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An activist investor is a private or institutional investor who wants to join the board of directors of a target firm in order to obtain control of the business. Activist investors want to fundamentally alter the target business and reveal what they believe to be a hidden value within.
Types of Activist Investors
Activist investors come in many different forms, including:
- Individual Activist Investors: Individual activist investors are frequently extremely wealthy and powerful. In order to obtain a sufficient number of voting rights on the board of directors, they can use their capital to buy a lot of a company's shares. They seek to sway the target company's strategic course. The people use their power to make structural changes to a company's strategy, and they are typically well-known in the finance sector. Bill Ackman, Carl Icahn, David Einhorn, and Dan Loeb are a few instances of well-known activist shareholders.
- Private Equity Firms: Private equity companies that represent activist investors use a variety of strategies, but they often seize control of a publicly traded company with the goal of taking it private. A private equity firm is structured with limited partners who hold a sizable portion of the fund and have limited responsibility and a general partner who has unlimited liability. Private equity firms often use debt finance to purchase a target company and then restructure it to increase profitability and efficiency.
- Hedge Funds: Hedge funds that are activist investors function as a collective group of investors rather than as an individual like individual activists do. Hedge funds, which specialize in activist investment, apply a variety of pressure techniques to management to compel them to make decisions that will increase shareholder value. By giving management advice, pressuring the company into a sale, forcing divestitures or restructuring, or removing the board of directors, hedge funds may try to increase shareholder value.
Advantages and Disadvantages of Activist Investors
Activist investors may have positive or negative impacts on the target company and its shareholders, depending on their goals and strategies. Some of the potential advantages and disadvantages are:
- Advantages: Activist investors may be able to increase value for present shareholders by directing management decisions in the shareholders' best interests. Activist investors can provide dispersed shareholders a voice when they lack the necessary shareholdings to have an impact on management decisions. Activist investors might also offer novel insights and suggestions that could boost the business's productivity and competitiveness.
- Disadvantages: Activist investors might not have the same priorities as other stockholders, which could result in a loss of value for all owners. For instance, an activist investor may solely favor a short-term holding time horizon and persuade management to take actions that benefit the company in the short run at the expense of shareholders with a long-term holding time horizon. By enforcing significant changes that might not be consistent with the company's goal and values, activist investors may also disturb the business's operations and culture.
