Activist investing is not a new concept. It’s been around since the stock market crash of 1929, and probably even before that. While not all activist investment campaigns are successful, they all have a common goal of increasing shareholder value and, by extension, stock prices.
Many point to Benjamin Graham’s 1926 fight against the Northern Pipeline as the beginning of the activist investment movement. Graham, mentored by Warren Buffett, amassed a large stake in the railroad company and worked with management to return excess cash to shareholders.
The story of Graham’s campaign and many other efforts to control public companies is detailed in Jeff Graham’s 2016 book. Dear Chairman: Boardroom conflict and the rise of shareholder activism.
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“During the stock market booms of the 1890s and 1920s, shareholders focused on horizontal and vertical acquisition of power. merger and Stock Market Manipulation” Strategy and Business Contributor Jill Prilak I have written In a 2016 review of Graham’s book, he said: “In the 1950s and 1960s, it was common for companies to make serial acquisitions to build conglomerates.”
In the 1980s, she continued, “there was a lot of so-called green mail, where activist investors would collect stock, threaten a takeover, and then sell the stock back to the company at a higher price.”
Activist investors undoubtedly believe that their campaigns create value for companies and their shareholders, but the evidence on how activist investing actually affects stock prices is inconclusive .
How does activist investing affect stock prices?
On the other hand, activist investors need to acquire large stakes in order to be in a position to pressure management for change. This purchasing power certainly helps support stock prices in the short term.
However, the lasting effects are negligible. For example, Goldman Sachs Research looked at data from 2006 to 2006. May 2023and The impact of more than 2,100 activist campaigns analyzed over 17 years was found to be negligible.
“The results of these campaigns over the years have been mixed. The median stock price targeted by an activist investor outperformed its sector by 3 percentage points in the week after the campaign began. However, excess returns are short-lived. “Typically, campaigns turn negative after 6 months,” Goldman Sachs wrote.
What are the benefits of activist investing?
“When you stop growing, you start dying.” I have written Author William S. Burroughs. The same adage applies to activist investors and their quest for change.
in 2019 podcast At the event, hosted by McKinsey & Company, panelists examined the strengths and weaknesses of activist investors and identified four areas where these investors seek to influence change: corporate governance; , M&A activities, business strategy and operations, and capital allocation.
Activist investors generally tend to get involved in blue-chip companies that have fallen by the wayside, underperforming by historical standards or relative to their peers.
Sandra Overholenser, a consultant at McKinsey & Company at the time, said, “It’s not so much geography or industry that influences whether a company is vulnerable to attack, but rather whether it’s been underperformed recently. It means that it is an excellent company with a strong reputation for excellence.”
Activist investors believe their actions will give companies the boost they need to boost their stock prices.
What is the impact of activist investing?
Activist investors tend to focus on three corporate governance issues: CEOs, executive compensation, and board composition. Ancora Holdings and Norfolk Southern (NSC) provide recent examples.
March 2024, activist investor Ancora Holdings I wrote to the Norfolk South Committee. CEO Alan Shaw was asked why he received a 37% raise in 2023 in light of the company’s response to the East Palestine, Ohio, hazardous materials derailment earlier that year. .
“We are pleased that the Board of Directors is awarding Mr. Shaw a total of $13.4 million, a 37% increase in compensation for a year in which all of our customers, employees, shareholders, and community partners have suffered. It’s amazing.” A letter written.
On April 22nd, Ancora second letter The company outlined its plans to shareholders, including adding seven new board members with railroad experience and replacing the CEO.
As a result of activist investment efforts, Ancora reportedly secured seats on at least three NSC boards. Preliminary results From the general meeting of shareholders in mid-May. However, shareholders also voted to retain Alan Shaw on the board.
Data shows M&A is the number one reason for activist investment
One of the most common requests from activist investors is to sell or spin off certain divisions of the target company.according to Activist Campaign 2023 Data From Barclays, about half were acquisition-related.
“M&A demand was the biggest driver for activists, with a record 49% of all campaigns in 2023 having some form of M&A demand,” the report said. “Perhaps this rally is driven by a desire to stimulate a depressed M&A market weighed down by rising interest rates and inflation.”
M&A is one area where activists wait longer to get the results they want.
Activist investors are pushing for change elsewhere too.
In connection with M&A activity, activist investors often have recommendations regarding a company’s business strategy. One example is the recent proxy battle between activist investors. Nelson Peltz and Walt Disney.
Mr. Peltz wanted several things from Disney, including two board seats, higher profit margins and a clear strategy.
Although Peltz did not win a seat on the board, he was satisfied with the outcome.
“Disney stock has risen nearly 50% over the past six months, the best performance of the Dow Jones Industrial Average this year,” Peltz’s firm, Trian Partners, said in a statement. April 3rd press release.
According to Goldman Sachs, other initiatives sought by activist investors include strategic reassessment (19%) and increased return of capital to shareholders through dividends and share buybacks (12%). All of these can affect a company’s short- and long-term profits.
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