Activist Investors Create Environments That Catalyze Change
March 20, 2015 Leave a comment
The age of activist investors is here, and they are a different breed than the 1980s stereotype of Gordon Gekko’s “greed is good” mentality. In addition to getting more revenue out of big companies, activist investors also help companies shift toward long term investments.
That’s not to say the interest of an activist investor doesn’t cause some company concerns! Big names like Daniel Loeb of Third Point and Jeffrey Ubben of ValueAct definitely come to the plate as investors expecting big changes in the companies they set their eyes on. But often these changes are meant to see the company through the long haul.
“Unless you have one eye on the long term—how customers and products are affected—you will not succeed,” said Loeb. His Third Point is currently set to make waves in Japan with its latest investment in Fanuc Corp., an insular industrial robotics business with untapped earning potential.
Ubben’s ValueAct has also interacted with major players in long term investments, including a campaign with Adobe, which sacrificed short-term earnings to focus on broader, long term goals.
This ideology of promoting growth and change exists across the board with activist investors, who have become ever more prominent in the business world since 2009. The research firm FactSet estimated that 15% of the members of the S&P index of America’s biggest firms have encountered activist inventor campaigns since then. While some campaigns are more successful than others, a 1994-2007 study by Lucian Bebchuck of Harvard Law School found that activist interventions generally lead to sustained improvement in operating performance and shareholder returns. The study looked at 2,000 interventions by activist hedge funds and found that, in addition to providing positive impact, activist investors’ actions did not support the “pump-and-dump” theory—that the stock prices of companies with this sort of interaction drop dramatically after the investors leave.
“Our findings indicate that policy makers and institutional investors should not accept assertions that activist interventions are detrimental in the long run,” wrote Bebchuck.
While individual activist investors’ tactics may not always endear them to the companies they want to work with, increasing evidence suggests that the move toward long term investment campaigns could be good for everyone involved.