Activist investing isn't a new concept. It has existed since the stock market crash of 1929, perhaps earlier. Not all activist investing campaigns have been successful, but they all have a similar goal: To increase shareholders' value and by extension, a stock's price.
Many point to Benjamin Graham's 1926 fight with Northern Pipeline as the beginning of the activist investing movement. Graham, a mentor to Warren Buffett, accumulated a major stake in the railroad company and worked with management to return excess cash to shareholders.
Graham's campaign as well as the stories of many other efforts to control public companies is detailed in Jeff Gramm's 2016 book, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"During the stock market booms of the 1890s and 1920s, shareholders focused on horizontal and vertical grabs for power in the form of mergers and stock market manipulations," Strategy + Business contributor Jill Priluck wrote in a 2016 review of Gramm's book. "In the 1950s and 1960s, it was common to see companies engage in serial acquisitions to build conglomerates."
Once the 1980s hit, there was " an abundance of what become known as greenmailing – a phenomenon in which activist investors would amass a stake, threaten a takeover, and then sell their shares back to the company at a higher price," she continued.
While activist investors undoubtedly believe their campaigns add value to a company and its shareholders, the evidence on how activist investing actually impacts stocks is less conclusive.
How does activist investing impact stocks?
On the one hand, in order to have the standing to pressure management into making changes, an activist investor must acquire a major stake. This buying power certainly helps support the share price in the short term.
However, the lasting impact is negligible. For instance, Goldman Sachs Research looked at data from 2006 through May 2023, and found that the impact of the more than 2,100 activist campaigns analyzed over 17 years was marginal.
"The results of these campaigns over the years have been mixed. The median stock targeted by activist investors outperformed its sector by 3 percentage points in the week after the launch of a campaign. However, excess returns were short-lived and typically turned negative after six months," Goldman Sachs wrote.
What are the benefits of activist investing?
"When you stop growing you start dying," wrote author William S. Burroughs. The same adage applies to activist investors and their quest for change.
In a 2019 podcast hosted by McKinsey & Co., panelists examined the pros and cons of activist investors, noting this particular breed of investor had four areas where they try to affect change: Corporate governance, M&A activity, business strategy and operations, and capital allocation.
Generally, activist investors tend to get involved with good companies that have lost their way, underperforming from their historical norm or relative to their peers.
"What we see is not so much geography or industry affecting whether a company could be under attack, but rather a good company that has been performing less well recently," stated Sandra Oberhollenzer, then a McKinsey & Company consultant.
Activist investors believe their actions are the kick-in-the-behind companies need to deliver higher share prices.
What is the impact of activist investing?
Activist investors tend to focus on three corporate governance issues: CEO, executive compensation and board composition. Ancora Holdings and Norfolk Southern (NSC) offer a recent example.
In March 2024, activist investor Ancora Holdings wrote to Norfolk Southern's board asking why its CEO Alan Shaw got a 37% pay raise in 2023, given the company's handling of the hazardous materials derailment in East Palestine, Ohio, earlier that year.
"It is astonishing to us that the Board would reward Mr. Shaw with a 37% increase in the value of compensation to a total of $13.4 million for a year in which the Company's customers, employees, shareholders and community partners all suffered," the letter stated.
On April 22, Ancora sent a second letter to shareholders outlining its plans for the company, including adding seven new board members with railroad experience and replacing the CEO.
As a result of its activist investing efforts, Ancora secured at least three NSC board seats according to preliminary results from its mid-May shareholders meeting. However, shareholders voted in favor to keep Alan Shaw on the board as well.
M&A is the biggest reason behind activist investing, data shows
One of the most common requests from activist investors is to sell or spin off a particular unit of a target company. According to 2023 data for activist campaigns from Barclays, approximately half were acquisition-related.
"The demand for M&A was the top driver for activists, with a record 49% of all campaigns in 2023 having some sort of M&A demand," the report stated. "Likely driving the surge is a desire to invigorate a sluggish M&A market, weighed down by higher interest rates and inflation."
M&A is one area where activists will wait longer for the desired results.
Activist investors also seek change elsewhere
Related to M&A activity, activist investors often have recommendations around a company's business strategy. An example is the recent proxy battle between activist investor Nelson Peltz and Walt Disney.
Peltz wanted several things from Disney, including two board seats, increased profit margins, and a clear strategy.
Although Peltz did not gain seats on the board, he was satisfied with the result.
"Over the last six months, Disney's stock is up approximately 50% and is the Dow Jones Industrial Average's best performer year-to-date," commented Trian Partners, Peltz's company, in an April 3 press release.
Other initiatives activist investors seek out, according to Goldman Sachs, are strategic reviews (19%) and returning more capital to shareholders through dividends and share repurchases (12%) – all of which can impact a company's short- and long-term returns.
Related content
-
I'm want to give my 3 grandkids $5K each for Christmas.You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us?A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm a Financial Planner: If You're Not Doing Roth Conversions, You Need to Read This
Roth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us? A Retirement Psychologist Makes the Case
A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm a Financial Adviser: This Is How You Can Adapt to Social Security UncertaintyRather than letting the unknowns make you anxious, focus on building a flexible income strategy that can adapt to possible future Social Security changes.
-
I'm a Financial Planner for Millionaires: Here's How to Give Your Kids Cash Gifts Without Triggering IRS PaperworkMost people can gift large sums without paying tax or filing a return, especially by structuring gifts across two tax years or splitting gifts with a spouse.
-
'Boomer Candy' Investments Might Seem Sweet, But They Can Have a Sour AftertasteProducts such as index annuities, structured notes and buffered ETFs might seem appealing, but sometimes they can rob you of flexibility and trap your capital.
-
AI Stocks Lead Nasdaq's 398-Point Nosedive: Stock Market TodayThe major stock market indexes do not yet reflect the bullish tendencies of sector rotation and broadening participation.
-
Got $100 to Gamble? These Penny Stocks Could Be Worth the RideVolatile penny stocks are high-risk plays with potentially high rewards. If you have $100 you can afford to lose, these three names are worth a look.
-
Quick Question: Are You Planning for a 20-Year Retirement or a 30-Year Retirement?You probably should be planning for a much longer retirement than you are. To avoid running out of retirement savings, you really need to make a plan.
