Is the Right Activism in Activist Investing? By JT Martin and Scott Roberts

In the last few years, activist investors have become more and more common. Activist investors are often given a bad connotation, yet like any financial tool, activist investors can use their influence for good or bad. But first, what is an activist investor, and what are some examples of how they operate?

Activist investors operate by buying a large amount of a company's stock, and pressuring them into making a ‘favorable’ decision.[1] They can also sell all their shares at any moment, which can also have a large impact on the company. This type of investing grew in popularity substantially during the 1980s when corporate raiders Carl Icahn and Nelson Peltz aimed to break up companies by buying a large fraction of shares and inciting proxy fights.[2]

Since then, activism investing has evolved. While these major players like Icahn are still in the game, activist investors have acquired a much more diverse arsenal. In addition to writing letters to higher-ups and disrupting board meetings, activist investors can hold aggressive media campaigns that spread like wildfire, putting immense pressure on companies. The problem with this power is that most activist investors are only looking out for themselves. This is a selfish and reckless way to invest. Taking actions that destroy a company to benefit one person or investment fund is unethical. For instance, many healthcare companies are facing the threat of being broken up or sold off.[3] Activist investors forcing these changes are disrupting important companies that serve the medical community in an essential manner, which is objectively destructive.

One of the main reasons activist investors are seen in a negative light is because the timeline for the activist investor can be much different than that of the company. Most firms that are targeted by activist investors receive pressure to maximize their profitability typically through cutting expenses. Many of these companies see an initial rise in their stock prices and company value but then an eventual return and fall as more time passes[4]. The short-lived rise is reflective of the typical activist investor’s pressure on the company; they enter into the firm and place immediate pressure to cut spending to raise profitability and then eventually pay out dividends to stockholders, but as time goes on the cuts from spending and outflow of cash to stockholders takes away from the long term growth of the company.

However, the effects of activist investing are not all bad and can have some very positive benefits to the company and shareholders. The presence of an activist investor can bring the attention of the company to someone with the perspective of an investor. This can be very beneficial to the company as they can enter with new ideas about the structure and business model of the company[5]. These new perspectives and idea can bring positive change and new focuses from the company if they are received well by the firm as well as bring new demand for company stock since much of the company stock is taken off the market and because such a large investment into the company can be seen as a positive view of the future for the firm. Like many things, activist investing can be both good and bad depending on the investor, the intentions, and the targeted firm; what is certain is that activist investing is and will remain a reality in business for the foreseeable future.

[1] Glenn Curtis, “Activist Investors: A Good or Bad Thing?”, Investopedia, August 6, 2021, https://www.investopedia.com/articles/stocks/09/activist-investors.asp [2] Erik Abdow, “Activist Investors History”, Gilmartin Group, February 5, 2021, https://gilmartinir.com/activist-investors/ [3] Erik Abdow, “Activist Investors History”, Gilmartin Group, February 5, 2021, https://gilmartinir.com/activist-investors/ [4] Mark Desjardine, “Activist Hedge Funds: Good for Some, Bad for Others?”, HEC Paris, March 26, 2021, https://www.hec.edu/en/knowledge/articles/activist-hedge-funds-good-some-bad-others [5] Glenn Curtis, “Activist Investors: A Good or Bad Thing?”, Investopedia, August 6, 2021, https://www.investopedia.com/articles/stocks/09/activist-investors.asp