Key takeaways
- Activist investors attempt to purchase enough shares in a company so that they can pressure management into changes they believe will improve shareholder value.
- As seen with Ryan Cohen, the actions of activist investors can also hurt retail investors, particularly when they exit their position.
- Paul Singer recently exited his Twitter position through his hedge fund, Elliott Management, while Elon Musk was attempting to acquire the company.
When looking for investment advice, we often turn to the experts to see what they’re doing in addition to performing our own analysis. One strategy that some investors use is to follow the recent investments of top activist investors.
These activist investors find publicly-traded companies they think could benefit from new initiatives, and attempt to put pressure on the management teams and executives running the show by purchasing large amounts of shares, hoping to catalyze new thinking and improve shareholder value. However, the changes aren’t always accepted by the current management, the motivation has been questionable at times, and we have even seen some hostile takeovers.
Let’s take a good, honest look at activist investing, the logic behind it, and recent investments from top players in this space.
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What do activist investors do?
The goal of an activist investor is to initiate change in a company whose business practices or management they believe is underperforming or outdated. By purchasing enough of the company’s shares, they hope to leverage their position to pressure the management into making changes. These investors tend to be hedge fund managers, and they’ll sometimes look for a spot on the board of directors to try to replace the management team outright with new appointees.
Activist investors are looking for an underperforming business that they can acquire a big stake in to force changes. Sometimes the changes are accepted and sometimes there are issues.
Recent investments by top activist investors
We’re going to look at recent investments of a few key activist investors.
Carl Icahn
Carl Icahn is a well-known figure among activist shareholders. Some would even say that aside from Warren Buffett, Icahn is one of the most popular personalities on Wall Street. Icahn has been making headlines since the 1980s with hostile takeover attempts that earned him the moniker “corporate raider.”
These are some of the noteworthy investments from Icahn through Icahn Enterprises as of the SEC filings for the quarter ending on June 30:
Ichan initiated a new stake in Bausch + Lomb ($BLCO) with 3.5 million shares. The $53 million investment in the Canadian eye health company was surprising because it only went public in May. Just weeks after the Bausch + Lomb IPO, the CEO and chairman stepped down from the board to be replaced by Icahn’s appointees. Since the company went public so recently, it’s difficult to track performance but it will be interesting to see what strategic changes occur and how the share price is impacted going forward.
Icahn also exited his position in Delek US Holdings (DK) during the second quarter. It was announced in March that Delek was buying back stock from Icahn in a deal that included withdrawing director nominations and additional share acquisition. This is evidence that these management changes don’t always work out well, it seems Delek was intent on keeping a diverse board of directors to serve its shareholders.
Paul Singer
Paul Singer started Elliott Management in 1977. The hedge fund has become one of the most prolific activist investors in the world by targeting large global companies, ranging from AT&T to Hyundai. There was one major trade in the second quarter that must be highlighted.
A securities filing showed that Elliott Management had no common stock in Twitter as of June 30, which means that the hedge fund completely exited its position in the second quarter. This was a huge move since Elliott held 10 million shares of $TWTR that were worth $387 million on March 31. It was also during the second quarter that the fiasco of Elon Musk announcing he was buying Twitter occurred. One can assume there were many issues behind the scenes as Elon Musk publicly commented on his potential acquisition of the social media platform.
Singer’s largest holding is currently Howmet Aerospace
Ryan Cohen
Ryan Cohen has become one of the more popular activist investors recently, often associated in the media with the meme stock rallies, and for good reason. Cohen became famous when he sold Chewy.com, a company he founded in 2011, for a record $3.34 billion to PetSmart. Cohen owns the venture capital firm RC Ventures.
He was recently in the news for his
Cohen sold his 7.78 million shares of BBBY stock for an estimated profit of $68 million on August 16 and 17, 2022. This led to a shareholder lawsuit alleging that Cohen participated in a pump and dump scheme and shortly thereafter we all learned of the suicide of Bed Bath & Beyond CFO
Why do these investments matter?
Investors look to analysts and experts for advice on how to invest their money because they believe these folks have a proven track record. As a retail investor, must of us will not have much say in how the company puts our hard earned money to work. Activist investors, on the other hand, invest in companies so that they can have a say in how the company operates.
According to Insightia, activist investors made public demands of 886 companies worldwide in 2021. Retail investors often track these investments because they believe in the mission and anticipate some innovation and a related increase in share price.
Activist investors tend to target companies they feel are mismanaged, have excessive expenses, or have any other issues that the activists feel they can fix to make the company more valuable to shareholders.
As an investor, you’re always trying to maximize your returns.
An argument against activist investors is that they could be focused on the short-term results to make a quick profit instead of considering the long-term horizon. If you’re a long-term investor in a company, you may experience some swings due to the actions of activist investors. It’s also not always a given that the changes requested by these activist investors will be for the better.
This leads us to another interesting question about activist investors.
What happens when an activist investor sells?
It’s important to consider the consequences of an activist investor exiting a position in a company. While there’s plenty of optimism when an activist investor first buys in, mounting shares and influence by the millions, there could be some serious issues when the activist decides to sell. Since they own so many shares in the company, this could be a major news event. If the hedge fund sells its shares because it didn’t get the changes requested, the company's value could drop off dramatically for no reason beyond they hype or sentiment associated with the selloff, which will hurt your holdings.
Activist investors will likely have a different time horizon than you, for a multitude of reasons, most likely being that you are saving for retirement or other longer-term goals. You must consider the possible swings associated with these stocks, when making investment decisions based on activist investors.
How should these investments impact your portfolio?
When deciding where to invest your money, you must do your own extensive research to mitigate risks and protect yourself. There are no guarantees that the activist investor will get their way or that their decisions will lead to long-term, sustainable growth.
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The bottom line
If you want to follow activist investors because you believe that they have a proven track record, you must consider the possible ramifications of what could happen if the hedge fund doesn’t get what it wants. There’s no guarantee that the activist investor will always be right or that the changes will be accepted by the company they invest in. As always, it’s best that you do your own research so that you make informed investments with your money or seek out a solution that does much of this work for you, Q.ai.
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