Question

What does it take to be successful activist investor today ?

Answer 1

ITRODUCTION TO 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 to effect a significant change within the company. A company can become a target for activist investors if it is mismanaged, has excessive costs and could be run more profitably as a private company or has another problem that the activist investor believes it can fix to make the company more valuable

ACTIVIST INVESTOR TACTICS

Activist investor tactics are relatively diverse and range from collaborative to contentious, including negotiations with management, public campaigns, shareholder resolutions, proxy contests, and litigation.

While high-profile activist campaigns garner the most attention and despite how activists are portrayed by embattled management teams, many activists prefer to approach companies privately in an effort to address the issues in a collaborative manner. Nonetheless, in certain instances, activist investor tactics will incorporate steps to put pressure on target companies prior to escalating the activist engagement:

• Private negotiation with management without publicly disclosed activism
• Publicly disclosed activism with letter and presentation to management
• Publicly disclosed activism with letter to shareholders
• Proxy fight and shareholder vote
• Shareholder litigation over shareholder proposals and stockholder appraisal rights
• Unsolicited offer or takeover

STRAGIES OF INVESTING

Even though hedge fund activism and activist investor strategies have transformed in recent years, the primary activist themes remain the same and can be categorized as follows:

1. Underperformance: The target company has underperformed relative to its industry peers or the broader stock market.
2. Capital Efficiency: The target company has a sub-par capital allocation and is either under-levered or has excess liquidity that can be returned to shareholders in the form of dividends and share buybacks.
3. Corporate Governance: The target company has significant corporate governance obstacles such as a captive Board of Directors, dual-class share structures, poison pills and other factors that preclude shareholders to prompt for change.
4. Strategic Redirection: The target company has assets that are undervalued by the market or no longer fit within the overall corporate strategy. A strategic redirection will free up the company to divest or spin-off subsidiaries, thereby creating more focused entities that are properly valued by the market.
5. Corporate Initiatives: The target company has put itself up for sale without seeking an adequate premium for shareholders due to leadership’s severance and change-in-control agreements (i.e. Golden Parachutes).