Activist Investor - Explained
What is an Activist Investor?
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Table of ContentsWhat is an Activist Investor?What Does an Activist Investor Do?Carl IcahnBill AckmanDavid EinhornDan LoebAcademic Research on Activist Investor
What is an Activist Investor?
An activist investor refers to an individual or group which buys large numbers shares owned by a public company and/or attempts obtaining seats on the company's board with the aim of effecting a significant change within the company. A company might be targeted by activist investors if it's mismanaged, has exorbitant costs, and can be run more profitably as a private company or has a different problem which the activist investor thinks it can fix in a bid to make the company have more value.
What Does an Activist Investor Do?
Hedge funds, private equity firms, and wealthy individuals are entity types which may decide to function as activist investors. An indication that a company might become activist investors' target is the SEC Form 13D filing, which has to be filed mandatorily when an investor buys 5% or more of a company's shares. A lot of prominent activist shareholders like Nelson Peltz and Carl Icahn, execute their business activities via hedge funds or holding companies.
He is the founder of Icahn Enterprises. This is a diversified holding company which owns tons of investments made by Icahn. In previous years, Icahn has held notable positions in companies like Netflix Inc., the Clorox Company, and Yahoo Inc. Apple Inc. was one of Icahn's major investments. Carl bought 4.7 million of the company's shares and then pushed for a share buyback of $150 billion. On the 26th of June, 2016, Xerox Corporation announced its placement of an Icahn associate on Xerox's board of directors.
He is the founder, as well as, CEO of the Perishing Capital hedge fund. Perishing Capital has held positions in Wendy's Company and Target Corporation. Ackman's more renowned moves comprise a short position in Herbalife Ltd., as well as, his huge bet on Valeant Pharmaceuticals International Inc., a troubled drug company. In 2003, Ackman entered into a partnership with Icahn for Hallwood Realty' shares. This deal made Ackman sue Icahn over profits made from the sale of shares.
David is the founder, as well as, president of Greenlight Capital. He has managed this hedge fund for twenty years. Two of his more popular plays include shorting Allied Capital Corporation and Lehman Brothers. In May 2016, he announced that Greenlight had taken a stake of $60 million in Yelp Inc.
Loeb is the founder of Third Point Partners, a $10 billion hedge fund. In 2012, he held a position in Yahoo and earned a seat on its board of directors over time. In 2013, he announced his company to be Sotheby's largest shareholder. Third Point has sizable positions in Lingand Pharmaceuticals Inc. and Baxter International Inc.
Academic Research on Activist Investor
- Optimal corporate governance in the presence of an activist investor, Cohn, J. B., & Rajan, U. (2013). Optimal corporate governance in the presence of an activist investor. The Review of Financial Studies, 26(4), 985-1020. We provide a model of governance in which a board arbitrates between an activist investor and a manager facing reputational concerns. The optimal level of internal board governance depends on both the severity of the agency conflict and the strength of external governance. Internal governance creates a certification effect, so greater intervention by the board can lead to worse managerial behavior. Internal and external governance are substitutes when external governance is weak (the board commits to an interventionist policy to induce participation from the activist) and complements when external governance is strong (the board relies to a greater extent on the activist's information).
- Examining market reaction to activist investor campaigns by hedge funds, Ryan, J. (2008). Examining market reaction to activist investor campaigns by hedge funds.
- The Activist Investor Process Model: Phase One of a Successful CampaignIdentifying a Target, Park, D., & Marchand, T. (2015). The Activist Investor Process Model: Phase One of a Successful CampaignIdentifying a Target. Journal of Applied Corporate Finance, 27(3), 83-87.
- Activist investor, Streeter, B. (2004). Activist investor. American Bankers Association. ABA Banking Journal, 96(4), 37.
- The success of the activist investor Guy Wyser-Pratte in Continental Europe, Bassen, A., Schiereck, D., & Schler, P. (2019). The success of the activist investor Guy Wyser-Pratte in Continental Europe. International Journal of Entrepreneurial Venturing, 11(1), 24-46. This paper analyses the investments of US activist investor Guy Wyser-Pratte in listed companies in Germany, France, Austria and Switzerland between the years 2001 and 2011. Wyser-Pratte is the best known single activist investor in Continental Europe whose investments have typically been followed intensively by the press. For the first time, this study examines the investment activities of a single activist investor with key focus on Continental Europe and complements the few existing studies on single activist investors and their focus on Anglo-Saxon jurisdictions. The results show that he approaches poor performing companies and that his investment activities increase the short- and long-term shareholder value. Key differentiator to existing research is the focus of Wyser-Pratte on improving the profitability of his target companies. This new insight can be interpreted as an indicator that value generation by shareholder activism works different in the institutional setting of Continental Europe.