Activist investors – What are they, what tactics do they use and how do you stop them?

What is an activist investor?

In short, an activist investor is a person, or group of people, who buys up a chunk of a company’s shares in the hope of changing something at that business, such as its structure or its decisions.

To some, they can appear to be the epitome of aggressive, short-term capitalism: the corporate raiders intervening in companies, ruffling feathers, in the hope of a quick return.

In practice however they can often play a crucial role in addressing structural management issues, fixing a company’s institutional problems and providing benefits to other, more passive, shareholders.

Why are they on the rise?

The activist investor effect snowballs. As their success grows, so these types of investors have drawn in more assets, and so their firepower has increased allowing them to wage more campaigns.

This means they can pursue more and larger companies.

Crucially, they also tend to win, which hardly deters other investors from following suit.

Another contributing factor, he says, is the fact that companies are becoming more proactive at reviewing their businesses “through the lens of what an activist might ask for” – essentially, warding them off by pre-empting the strike.

What do they want?

Their demands vary from company to company, of course, but there are a string of common themes.

A typical campaign centres around pushing a company, known as a target, to focus on shorter-term value creation, and such scenarios are often used as a stick with which to beat the ‘meddling’ investor, who can be accused of sacrificing the company’s long-term goals for immediate returns.

But there are also plenty of examples of activists pushing back against board remuneration and governance.

How do they do it?

That battle can be fought in the shape of a proxy contest, where a director is nominated at a special meeting, or the company can agree to the request in an attempt to limit the destruction.

Media scraps are an ugly way of going about their business, but they can be an effective way of keeping the pressure on the company in question.

How do you defend against an activist?

In short, the best way to beat them is to avoid them altogether. That is why it is so important to pre-empt potential moves, and deliver shareholder value.

To guard against becoming a target, public company boards and executive teams need to urgently review their businesses more self-critically.

Read the full article here