Activist Investing

What are activist shareholders?

Photo: Taryn. Source: Wikipedia

An activist is someone who buys a stake in a company to make a change. Their goals can be financial, social, or governance-driven. They might want to increase dividends, reduce managements’ salaries, or divest from particular countries or activities.

30 years ago these folks were often called corporate raiders, forcing management to take action or buy them out, often at a fat premium to the current stock price. This sort of “greenmail” seemed deeply unfair. More recently they have been more like investment prospectors, looking for shareholder value in unlikely places – like undervalued real estate that should be sold, or byzantine corporate structures that can be simplified.

Not surprisingly, corporate managers aren’t particularly fond of activists. Often, activists want management to distribute excess cash. That cash can be a security blanket – a rainy-day fund in case something goes wrong. But the cash belongs to the owners, not the executives. When it builds up on the balance sheet, management can be tempted to do something stupid – like overpaying for an acquisition, or engaging in high-profile vanity projects.

Activist investors should have a strategic view, and not just focus on short-term returns. Twenty ago, cash was 40% of Ford’s market value. Ford paid out half of this cash-hoard in a special dividend. If they hadn’t distributed this to shareholders, they could have bought a lot of very cheap factories and businesses during the financial crisis, when no one had any cash. But the activists weren’t looking that far forward. Strategic, long-term thinking is rare.

Still, activists can be catalysts, unlocking the value in a firm. That’s why share prices often rise dramatically when their interest is reported. Active investing can beat passive indices when the activists are effective.

Investment protesters just need to be sure that they’re part of the solution, not part of the problem.

Douglas R. Tengdin, CFA

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