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The impact of activist investors – what investors need to know

We look at how activist investors shape the market and how they might impact ordinary investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Activist investors buy a large stake in a company in order to make changes to the way it’s run. It can be a wealthy individual, a private equity firm or a hedge fund. They’ll typically look for companies they believe are mismanaged.

Once they’ve established their position as a major shareholder, they’ll look to make changes to the way the company’s run. If the board opposes their advances, which is often the case, they’ll start what’s called a proxy battle to remove members of the board and replace them with their own picks. In this scenario, activist investors use their own large stake plus proxy votes, or those that other shareholders give them.

Because many of the market’s largest investors are passive investors like pension funds, activist investors only need to convince a few key people to gather quite a few votes.

Activists influence business decisions

Activist investors sound brutal. And to the current board and CEO, they can be. They’re essentially forcing changes to the way a company’s run. The changes they want to install tend to be ones they think will make the company more profitable. Usually, this means cost cutting and selling assets the business owns. That’s not the only change they bring about though.

In 2013, Carl Icahn built up a 1% stake in Apple, seeking to improve investor returns. At the time Apple was sitting on a $130bn cash pile and Icahn called for Apple to return some of that cash to shareholders. In the end, Icahn didn’t need to continue building his stake or start a proxy battle. CEO Tim Cook took his advances seriously, sitting down with Icahn for dinner. It’s unclear whether Icahn’s influence was behind Apple’s buybacks at the time, but there’s no question his looming presence weighed on management’s decisions.

Carl Icahn’s involvement in Apple is an example of how activist investors can benefit shareholders. The total return for Apple stock went up considerably during the time Icahn got involved, significantly outpacing wider market returns as shown below. He sold his shares in 2016.

Apple vs. wider US market

Past performance is not a guide to the future. Source: Refinitiv, 04/03/2022.

This isn’t to say it’s all Icahn’s doing, of course. Tim Cook’s managed to shift Apple’s revenue toward more profitable services and subscriptions, which has massively improved the group’s growth prospects. As a further example the group’s also released quite a lot of cash to its shareholders along the way, returning over $100bn to shareholders last year.

Is activism good for shareholders?

Most activist shareholders are after one thing – profits. As a shareholder, that’s generally what you’re looking for too. So, when an activist investor starts taking an interest in a company you hold, it can be a good thing.

For one, they’re buying up huge bundles of the company’s stock. That can push the share price higher. It can also encourage smaller investors to jump on the bandwagon.

An activist investor is also a fresh pair of eyes and that can be a useful way to make changes. It can be difficult for management to see the forest through the trees, so an outside opinion can be beneficial. As was the case with Apple, an activist shareholder pushed for a better use of cash and that in this one instance ultimately lined shareholders’ pockets.

It’s not always quite so rosy. As shareholders, activist investors’ interests are somewhat aligned with ordinary shareholders. But they’re not a charity. They’re looking out for themselves above all, and shareholders should keep that in mind. They might be willing to sacrifice long-term growth for short-term profits, upending an existing strategy in the name of higher returns. Ultimately there are no guarantees and investors could still get back less than they invest. Past performance is not a guide to the future.

ESG activism

Historically, profits have been the major focus for most activists and it’s safe to say that’s a big part of the equation today. But the growing importance of Environmental, Social and Governance (ESG) concerns has created a new class of activist investors.

ESG has become closely intertwined with profitability these days, with regulatory changes calling for more corporate responsibility. That’s meant some activist investors are calling on companies to do more to up their ESG game.

Exxon Mobil was on the receiving end of one such attack when hedge fund Engine no.1 shook up Exxon’s board with three of its own candidates. The group was calling on Exxon to accelerate its transition toward clean energy.

As ESG investing takes a larger role in the market, we could see this type of activist investor cropping up more often.

Activism in today’s market

Number of companies targeted by activist investors

Source: Activist insight, July 2021.

Activist investors are everywhere in the current market. Consumer goods giant Unilever has become a target for Nelson Peltz’s Trian Partners. It’s unclear exactly what Peltz’s hopes are for the company, but some suspect he could be looking to break it up into several smaller, more focussed businesses.

British Gas owner, Centrica, has also come under fire, though not directly. The group’s seen large chunks of its shares snapped up in recent weeks, suggesting an activist could be building a position. But of course this might not be the case. The energy crisis coupled with Centrica’s own struggles to streamline the business could make the company an appealing target for an activist.

The threat of activist investors has caused some companies to change the way they structure their shares. Peloton, the fitness equipment maker that was all the rage during the pandemic, has recently found itself in the crosshairs of Blackwells Capital.

The activist investor has called for a complete management overhaul saying it’s been “grossly mismanaged”. The company has taken an almost 5% stake, but change was hard to come by. That’s because Peloton shares are structured so that management’s B class shares have more voting power than ordinary shares do.

Peloton CEO John Foley, who Blackwells was trying to oust, controlled almost 40% of the vote. In the end, there was enough pressure for Foley to step down, but Blackwells would’ve found it challenging if it’d come down to a vote.

The future of activism

Activist shareholders aren’t going anywhere. Changing the way companies structure their voting rights is a controversial practice because it strips away shareholders’ control. It’s unlikely to become regular practice.

If an activist investor is taking an interest in a company you hold, remember to keep the long-term story in mind. Activist investing often comes with a great deal of fanfare and media hype. This can cause big swings in the share price, but might not change the long-term story for the stock.

Investors should look at activists’ proposals with their own interests in mind. And remember, just because they’re pushing for something doesn’t mean they’ll get it.

This article isn’t personal advice, if you’re not sure whether an investment is right for you, seek advice. All investments and any income they produce can fall as well as rise in value so you could make a loss.

Unless otherwise stated, estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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