What is Activist Investor?

1416 reads · Last updated: December 5, 2024

An activist investor is an individual or group that purchases significant shares in a company and seeks to influence its management and strategic decisions to enhance the company's value. Activist investors typically engage in various actions to achieve their objectives, including but not limited to:Proposing Board Members: Activist investors may nominate new board members to change the company's governance structure.Pushing for Restructuring: They may push for the company to undergo restructuring, spin-offs, or the sale of certain assets to increase overall value.Public Pressure: By releasing open letters or leveraging media coverage, they exert pressure on the company's management to take specific actions.Gaining Shareholder Support: Activist investors often seek the support of other shareholders to amplify their influence.The primary goal of activist investors is to improve shareholder value by enhancing the company's operational efficiency, governance, or strategic direction. While their actions can be controversial, they can sometimes lead to positive changes within the company.

Definition

Activist investors are those who purchase significant shares of a company and attempt to enhance the company's value by influencing its management and strategic decisions. They typically engage in actions such as proposing board members, pushing for company restructuring, applying public pressure, and rallying shareholder support. Their goal is usually to improve shareholder value by enhancing the company's operational efficiency, governance structure, or strategic direction.

Origin

The concept of activist investors originated in the United States during the 1980s when some investors began influencing company decisions by acquiring large stakes and actively participating in corporate governance. This investment strategy has evolved over the decades and is now applied globally.

Categories and Features

Activist investors can be categorized into several types: 1. Financial activists, who focus on the company's financial performance and shareholder returns; 2. Strategic activists, who are concerned with the company's long-term strategy and market positioning; 3. Social responsibility activists, who focus on the company's social responsibility and environmental impact. Each type of activist investor has its unique focus and strategies.

Case Studies

A notable example is Carl Icahn's investment in Apple. Icahn purchased a significant amount of Apple stock and publicly advocated for a stock buyback program, which enhanced shareholder value. Another example is Elliott Management's involvement with AT&T, where Elliott proposed restructuring and asset divestitures, successfully increasing the company's market value.

Common Issues

Investors may worry that the involvement of activist investors could lead to short-term volatility and uncertainty within the company. Additionally, the goals of activist investors might not align with the company's long-term objectives, leading to potential conflicts of interest. Investors should carefully evaluate the proposals and strategies of activist investors to assess their long-term impact on the company and its shareholders.

Suggested for You

Bonus Depreciation

Bonus depreciation is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery, rather than write them off over the "useful life" of that asset. Bonus depreciation is also known as the additional first-year depreciation deduction.

Accelerated Depreciation

Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater depreciation expenses in the early years of the life of an asset. Accelerated depreciation methods, such as double-declining balance (DDB), means there will be higher depreciation expenses in the first few years and lower expenses as the asset ages. This is unlike the straight-line depreciation method, which spreads the cost evenly over the life of an asset.

Activity Ratios

An activity ratio is a type of financial metric that indicates how efficiently a company is leveraging the assets on its balance sheet, to generate revenues and cash. Commonly referred to as efficiency ratios, activity ratios help analysts gauge how a company handles inventory management, which is key to its operational fluidity and overall fiscal health.

Accounting Profit

Accounting Profit, also known as Financial Profit or Book Profit, is the net income of a business for a specific accounting period, calculated according to accounting standards. It is derived by subtracting total expenses from total revenues and is typically reported in financial statements, particularly the income statement (profit and loss statement). Accounting profit includes all realized revenues and incurred expenses but excludes unrealized gains or potential losses. It reflects the financial performance and operational results of a business and is a crucial indicator for assessing profitability. Accounting profit differs from economic profit, which considers opportunity costs and implicit costs, whereas accounting profit is based solely on actual transactions recorded.

Accounting Method

An accounting method refers to the rules a company follows in reporting revenues and expenses. The two primary methods of accounting are accrual accounting (generally used by companies) and cash accounting (generally used by individuals).Cash accounting reports revenues and expenses as they are received and paid through cash inflows and outflows; accrual accounting reports them as they are earned and incurred through sales and purchases on credit and by using accounts receivable & accounts payable. Generally accepted accounting principles (GAAP) requires accrual accounting.

Accounting Ratio

An Accounting Ratio, also known as a Financial Ratio, is a ratio derived from data in financial statements used to analyze and assess a company's financial condition, operational efficiency, and profitability. Common accounting ratios include the current ratio, quick ratio, debt-to-equity ratio, gross profit margin, net profit margin, and return on assets. These ratios help investors, management, and other stakeholders understand the financial health and performance of a business. For example, the current ratio measures a company's short-term liquidity, while the net profit margin indicates its profitability. Accounting ratios are essential tools in financial analysis, aiding in making more informed investment and management decisions.