On April 14, 2022, Elon Musk announced a cash offer to buy Twitter for $54.20 per share.
This came after it had been revealed that he had acquired a 9.2% stake in the company
and briefly entertained being on the company’s board.
Musk’s stated purpose was to change the company’s approach to content moderation.
Musk’s attempt to influence Twitter was a form of what’s called activist investing.
Activist investing can take many forms, but the goal is the same: to influence how a company
is run.
Activist investors commonly do this by becoming a major shareholder.
CEOs of publicly traded companies must ultimately answer to the company shareholders and the
board of directors who represent shareholders’ interests.
Often being a large shareholder allows them to appoint or take seats on the board of directors,
which gives them greater access and influence with the company’s leadership.
Famous activist investors include Carl Icahn, Bill Ackman, Paul Singer, and so on.
In the 2020s, activist investors were making headlines like Ryan Cohen and his influence
on Gamestop as well as Macellum Capital Management and Kohl’s.
So, what do activist investors do?
And do they add value or extract it?
Activists invest in a company if they think they can increase shareholder value by enhancing
the company’s profitability, efficiency, or structure.
For example, in the mid-2000s, Daniel Loeb became a major shareholder in Ligand Pharmaceuticals
and wrote a famously scathing public letter accusing the CEO of mismanagement.
Loeb joined the board and appointed a new CEO who quickly reduced employee headcount
and moved the company headquarters from an expensive San Diego office building.
Over the next two years, sales increased dramatically, producing $218 million in cash.
By the time Loeb cashed out, he had nearly doubled his $50 million investment.
Total revenue for Ligand in 2021 was $277 million and had 155 employees.
Sometimes activists are less disruptive, like when Carl Icahn’s investment fund owned
$2 billion of Apple and used his influence to convince Apple CEO Tim Cook to use its
excess cash to start a share buyback program to boost the stock price.
Another approach activists take is shorting company shares and then revealing an underlying
problem that causes the stock to fall so they can profit.
Short-selling activists are often seen as enemies by investors.
However, they sometimes act as private investigators and expose malfeasance.
For example, electric car company Nikola was touted as a green alternative to fossil-fueled
commercial trucks.
Its market cap reached an intraday peak of $34 billion before it had any revenue.
As suspicion about the company’s claims rose, Hindenburg Research took a short position
on the company and then issued a report documenting how management had mislead shareholders.
The report prompted an SEC investigation, which resulted in founder and CEO Trevor Milton
being indicted by federal prosecutors, and the company’s stock plummeted.
Hindenburg never disclosed how much they made on the trade but said it was their largest
win.
Short sellers aren’t the only activists with a bad reputation.
Activists often push for companies to make hard decisions like selling parts of the business,
laying off workers, or relocating to areas with lower costs.
In the 80s, activists known as corporate raiders would buy up companies and sell off
the parts because they were worth more than the whole.
Many activists would argue that companies often become bloated and inefficient, failing
to provide value to their customers and risking failure or bankruptcy.
They might say that it’s better to trim the fat, even if it’s painful, rather than
let the company die.
This leads us to the question of what kind of track record do activists have in adding
value to a company?
There are a lot of studies around activist investing and its benefits and drawbacks.
Many studies have found that activism has provided strategic, operational, and financial
solutions in many cases that have led to increased and sustained company valuations.
For example, one influential study found that companies targeted by activist investors saw
short-term share price gains of about 7% on average.
Another found that activists increased factory productivity and improved company research
and development, leading to greater innovation.
However, there isn’t a consensus on the benefit of activism.
While some studies have found long-term benefits to a company, others have found that activists
are often too focused on the short term or that shareholder value tends to find the greatest
increases if the company is bought out by another company.
Others have expressed concerns that activism gains come at a social cost such as workers
being laid off.
When it comes to activist investing, the evidence suggests that they tend to add value to individual
companies but they’re not always a success.
If an activist targets a stock you own, research their goals, plans, and time frame before
tagging along for the ride.