Activist Investor

An activist shareholder is a person or organization that aims to acquire a majority ownership in a corporation in order to initiate modifications.

What Is an Activist Investor?

An activist investor is an individual or group, such as a hedge fund that buys a significant stake in a public company to influence how the company is run, for instance by obtaining access to its board of directors.

How Do Activist Investors Pick Firms?

Activist investors hand-pick firms if they feel the company has untapped value or potential. They analyze certain business fundamentals to identify those companies that are undervalued.

A company could find itself a target of activist investors if it has excessive cash reserves or its operating costs are deemed wasteful. In such a case, activist investors could seek to gain control of the firm to distribute dividends to shareholders better or improve its efficiency by turning it into a private company.

Value Investing

The practice of activist investing is often called value investing because the target company’s stock is often viewed as undervalued. The primary goal here is capital appreciation. Activist investors acquire a huge stake in a company and begin implementing a specific plan that they believe will unlock its value.

Practices of Activist Investors

While activist investors do not actively manage the firms, they do focus on using the support of external institutional investors to exert pressure on policy decisions. Numerous tactics are used, both collaborative and contentious, including holding talks with management, shareholder resolutions, proxy contests, litigation and public campaigns. 

When an activist investor uses aggressive publicity campaigns, provocative resolutions and prolonged proxy wars, these are guaranteed to generate headlines. However, in most cases, a cooperative approach is used. The investor will engage the board in constructive negotiations that increase shareholder value.

How Successful Are Activist Investors?

As per the data, when activist investors target a company, they often have high returns on assets and operating profit margins. During the event year, they usually experience a dip that is followed by a recovery one year later, with significant improvement two years after the event. Changes are made to the payout policies in the event year and peaking the year afterward.

Does Activist Investing Work in the Crypto World?

When it comes to cryptocurrencies, there are instances where activist investing would apply. It is especially so with projects that have a governance system in place. Activist investors might buy a huge chunk of coins to persuade developers to make changes to the code.