An Introduction to Activist Investing
Most investors will just own a single index fund for their whole lives and call it a day. Some more complex investors may dabble around in picking stocks. Investors who are truly passionate about what they do may start working at banks and other funds, managing assets for other individuals. However, especially in hedge funds, activist investing has started to become much more popular than other forms of passive investing and has netted billions for managers, companies, and more.
So What is Activist Investing
An activist is just like a normal investor in that they acquire shares in a company. However, unlike other investors, they generally acquire a large number of shares in a very short amount of time with the hope of inciting change in that company to reap a profit. This could include reducing inflated executive salaries and perks, laying off employees, and more. Most of the time their motives align with common shareholders providing immense value for both groups. A few examples of activist investors include Carl Icahn and Nelson Peltz. Their notoriety in the corporate world generally leads to companies providing them with a hefty payout whenever they see that one of them has acquired a significant share of the organization.
Greenmail
Greenmail is often an outcome that occurs in activist situations. Essentially, when investors acquire a large number of shares in a company, they can threaten a hostile takeover. Companies that are afraid of this outcome can offer greenmail to investors. This just means that they will re-acquire those shares for a premium netting the investor a profit and saving the company from a takeover. This is generally a very large premium that can gain investors hundreds of millions of dollars for not doing anything. A good example of this is Sir James Goldsmith. Within two months he was able to net $93 million from an investment in Goodyear Tires over just a two-month period. This is because of the payment Goodyear Tires provided him just for leaving the company alone. Carl Icahn has also made billions from this strategy.
Herbalife
Herbalife is a company that caused a large battle between activist investors Carl Icahn and Bill Ackman. Ackman took a large short position in the company believing that it was a pyramid scheme and even said that he thought that the shares would crash to $0. Carl Icahn took a long position and owned almost 26% of the shares at one point. This ordeal ended with Icahn winning big with a $1 billion payout and led to Ackman losing over $1 billion. However, these battles between investors can be fierce which deters many people from the lucrative field of activist investing.
Conclusion
Activist investing is a very lucrative mode of investing for investors with large sums of capital. However, it is quite risky and only investors who can see moves ahead and are willing to hurt shareholders can truly make billion in this field.
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