By Harrison Heaton and Chase Nerison
Giving a majority of anything to anyone is never the smartest idea, as it allows for power manipulation and control. This is no different from the concept of activist investing. When one person purchases or shorts a large percentage of the corporation, they demand an immense amount of attention and usually receive it from the company they have a good portion of ownership in, or from the media. What they do with this attention is up to them, but a solid majority use it to advance an ideology or agenda.
One of the hindrances of having one person that seeks to have so much ownership in a company is the fact that the management has to acknowledge that the activist investor is a major contributor and influence in the company, therefore making them a huge factor to the well being of the company. They can’t ignore a person that has devoted huge capital towards their company, and has the ability to make decisions. However, being able to hold management's feet in the fire and keep them accountable is incredibly important and vital as that is something activist investors do. Activist Investors demand certain results and hopefully, if the activist investor is production and progress minded, will work hard to enhance stockholder value. It benefits them, the company, and all who believe in the future of their business. When a new face with huge influence enters the metaphoric “chat room” I.E. (The business), they usually bring along with them their opinions on change within the company and how to actively better run it, so this is exactly what they try to do. It is up to management to be receptive to the criticism and acknowledge the activist investors' concerns, yet when a single person has bought a large portion of the stock of the company, change is likely inevitable.
However, selfishness and looking out for your own back is an intense and large reservation that is present with activist investors. Usually when these activist investors buy large percentages of the stock of a company, the stock price goes up benefiting all who are invested in such, yet with the simple denial of an activist request or demand, they could drop these large proportions of the stock, therefore hurting the smaller investors.
Above, We have presented an illustration of the most prominent activist investors with some names being quite famous for their contributions and influence with their respected company. In the little paragraph in the illustration, it explains how opportunity for profit is the goal for these specific investors and it does not matter the size or sector, even though some are more profitable than others. More times than not, smaller retail investors have been harmed by these people’s actions which is where the ugliness mentioned in the title comes into play and alone is reason to be skeptical against these activists. It is always beneficial for smaller investors to take these activists' words with a grain of salt for several reasons. First, these activists could be wrong, and are perceived as being smarter than the average investor which plays into their credibility. Yet, there have been a plethora of examples in which these activist’s timing was off, the progress they thought they would see never resulted, etc.
The main issue with giving this select elite such power in a business is that they may hold onto a position for many years and then drop it in a dime. The repercussions of every single party involved are severe and therefore is a bad aspect of this investing concept. The horizon for an activist investor is not the same as an average investor. If an activist investor does not see the outcome or progress that they hoped for, they don't mind taking a loss on their investment which is the difference between them and average investors.
Activist Investors campaigns are a huge indicator of these peoples purpose and stance on the business. Campaigns are designed to increase profitability while simultaneously pushing their agenda on the company and therefore the consumer. While these campaigns have the ability and potential to have huge monetary advantage and profit, a study by Harvard Law indicates that a small percentage of these campaigns are successful, about 17%. Campaigns usually involve a 5 step process.
1. Buy a large portion of the companies assets through stocks
2. Publicly propose a set a changes for the business
3. Negotiate and barter with the board of directors, potentially getting a seat
4. Direct attention to addition necessary change
5. Sell when their objectives are complete.
The visual shows the increasing number of campaigns in recent years and how large this concept of investing has grown, yet also shows the substantial difference in success rates in a relatively short period of time. When success rates are halved in the span of 2 years, we have to speculate that there is some type of problem that every activist investor incurs and when they face problems, they likely exit their position and therefore again harm the smaller retail investor.
Agreeing that activist investors have some beneficial aspects to them like keeping businesses honest and providing new perspectives/insight on how a company can improve. Yet for the most part, as you can see above, the negatives and potential pitfalls of this type of investing, in my opinion, far outweigh the positives. Like I said in the beginning, anytime a person proportionally invests in a large percentage of a company, they usually have a certain amount of power. What they do with this power is up to them, but it usually results in negative percussions and multiple parties losing money which is why a low percentage of activist campaigns succeed.
Work Cited
Curtis, Glenn. “Activist Investors: A Good or Bad Thing?” Investopedia, Investopedia, 21 Sept. 2021, https://www.investopedia.com/articles/stocks/09/activist-investors.asp.
Brock, Catherine. “What Is Activist Investing?” The Motley Fool, The Motley Fool, 28 Oct. 2016, https://www.fool.com/investing/how-to-invest/stocks/activist-investing/.
Infographics Activist Investor Report - Cglytics. https://cglytics.com/wp-content/uploads/2020/08/Infographics-Activist-Investor-report.pdf.
Fernandes, Nuno. “Beware of Activist Investors? like It or Not They Are Here to Stay.” IMD Business School, IMD Business School, 16 Aug. 2018, https://www.imd.org/research-knowledge/articles/beware-of-activist-investors/.
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