What Is an Activist Investor?
An activist investor refers to an individual or group, such as a hedge fund, that purchases a significant stake in a public company to influence its management and decision-making processes, including gaining access to its board of directors.
How Do Activist Investors Choose Firms?
Activist investors carefully select firms based on their assessment of untapped value or potential.
They analyze various business fundamentals to identify undervalued companies.
A company may become a target for activist investors if it has excessive cash reserves or its operating costs are deemed wasteful.
In such cases, activist investors may aim to gain control of the firm to improve shareholder dividends or enhance efficiency by transforming it into a private company.
Value Investing
Activist investing is often called value investing because the targeted company’s stock is typically perceived as undervalued.
The primary objective is capital appreciation.
Activist investors acquire a substantial stake in the company and then implement a specific plan they believe will unlock its value.
Strategies of Activist Investors
While activist investors do not directly manage the companies, they leverage the support of external institutional investors to exert pressure on policy decisions.
They employ various tactics, ranging from collaborative to contentious, including engaging in discussions with management, proposing shareholder resolutions, initiating proxy contests, resorting to litigation, and conducting public campaigns.
While aggressive publicity campaigns, provocative resolutions, and prolonged proxy wars may generate headlines, in many cases, a cooperative approach is adopted.
The investor engages in constructive negotiations with the board to enhance shareholder value.
The Success of Activist Investors
Based on data, activist investors often experience higher returns on assets and operating profit margins when they target companies.
Although a dip may occur during the event year, there is typically a subsequent recovery one year later, with significant improvement observed two years after the event.
Payout policies are often modified in the event year, reaching their peak in the subsequent year.
Activist Investing in the Crypto World
In the realm of cryptocurrencies, activist investing can also be relevant, particularly for projects with a governance system.
Activist investors might acquire many coins to persuade developers to change the underlying code.