Intermediate Investing: Activist Investors

We’ve talked recently about Bill Ackman and Carl Icahn.  Two very famous investors in their own right, and both extremely successful men.  Both can be labelled “activist investors”.  Activist investing isn’t a new idea, but it has become much more popular in the past decade or two.  The individuals who have the ability and resources to actively invest are few and far between.  However, today I’d like to discuss how active investing works and how it affects your life.

What is activist investing?

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Business is not always the glorious money making party that some people believe it to be.  Companies go through hard times and lose money or are less profitable. Periods of lowered profits or shrinking of a company can be caused by bad leadership, tough economic times, changes in the market and a host of other internal or external factors.

A host of popular, well known companies have gone through hard times.  Well known brands that you could ask literally any American about and they would know exactly who you were talking about.  What happens when a popular company takes a turn for the worse?

In some cases very well-to-do investors, “activist investors” see the potential in a company and decide they’d like to turn the company around and bring it back to it’s former glory.  Activist investors buy large stakes in a company in order to have a powerful voice and change the structure of the company.  These investors have one purpose; to make a dying company profitable again.

How do they turn the company around?

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Activist investors have many different tools in their kit to turn a company around. Some are gentle guidance, others are harsh takeovers.  The first and probably most influential position that an activist investor can take is to replace the CEO or president of the company.  Replacing the current CEO is a top-down strategy that enables the investor to have an inside man.  Sometimes good CEOs and good companies can cause bad results.

Take Canadian Pacific for instance.  Bill Ackman bought a large stake in the company, replaced the CEO with Hunter Harrison (one of, if not the best railroader in the current era) and turned a failing company into the second most profitable railroad in North America.  This all occurred in 18 months.

A second highly influential tool is replacing or adding members of the board. Board seats influence important business related decisions within a company.  Taking board seats can help steer a company in the proper direction or revise a faulty business plan that isn’t profitable.  Companies that get stuck in the past  and refuse to update to the modern age are extremely susceptible to stagnant growth and progress.  Replacing board members with younger visionaries has been beneficial to some older brands.

Activist investing in your life

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Activist investors manipulate companies in ways that they see fit or correct.  Sometimes these changes work, sometimes they don’t.  Carl Icahn was part of the spin-off of Paypal from Ebay recently, and both companies have watched their stock prices plummet.

This manipulation of companies and stock affects everyone invested or touched by the company.  The turn around of Canadian Pacific greatly benefited the stockholders of the company.  On the flip side, the plummet in JCPenney (another company activist investor Bill Ackman tried to help) has lost a lot of people money.  That’s the risk of investing.

Overall, companies that are intriguing to activist investors are already in trouble, and stockholders are unhappy.  The public perception of activist investors varies from person to person, but the intentions of the primary investor is to make money and increase the strength of the company.  If the company grows stronger, everyone wins.  Overall activist investors do a lot of good for hurting businesses.

I hope you’ve found this useful!  If you have any questions or comments, feel free to leave them below (we love hearing from you guys), or email me personally at David.Coleman@Collegeinvestr.com.  Thanks for reading!


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-David Coleman

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