Definition
An activist investor is an individual or group that purchases a significant amount of a company’s shares and uses their stake to push for changes in the company. Their goal is often to improve financial performance and shareholder value. They may implement changes by influencing management, board decisions, or even pursing a change in company strategy.
Key Takeaways
- An Activist Investor is an individual or group that purchases large numbers of a public company’s shares and/or tries to obtain seats on the company’s board with the aim of effecting a significant change within the company.
- Activist Investors predominantly focus on issues such as financial performance, balance sheet efficiencies, strategy, and corporate governance, aiming to unlock value by pushing for changes that will increase share price.
- While Activist Investors can sometimes create tension with company management, they can also serve as a check on a company’s board, enforcing accountability and keeping the company’s leadership focused on shareholder value.
Importance
The finance term Activist Investor is significant as it refers to an entity or individual that buys a significant portion of a company’s shares and uses their stake to demand changes within the company.
These changes are usually intended to increase the company’s value, thereby benefiting all shareholders.
Changes could entail altering the company’s strategy, operations, or board of directors.
The impact of an activist investor can be hugely influential, potentially leading to significant shifts within the company, improved corporate governance, and increased shareholder value.
Therefore, monitoring the presence and activities of such investors can be an essential aspect of evaluating a company’s financial landscape.
Explanation
An activist investor is usually a shareholder with a significant amount of a company’s shares, who leverages their stake to influence the company’s decisions in a manner they believe will increase shareholder value. The purpose of an activist investor is to bring about changes within a company that is underperforming or undervalued, or where they believe the current management is not acting in the best interests of the shareholders.
This is done to maximize the value of their investment – a demonstration of the primary motivation of profitability. Activist investors tend to employ various strategies in an attempt to achieve their objectives.
They may propose new business strategies, changes in management, cost-cutting measures, buybacks, or even a company sale. These often involve publicly voicing their concerns or suggestions, requesting extra seats on the board where they can directly influence company policies, or soliciting other shareholders’ support for their proposals.
These actions are typically spurred on by the belief that such changes could result in increased share value and dividends, thereby yielding a higher return on their investment. Thus, activist investors play a unique yet significant role in the world of corporate finance.
Examples of Activist Investor
1) Carl Icahn: Carl Icahn is often referred to as the quintessential activist investor. He has initiated change in several notable companies throughout his career, including RJR Nabisco, Blockbuster, and Yahoo. He typically invests in companies he believes are undervalued and pushes for changes like spin-offs, dividends, or buybacks to increase shareholder value.2) Pershing Square Capital Management: Founded by Bill Ackman, Pershing Square Capital Management often engages in activist investing. A high-profile example was taking a $1 billion short position in Herbalife in 2012 and engaging a very public campaign to expose what it believed to be a pyramid scheme, an operation model for the company. Another example was in 2015 when Pershing took a $
5 billion stake in Mondelez International and pushed for cost savings, revenue growth strategies, and future mergers/acquisitions.3) ValueAct Capital: ValueAct Capital, founded by Jeffrey Ubben, has a track record of investing in companies and working constructively with management and the board of directors to create shareholder value. The firm became an activist investor with Microsoft in 2013, acquiring $2 billion worth of shares and utilizing its ownership to get a seat on the board to help turn the company around.
FAQs on Activist Investor
1. What is an Activist Investor?
An activist investor is an individual or group that purchases large numbers of a public company’s shares and/or tries to obtain seats on the company’s board with the goal of effecting a major change in the company.
2. What does an Activist Investor do?
Activist investors seek to influence or change the direction of a company. This may be accomplished by advocating for changes in management, restructuring, or via other strategies such as mergers and acquisitions.
3. How does Activist Investing impact a company?
When successful, activist investing can lead to changes that return greater value to shareholders and improved company performance. However, it can also lead to conflict within the company and potential instability.
4. What are some examples of Activist Investors?
Well-known activist investors include Bill Ackman of Pershing Square Capital Management, Carl Icahn of Icahn Enterprises, and Nelson Peltz of Trian Fund Management.
5. How is Activist Investing different from traditional investing?
Unlike traditional investors who invest passively with no intention of influencing company management, activist investors take an active role in influencing the company’s decisions to maximize their investment returns.
Related Entrepreneurship Terms
- Proxy Fight
- Shareholder Resolution
- Corporate Governance
- Takeover Bids
- Stakeholder Activism
Sources for More Information
- Investopedia – A leading source of financial content on the web, ranging from market news to retirement strategies.
- Bloomberg – A global leader in business and finance news, market data, analysis, and video to the world.
- CNBC – The world leader in business news and real-time financial market coverage.
- The Balance – Popular resource for personal finance, career advancement, investing, and more.
