Predatory Investing?

What good are activist shareholders?

Photo: Britta Reinhartz. Source: Pixabay

An active investor is someone who buys a stake in a company to put public pressure on management to make some sort of change. Their goals can be financial, social, or governance-driven. Common objectives might be increasing dividends and share buybacks, reducing excessive management salaries, or disinvestment from particular countries or activities.

25 years ago these folks were 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 very fond of activists. Often, activists want management to distribute accumulated cash. That cash can feel like 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 need to have a strategic view, and not just focus on short-term returns. Fifteen years ago cash comprised 40% of Ford’s market cap. Ford paid out half of this cash-hoard in a special dividend. If they hadn’t distributed this to shareholders, they would have been able to purchase a lot of undervalued assets just a few years later, during the financial crisis. But no one was looking that far forward.

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

Predatory investors just need to be careful that they don’t become the prey.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:22:42+00:00 July 16th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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