London, Tuesday, 5 December 2023
What's Behind the Increase of Activist Investors? Which Companies Play a Leading Role and What Does the Future Hold?
By Angelos Tsigkopoulos
Founder & CEO, Diorasis Group
Publisher, The Decision Maker magazine
Keynote Speaker at The International Negotiations Conference, NegotiCON 2024
Michaeal Douglas as Gordon Gekko from the film "Wall Street", 1987, Picture by Villains Wiki
With the ever-evolving landscape of corporate governance, a notable trend has emerged in recent years – the increase of activist investors. These investors, often hedge funds, have gained significant influence in shaping the strategies and decisions of the companies they target.
The role of hedge funds in driving this surge of activist investors
The disclosure rules surrounding their activities
Companies that have played leading roles in this space
What does the future holds for this growing trend
The Role of Hedge Funds
Hedge funds, with their vast pools of capital and sophisticated investment strategies, have long been known for their ability to generate substantial returns. Their involvement in activist investing has added a new dimension to their role in the financial markets. By taking substantial equity stakes in target companies, these funds aim to influence management decisions and drive enhanced shareholder value.
Hedge funds employ various tactics to achieve their goals, such as advocating for changes in corporate strategy, demanding board representation, or even pushing for a sale or merger of the target company. Their actions often make headlines and can have a significant impact on the companies they target.
Disclosure Rules on Activist Investors
To ensure transparency and protect the interest of other shareholders, regulators have imposed disclosure rules on activist investors. The Securities and Exchange Commission (SEC), for example, requires investors who hold more than 5% of a company's stock to file a Schedule 13D or 13G, which discloses their intentions and share ownership.
However, some hedge funds take advantage of loopholes and delay their disclosure until they have amassed a significant stake in a company. This practice, known as “wolf-packing,” enables them to keep their investment activities hidden from public view until they are ready to disclose their intentions. Such tactics can create challenges for regulators in monitoring and regulating activist investing activities effectively.
Leading Companies in Activist Investing
Several companies have faced the brunt of activist investors and have become household names in the world of corporate activism.
One such example is Apple Inc., which faced pressure from activist investor Carl Icahn. Icahn was vocal about his belief that Apple was undervalued and pushed for the company to increase its share buyback program. Apple eventually succumbed to his demands and considerably expanded its capital return program.
Carl Icahn During a Conference 1980, Picture by Wikipedia
Another notable case is the pharmaceutical giant, Allergan. It experienced a hostile takeover attempt by activist investors Bill Ackman and Valeant Pharmaceuticals. Ackman's hedge fund, Pershing Square Capital Management, accumulated a substantial stake in Allergan and pursued a merger with Valeant. Although the takeover ultimately failed, it highlighted the power of activist investors in shaping the future of companies.
Bill Ackman in 2016, Picture by Wikipedia
What Does the Future Hold?
The future of activist investing appears to be promising, with no signs of slowing down. As hedge funds continue to amass large pools of capital, the potential for increased activism remains high. Additionally, changing market dynamics and evolving investor expectations are likely to fuel further interest in this approach.
However, there are concerns about the potential downside of activist investing. Critics argue that short-term profit motives may overshadow the long-term interests of companies and their stakeholders. Excessive pressure for immediate results could hinder strategic decision-making and inhibit essential investments in research and development or long-term growth initiatives.
Regulators and market participants will need to strike a delicate balance between protecting shareholders' rights and promoting sustainable corporate governance. Stricter disclosure rules and improved monitoring mechanisms may be required to promote transparency while allowing investors to express their views constructively.
To conclude, the increase of activist investors, particularly hedge funds, has transformed the corporate landscape. These investors wield considerable influence over the companies they target and can shape their strategies and decision-making. As this trend continues to evolve, it is important for regulators, companies, and investors alike to carefully navigate the challenges and opportunities presented by activist investing. Only with a balanced and well-regulated approach can this phenomenon contribute positively to the advancement of shareholder value and corporate governance.