February Monthly Market Commentary
The Rise of the Activist Investor
If you’ve been keeping up on the news, you may have heard about SoFi’s latest hands-on way to put your money to work through Active Investing. But are you familiar with the class of investors bearing a similar-sounding title, who are driving dramatic change in the market?
For the uninitiated, activist investors are individuals who buy shares at a public company with the intent of gaining a seat on the board and affecting major change.
To make it easier to digest, let’s use your kitchen as a metaphor.
Imagine you’ve arrived in your kitchen after a long day of work. Your stomach is roaring and you’re verging on becoming hangry at any moment. Rather than cooking a nutritious meal you know will be good for you, you opt to nuke some leftover Pad Thai.
Then suddenly, a famous chef (let’s say a famous British chef known for his passionate outbursts) breaks into your home. This is perplexing for a couple of reasons.
1. You locked the front door.
2. You have absolutely no personal relationship with him and never auditioned for any of his cooking shows.
The chef aggressively informs you that your dinner is subpar. He throws your noodles in the trash, scolding you for relying on leftovers. Instead, he demands you merge meal prep with your neighbors. He wants you to form a neighborhood conglomerate to cook.
The chef is particularly bullish on salmon. And if you don’t agree to cook it, you will be forcibly removed from your home and replaced with someone who can follow through with the ambitious chef’s wishes.
Will a celebrity chef put pressure on your next meal? Unlikely. But in monitoring market activity, we are seeing something similar. In the shadow of years of market growth, say-on-pay votes, and Dodd-Frank, activist shareholders are becoming more assertive. The number of companies being targeted by activist investors demanding they change how they operate, hit an all-time high in 2018.
In 2019, the activist trend shows no signs of abating, and even made some headlines this past month.
Activist Investing: A Deeper Dive
Activist investors have a simple aim: To make money. They do this by buying shares of companies they view as undervalued for reasons within management’s control, then pressure the management to shape up. They are often hedge fund managers and some of the world’s richest men and women.
It’s common for an activist investor to push for changes like significant cost-cutting, taking the company private, jettisoning a money-losing division, increasing share buybacks, increasing debt, or replacing executives.
The activist investor playbook: Money >> Power >> Change >> Profits >> More Money.
Here’s how it works:
• You find a company that isn’t efficiently run.
• You purchase large numbers of shares of, often the largest amount possible without requiring an SEC filing.
• Once you have a meaningful stake in the company, possibly to the point where you can get a board seat, you have the ear of management and can make the pitch.
• Make a public announcement of your intentions to change.
• Use the control you’ve bought to influence how the company operates.
• Make quick changes, attempting to sell at a profit.
• Rinse, repeat, take over as many companies as possible as you add additional zeros to your net worth.
Why Activist Investors Are Having a Moment Now
Here are a few examples of activist investors on the move right now.
At the end of January, Elliott Management, the activist hedge fund founded by billionaire Paul Singer, made waves at eBay. eBay got its start as a marketplace for selling goods and services in 1995, the same year Jeff Bezos launched a humble online bookstore.
Elliott Management wants eBay to be as successful as Amazon and recently outlined a dramatic restructuring initiative called the “Enhancing eBay Plan.” They suggest eliminating entire segments of eBay to revitalize its core marketplace business. They are looking at changing the company from within.
Navient, the student loan servicer and subject of a 2017 Consumer Financial Protection Bureau (CFPB) lawsuit claiming that it “illegally cheated” borrowers in a way that pushed them into default, was in heated takeover talks with Canyon Capital.
Activist investors are working this month to kick many of the current executives to the curb and replace them with new leaders who can provide a “fresh perspective” to the company’s strategic direction.
Activist investor Carl Icahn had quite a February. He amassed nearly 10% of casino operator Caesars Entertainment. He then urged the company to sell itself. He believes the best move forward is to shut its doors and sell every asset the company owns.
This follows a recent move in which he acquired a large chunk of Family Dollar, convinced the company to sell itself to competitor Dollar Tree , personally netting him tens of millions of dollars. This type of exit is common; activists regularly cash out their holdings shortly after their demands are accepted or rejected.
Activist investing remains a primarily American phenomenon. Approximately 80% of activist interventions occur in U.S. stocks. If you’re the CEO of an S&P 500 company, there’s a fair chance that an activist investor was among your shareholders during the past few years.
A few companies that have been involved with activist investors include:
• Papa John’s
• And others
Are Activist Investors Good or Evil?
Activist investors have been around since the 1980s, when they were often looked at as corporate raiders who gutted weak companies for a quick profit. The more hostile activist investors might want to maximize share value to cash out quickly. Consider this a short-term uprising in your portfolio. But companies do need enough time to grow, evolve, and prosper—and create a meaningful contribution to the wider economy. Multiple studies have shown that activist investors succeed in raising share prices, albeit sometimes only temporarily.
Some activists are now seen as more like Robin Hood-esque superheroes than soulless villains. Activist investors are often looking to enact more sustainable positive changes .
Even the prospect of an activist campaign keeps CEOs alert. This is in the best interest of everybody. The CEOs of the companies you own stay focused on creating value for shareholders. Shareholders earn a healthy return on their investment. Activist investors likely know the financial, competitors, industry dynamics better than most board members and will insist the executives and board members remember this. Let’s hope they listen.
Making money is perhaps more compatible with doing good. Their work involves shining a light on inefficiencies. And, they can pump their profits into the wider economy. Carl Icahn, for example, has donated hundreds of millions of dollars to charities focusing on medicine, education, and child welfare.
An activist investor with the right mindset can be a wonderful thing.
We don’t think it’s acceptable for anyone, including famous chefs, to break into your house, throw out your food, and leave you starving. But we do think that we can all learn a thing or two about cooking from a famous Chef.
He’s teaching aspiring chefs around the world to cook better. In some ways, activist investors are helping companies operate better. You can use that as inspiration with your own money: to activate positive changes in your life and the lives of those you care about.
The opinions and analysis expressed here are those of Alison Norris as of March 1, 2019. These views may change as market, economic, and other conditions change. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services made available through SoFi Wealth LLC. A registered investment advisor.