There are more and more activist investors backed by ever-increasing war chests that keep filling up in response to activist success. Pension funds and other investors search high and low for decent returns and many seem convinced that activist investors can deliver the goods.
What drives shareholder activism and its success? Unfortunately, many companies are not run as well as they should be, which allows activists to find companies with performance problems, inadequate valuations and governance troubles. They buy in cheap, apply pressure to move management in a new direction and then seek to sell at a higher valuation.
Frankly, it can be embarrassing for executives that outsiders can be so successful without the benefit of inside information available to management. It should be much easier for management to drive these kinds of successes from the inside.
On top of this, in an environment where the public trust of corporate leaders has faded, activist investors have garnered an almost Robin Hood-like image as combatants of greedy, power hungry CEOs. Since activists usually own less than 10 percent of the company, the vast majority of any gains they stimulate are realized by other investors, including pension funds which invest on behalf of the masses. Activist activity seems almost altruistic.
The experience is very different from a corporate perspective. Many executives find dealing with activists to be very unpleasant. It is difficult to lead a company toward long-term success while a seemingly naïve outsider acts like a bully with a megaphone and cries out grievances for all to hear. Activists are disruptive, unsettling and downright frustrating.
Activists complain about deteriorating competitive advantages, weak revenue growth, declining profit margins and/or eroding returns on capital. They whine about slumping valuation and poor share-price performance. They often demand for the business to be broken up through spinoffs and divestitures or for it to stop its acquisitions. And they often insist on massive stock buybacks, sometimes funded by taking on heavy levels of debt.