth, operating performance or other critical aspects of its business plans and strategy. Having done so, the activist will typically seek to work with the company’s management and board in order to stimulate the positive reforms they have identified and championed in order to maximize both short and long-term value for all company shareholders, and as a result the U.S. economy in general. In cases where the activist and management are unable to reach a mutually satisfactory conclusion, the activist may ask the company’s shareowners to decide the dispute by launching a proxy contest to elect a revised board to make the decision.

They make their case. Activist investors bring their ideas to the attention of senior management and, where appropriate the board, and present their case for change. 

When a company’s leadership is unprepared to work with an activist investor or is unwilling to alter its plans, and thus reject the opportunity to create higher returns for shareholders, the activist investor, who is almost always a minority shareholder, will often seek to persuade the company’s other shareholders to join them as a catalyst for positive change.

Activism contributes to the growth of the US and global economies by fostering more effective business practices and value creating business strategies, thus not only benefitting the shareowners of the affected companies, but also the economy in the form of greater productivity and competitiveness.

Institutional investors, as shareowners of affected companies, benefit most immediately by value accretion in their investments. As a result, institutional investors, including mutual funds and public and private pension funds, are increasingly supportive of activist investors.

Activists create value in a multitude of ways including improvements to capital allocation, management and leadership, business strategy and operations. These benefits accrue to all shareholders, not just activist investors. Sometimes improvements in value are realized in a relatively short period of time, but more often than not those improvements in value persist over a period of many years. When the immediate value realization takes place in months rather than years, the evidence does not suggest that long-term value has been sacrificed. Meanwhile, the excess value created by the activists is overwhelmingly re-invested and thus put back to work for the long term benefit of Americans whose pensions are tied directly or indirectly to the performance of the stock market and the U.S. economy. 

Activists and activist programs come in all shapes and sizes. While in some cases activists propose value creation programs of relatively short duration, they often champion longer-term programs that may take years to implement. Likewise, the available evidence shows that an activist’s average holding period for an investment is much longer than popularly supposed, and quite often is measured in years, not months. Activists are frequently called short-term investors as part of a campaign to disparage their attempts to create value for all shareholders, without regard to the specifics of the situation.

Stock buy-backs are not inherently good or bad. If the buy-backs utilize excess company funds (that is, money which the company cannot put to work productively), they are good because they are an efficient way to repatriate excess and unneeded capital to the company’s shareowners. On the other hand, if they drain the company of money that would otherwise be put to better and productive use to grow the company’s profits, then the question is harder and its answer depends on which program—the share buy-back or the investment—will create the greatest amount of net present value. At the end of the day, the question of whether activists recommend too many share buy-backs cannot be answered by a generalization. Each situation must be analyzed on its own in terms of which solution creates more value on a present value basis.

Activist investors are more relevant and sophisticated than ever before. Their track record of creating value at scores of public companies over the past decade is clear and convincing. As a result, activist investors’ aggregate investable funds have grown dramatically over the past several years, making them a larger presence with greater capacity to effect constructive change in our public company arena.

Because of the activists’ established track record of value creation and corporate leadership, other shareholders are more willing to listen and trust the recommendations of activist investors than they were in the past. This has contributed to the increased effectiveness of activist investors and to their solid record of accomplishment.

When an activist gets engaged at a company, it doesn’t just benefit all of the company’s other shareholders – it benefits the entire marketplace. Activist investors generally improve the value and competitiveness of a company, which redounds to the vigor and health of America’s economy. The more competitive companies are, the better off the economy as a whole. 

A study conducted by Bloomberg in early 2014 found that stocks of companies targeted by activist investors from 2009 to 2013 gained 48% on average, beating the S&P index by approximately 17 percentage points.

This vigor that activist investors inject into the marketplace makes our US economy stronger and more competitive in the global economy.

The Steering Committee of CIRCA include Elliott Management, Saddle Point Management, L.P. and Third Point LLC