What an Activist Investor Means for Your Investments

Carl Icahn, influential activist investor

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It’s common these days to hear about a company that is under pressure from “activist investors” who are looking to force change. These investors are often hedge fund managers who work to acquire a big percentage of a company’s shares, then use that as leverage to lean on management. Often, these investors are seeking spots on a company’s board of directors. They also look to influence the direction of a company’s business or urge the company to sell itself or acquire another firm.

Activist shareholders have been rising in number. They made more than 600 demands of public companies in both 2015 and 2016, according to a report from McKinsey & Company, a worldwide business consultancy. McKinsey says that as of early 2017, there were about 550 of these activist investors worldwide, and they controlled more than $180 billion in shareholder value.

The Impact of Activist Investors

What do activist investors mean to average shareholders? It’s a mixed bag. There are many examples where their efforts have succeeded in boosting shareholder value and making money for the typical investor. But there's also evidence that activist investors are too likely to push for short-term changes instead of taking a long view that would be more beneficial to everyday investors with a long time horizon.  

Average Holding Periods

The average shareholding period in the U.S. has dropped from 5.1 years in 1976 to 7.3 months as of 2015, according to data from the World Bank.

Activist investors can help give a voice to average investors who typically own too few shares of a company to have a real voice in its decisions. If you own 100 shares of Apple out of a total of 5.1 billion outstanding, for example, you’re probably not getting CEO Tim Cook’s attention. But it’s also important to understand that activist investors don’t necessarily have the same motivations or investment goals as the average citizen.

High-Profile Activist Investor Battles

Over the years, several top activist investors have gained notoriety—and wealth—by wielding the power of their shares to influence corporate decisions.

One of the most famous activist investors is Carl Icahn, who came onto the scene in the 1980s after engineering a hostile takeover of TransWorld Airlines, then profiting from the sale of the company’s assets. Over the years, he has used his power as a shareholder to influence decisions by some of the world’s most recognizable companies, including Apple, eBay, and PayPal.

In 2014, Icahn acquired a nearly 10% stake in Family Dollar, then urged the company to sell itself to competitor Dollar Tree. He later sold a large chunk of his stake in the company, personally earning $200 million.

In 2012, Icahn also played a role in pressuring Apple to return some capital to shareholders by performing a share buyback and issuing dividends.

Some of Icahn’s proteges have gone on to become notable activist investors themselves, in some cases even going up against Icahn on deals. Other top activist investors include Starboard Capital, which has waged fights with Macy’s and Yahoo! and fought its way to a takeover of Darden Restaurants, and Trian Partners, which in 2017 fought to have its CEO Nelson Peltz placed on the board of directors for Procter and Gamble.

Do Activist Investors Make a Difference?

Do the actions of activist investors actually help make money for shareholders? In many cases, yes. 

Icahn’s efforts against Apple were undoubtedly positive for people who owned the company’s shares. Apple’s share price rose nearly 30% over the course of 2012 and has continued to rise since.

In a 2016 article in Harvard Business Review, two officials from consulting firm PwC argued that more companies should listen to activist investors because they often ask tough but valid questions. The authors of the McKinsey & Company report, meanwhile, said that if a company engages positively with activist investors, they can almost serve as informal advisors.

“To look at the matter in a less threatening way, instead of having to spend millions on a consulting review, you could get one for free from would-be activist investors,” McKinsey wrote.

However, a 2015 paper by business professors from Columbia University and Rutgers University expressed concern that companies have been investing less in research and development due to pressure from activist investors, who want to see profits sooner rather than later.

It’s also worth noting the impact of having one person or group controlling large quantities of a company. When an individual or group of investors buys a large number of shares of stock, that can force a price upward. That’s good for everyone. But this also means they can sell large quantities of shares all at once, thus pressing share prices down.

They May Not Have Your Interests in Mind

If you are saving for retirement, you want a stock’s value to rise, but you aren’t going to be too concerned about whether a stock goes up dramatically over the next few months or even the next year. As long as there is upward movement over time, you’re pretty happy.

Activist investors, on the other hand, can be more concerned about a company’s performance in the short term. They may want to force change that will boost share prices right away so that they can then sell shares at a profit. Activist investors aren’t generally concerned about the impact on a company’s performance five, 10, or even 20 years into the future. This is why some critics have expressed concern over the drop in research and development by companies that have faced pressure from an activist investor.

This is not to say that activist investors can’t make you money. Indeed, changes made now can certainly pay off in the long run. But keep in mind that other investors’ goals aren’t necessarily the same as yours.