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What is an Activist Investor?

!!!What is an Activist Investor?

T. Boone Pickens, Jr., Kirk Kerkorian, Carl Icahn, Nelson Peltz, Bill Ackman, David Einhorn, Dan Loeb… Financial newspapers regularly report on these people. But, who are they? What do they do to earn their living? ”Are they really corporate raiders or agitators for the shareholders?”

These people have been called __activist investors__ or corporate raiders, depending on the perspective of the commentator. What kind of change do they want to bring about and for whom?

Activist investors are individuals or institutional investors (such as hedge funds and private equity funds) that purchase a significant amount stocks in a public company. They do so to instigate changes within that company. The goal of an activist investor may ultimately be to gain a seat on the board of the target company.

Typically, a company can become the target for activist investors if the company has excessive cash reserves or wasteful operating costs that could be distributed as dividends to shareholders, or the company could be run more efficiently as a private company. Activist investors do not usually manage the corporations in which they invest. Instead, they rely on the support of external institutional investors to exert friendly pressure as they exercise shareholder rights.

Activist investor tactics can be anything from collaborative to contentious. They can include negotiating with management, public campaigns, shareholder resolutions, proxy contests, and even litigation. Proxy fights and litigations can be costly and time consuming so few activist investor campaigns proceed to that level.

A good indicator of a company becoming a target for activist investors is the filing of SEC Schedule 13D (beneficial ownership report). When an activist investor or institutional investor purchases beneficial ownership of more than 5 percent of a voting class of the target company’s stocks registered under Section 12 of the Securities Exchange Act of 1934, they are required to file a Schedule 13D or 13G. Once a company becomes a target, they may also want an amicable settlement in an effort to avoid a costly battle due to the changing attitudes of institutional investors.

!!!Examples of Activist Investors

!Carl Icahn

Carl Icahn started as a stockbroker in 1961 on Wall Street. In 1978, he began to act as an activist investor by taking controlling positions in individual firms. Companies such as Trans World Airlines, U.S. Steel, Yahoo Inc., Netflix Inc., Xerox, and the Clorox Company became the targets. One of Icahn’s more notable investments was in Apple Inc. and Xerox Corporation.

!Bill Ackman

Bill Ackman is the founder and chief executive officer (CEO) of the Pershing Square Capital Management, a hedge fund management company. Pershing has taken positions in Target Corporation, Wendy’s Company, Valeant Pharmaceuticals, and Chipotle Mexican Grill. Ackman’s notable investments and positions include Valeant Pharmaceuticals International Inc. and a short position in Herbalife Ltd.

!Dan Loeb

Dan Loeb is the founder of the $10.8 billion hedge fund Third Point Partners, a hedge fund based in New York. Third Point has sizable positions in Baxter International Inc. and Ligand Pharmaceuticals Inc. He also gained a seat on the Yahoo board of directors in 2012. Loeb’s strategy is to purchase companies that are in trouble, replace the management, and attempt to restore profitability.

!Activist Investment Funds

Examples of activist investment funds include the California Public Employees’ Retirement System (CalPERS) and the State Board of Administration of Florida.

!!!Lesson Summary

Whenever the management of public companies lacks appropriate incentives to maximize shareholder value, __activist investors__ jump in to make the company more valuable. Without activist investors, the complacent managers incur agency costs, maintaining their position regardless of performance while receiving excessive executive compensation and fringe benefits.

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