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While activist investors gained notoriety for their confrontational
approach, they often aim for collegial if firmly “hands on” approach with
There is an overlap in investment philosophies between activist investors
and the prototypical value investor.
Activist investors typically seek out undervalued companies where they
anticipate shareholder value can be unlocked through intervention.
In other words, instead of speculating about future performance, activist
investors aim to change future performance.
Source: Institutional Investor (2003); Bruce C. N. Greenwald, Kahn, Sonkin, Biema (2004)
Major factors driving
relative to peers,
2. Deteriorating share
relative to peers,
3. Low leverage/high
4. Failure to execute
5. Multiple distinct
6. Takeover target in
Activist investors focus on shareholder value:
• Limited board
• History of
• Diminished investor
• Lack of
• Excessive executive
• Heavy institutional
• Limited insider
• Large founding
• High cash balance,
• Stable cash flow,
• Low debt levels,
• Low book-to-
line(s) of business,
• Uncertain or
• Change in CEO,
• Cyclical downturns,
They are supposed to prevent
from taking actions
detrimental to shareholders.
They are not uniform across
They are shaped by a variety
of factors that are inherent to
the business environment.
Governance systems are complex:
Governance systems are
diverse because these factors
combine in different ways in
Differences in factors impact
prevalence of agency issues
and control mechanisms
needed to prevent them.
Governance debate is
characterized by considerable
hype but few hard facts.
Governance systems are diverse:
Efficient markets protect against:
• One party in a transaction has an information
advantage and uses this advantage to receive
preferential pricing or risk transfer
• One party does not bear the full risk of its actions and
so engages in excessively risky transactionsMoral Hazard
When capital markets are efficient, prices (labor, capital, and natural
resources) are “correct”, which improves decision making.
Efficient capital markets “discipline” companies:
Poor decisions are punished
Stock prices decline
Cost of capital increases
Risk of bankruptcy or being taken over increases
If a country lacks efficient capital markets, something else must take its
These institutions also “discipline” companies in order to protect their
investment. However, their interests may be different from those of
other shareholders and stakeholders.
Well-functioning markets require disciplining mechanisms that influence
management to act in the interest of shareholders.
In efficient capital markets, the “market for corporate control” puts
pressure on the CEO to perform or risk sale of company to new owners.
Shareholders suffer from two primary limitations:
Free-rider problem. Shareholder actions are expensive. Although all
shareholders enjoy the benefits, a few bear the costs. This provides a
disincentive to act.
Indirect influence. Since shareholders do not have direct control over
the company, they tend to exert influence via the following:
Communicating their concerns
Withholding votes from directors
Waging a proxy contest to elect an alternative board
Voting against company proxy items
Sponsoring their own proxy items
Selling their shares
Activist Investor Hostile Acquirer
Objective Enhancing Shareholder Value Capturing Shareholder Value
Avg. Investment Period 15 to 36 Months 5+ Years
Aims for significant influence in
cooperation with fellow
Willingness to Partner
Yes, seeks often third-party
support and consensus
Tolerance for Negative
Investors & Public
Depends on activist’s reputation
and track record
Low, can be creative and nimble
High, due to influence of many
Ability to Pressure
Target Board &
• Acquiring firm believes it can increase profits through revenue
improvements, cost reduction, or vertical integration. This is what
drives strategic buyers.
• Two companies whose earnings are uncorrelated might benefit by
relying on capital generated when one business is thriving to help
the other when it is struggling. This is what drives conglomerates.
• New owner group might have superior access to capital, managerial
expertise, or other resources. This is what drives private equity
• Acquirer purchases target primarily for sake of managing a larger
• Company pursues acquisition because its competitors have recently
• Management of target company agrees to acquisition primarily
because it stands to receive significant windfall.
Research has routinely shown that public markets expect the incremental
value of an acquisition to flow to the target rather than to the acquirer.
Source: Eckbo (2009); Servaes (1991); Andrade, Mitchell, and Stafford (2001); Martynova and Renneboog (2008);
Goergen and Renneboog (2004)
• Receives double-digit takeover premium offer
• Experiences greater excess returns in hostile deals
• Experiences greater excess returns in all-cash deals
• Experiences no excess returns following bid
• Experiences negative excess returns for hostile bid
• Experiences greater declines if equity-financed bid
Research has also shown that acquirers realize less value following a merger
than originally projected.
Source: Martynova and Renneboog (2008); Krug and Shill (2008)
• Underperforms peers on a one-to three-year basis
• Performs worse if acquisition is financed with equity
• Decreases investment in working capital and capex
• They are highly disruptive
• They require significant management attention
• The lead to elevated turnover rates for up to 10
years following consummation of deal
Activist investors tend to get involved when company performance is
falling short of competitors’ performance and market expectations.
A collaborative, negotiated, or settled response to activist campaigns
tends to lead to higher excess shareholder returns than a combative one.
It is often more effective to get companies to change when in crisis.
Value investors who focus solely on share price may end up investing in
value mines (i.e. stocks that are fatal to investor’s financial health).
“Price is what you pay; value is what you get.”
• Warren Buffett
Source: Cyriac, Backer, and Sanders (2014)
• Activist investor acquires 1% to 10% of voting class equity;
gains recognition as leading minority shareholder
• Will include changes to corporate governance, strategic
direction, operational execution, and/or capital allocation
• Certain activist investors prefer to engage privately before
going public; other activists prefer to go public first
• Most activist investors have little trepidation to go public
and are adept at making their case to the press
• May lobby third parties, including other shareholders,
institutions, and proxy advisory firms
Litigation: Expensive and utilized generally as last resort to protect investment
activists and management
remains most effective
method to achieve goals.
Not only can it be less
confrontational, but dialogue
helps build relationships
between management and
shareholders in the future.
Staying out of media is best
for both parties when
Achieving desired results:
Source: Schulte Roth & Zabel (2012)
Dialogue & negotiations Proxy contest & solicitation
Publicity campaigns Shareholder resolutions
• Many activist investors advocate strategies that
require substantial time to implement with
durations measured in years rather than months.
• Research shows that most target’s valuations,
ROA, and operating performance improved in
five-year period following activist engagement.
• Three years after partial or full cashing out of an
activist investor’s stake, long-term shareholders
continued to have positive returns.
Source: Enginalev (2014); Brav, Jiang, Thomas, Partnoy (2008)
One of the key benefits of
engaging directly with activist
investors is that of getting
another point of view.
Activist investors provide
management with candid and
educated perspectives from
the investment community.
Appropriate engagement can
achieve superior performance
when dealing with activist
Responding to activist engagement:
Source: Linklaters (2013)
Target Company Financial Results
(Average Return Annualized)
• Board Size &
• Shareholder Rights
• Executive Compensation
• Segments & Subsidiaries
• Mergers & Acquisitions
• Public vs. Private Decision
• Production Efficiency
• Business Processes
• Personnel Issues
• Capital Efficiency &
• Dividend Policy
• Share Buybacks &
• Analyst Coverage
• Investor Interactions
• Forecast Accuracy
• Credibility with Markets
Factors that impact shareholder value:
Activist investors conduct thorough assessments of target company’s
operations, incl. management, product strategies and capital structure.
Significant shareholder value lies hidden in many public companies that is
difficult to unlock without commitment and proactive involvement.
Accounting consolidation makes many complex companies look simpler than
they really are. This is important given that markets rely on consolidated
data for valuation purposes.
Shareholder value can be unlocked by restructuring – changing strategy,
operations, capital structure, capital expenditure plans – but overcoming
status quo requires support from multiple stakeholders.
Activist investors specialize in fostering such coalitions through the quality
of their analysis, their network of institutional contacts and the credibility
of their reputation and track record rather than the size of their holdings.
Activist investors act as important intermediaries in equity markets.
Activist investors, like M&A acquirers, aim to arbitrage the value gap
between poor company performance and good company performance.
While an inherent bias in favor of management may once have existed
among institutional investors, this is no longer always the case.
Open communications with activist investors can build credibility with
shareholders and potentially enhance corporate strategies.
Shareholder activism can be costly and success is not guaranteed.
Proxy Warriors. Institutional Investor. January 2003.
Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael Van Biema. Value Investing: From Graham To
Buffett And Beyond. 2004.
B. Espen Eckbo. Bidding Strategies and Takeover Premiums: A Review. 2009. Journal of Corporate Finance.
Henri Servaes. Tobin’s Q and Gains from Takeovers. 1991. Journal of Finance.
Gregor Andrade, Mark Mitchell, and Erik Stafford. New Evidence and Perspectives on Mergers. 2001.
Journal of Economic Perspectives.
Marina Martynova and Luc Renneboog. A Century of Corporate Takeovers: What Have We Learned and
Where Do We Stand? 2008. Journal of Banking and Finance.
Mark Goergen and Luc Renneboog. Shareholder Wealth Effects of European Domestic and Cross-border
Takeover Bids. 2004. European Financial Management.
Jeffrey A. Krug and Walt Shill. The Big Exit: Executive Churn in the Wake of M&As. 2008. Journal of
Joseph Cyriac, Ruth De Backer, and Justin Sanders. Preparing For Bigger, Bolder Shareholder Activists.
March 2014. McKinsey Insights.
Schulte Roth & Zabel. Shareholder Activism Insight. 2012.
Ertan Enginalev. Is Shareholder Activism the Cure for the Common Stock. July 2014. Carried Interest.
Alon Brav, Wei Jiang, Randall S. Thomas, Frank Partnoy. Hedge Fund Activism, Corporate Governance, and
Firm Performance. May 2008. Journal of Finance.
Linklaters. Activism Rising. 2013.
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