How Activist Investors Pick Their Targets

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Activist investors are known for building up a stake in a couple for the purpose of rocking the boat, but how do they decide which companies are worth targeting and which aren’t? There has been an increasing number of studies on activism published recently, and it’s easy to see why. Last year brought 343 activist campaigns in the U.S., which is the most since 2009.

Who are the activist investors?

PricewaterhouseCoopers published its recent study entitled Shareholder activism: Who, what, when, and how? They examined activism from every angle and classify it into four main categories. Different types of activist investors tend to fall into each category (All graphs in this article are courtesy PricewaterhouseCoopers):

The firm considers hedge fund activism, which includes big names like Carl Icahn and Bill Ackman, to be the most extreme type. At the other end of the spectrum are “say on pay” campaigns, which are one-on-one discussions between companies and shareholders that are triggered by advisory votes granted under the Dodd-Frank Act.

Hedge fund activism

PricewaterhouseCoopers notes that Nelson Peltz, Carl Icahn and others became known as “corporate raiders” in the 1980s when they began to engage in activism. At that time, they often wanted to break up the companies they targeted. These hedge fund activists tend to buy up a significant share of a company and then try to take control of the company’s board of directors through a proxy contest.


These firms still follow this strategy today, although they also often seek to replace management, increase operational efficiency or restructure a company’s finances. Many also pick fights for the purpose of unlocking shareholder value.

The tactics for getting what they want vary as well, with some running a PR campaign and others holding talks with their target companies behind closed doors.

New activist hedge funds jump in

The number of activist hedge funds has risen dramatically in the last ten years. PricewaterhouseCoopers estimates that more than $100 billion in assets are under management by activist hedge funds around the world.


The firm also states that between 2003 and May 2014, 275 new activist hedge funds were created.

Several new funds entered the arena in the 1990s, including Paulson & Co., which was founded by John Paulson, and Lawndale Capital, which was founded by Andrew Shapiro. PricewaterhouseCoopers states that these funds were able to raise more from other investors and, instead of trying to take over the majority of a company’s board, opted for minority representation.

“Vote no” campaigns

A slightly less extreme version of hedge fund activism is what PricewaterhouseCoopers calls “vote no” campaigns, in which investors try to convince shareholders not to vote for board nominees named by a company’s directors. These campaigns almost never work in ousting a director involuntarily because most companies require a majority vote of outstanding shares. However, sometimes these campaigns convince a director to voluntarily withdraw from consideration.

In most cases, public or labor pension funds run “vote no” campaigns.

Shareholder proposals

The next area of activism comes in the form of shareholder proposals. PricewaterhouseCoopers categorizes proposals into four areas: corporate governance, executive pay, company oversight and changes related to a company’s corporate citizenship, like lobbying, environmental concerns, etc.

Many different types of investors take this activist route. Public or labor pension funds or individual investors often sponsor governance, executive pay and company oversight issues. Social and environmental proposals are often sponsored by labor pension funds, religious groups or other coalitions. Proposals focused on increasing shareholder value tend to be brought by hedge funds as part of a broader activist campaign.

Shareholder proposal volume tends to be more focused in the Russell 3000, although S&P 500 companies certainly aren’t immune.


“Say on pay” campaigns

So-called “say on pay” campaigns are the most passive ones, according to PricewaterhouseCoopers. In most cases, these campaigns involve letter writing, phone calls or meetings with company management. Activist investors who run these campaigns simply just want to change how executives are compensated.

Many types of investors engage in this form of activism, including pension funds, individuals, mutual funds and traditional asset managers.

Activist investors pick their targets

Understanding the different types of activist investors and why they do what they do makes it easier to understand how they select their targets. Recently another study focused on how companies can protect themselves from activist investors, and it certainly helps to understand what kinds of red flags activists may pick up on.

Of course all hedge funds follow their own strategies in picking targets, but PricewaterhouseCoopers found a number of similarities among them. For example, profitable companies with a “low market value relative to book value” often make good targets, particularly if they have a popular brand. These companies also must have good operating cash flow and return on assets.

Also companies that are sitting on a huge pot of cash, like Apple, which attracted Carl Icahn’s attention with its huge cash stash, and Google, tend to attract activists, especially if they don’t make it clear why they are hoarding cash. Activists also tend to keep an eye out for companies that have divisions which are underperforming their markets significantly.

Another red flag for some companies is if institutional investors hold the greatest majority of their outstanding voting stock. And finally, activists often target companies that aren’t following current “best practices” for board composition.

PricewaterhouseCoopers created this wonderful chart explaining which red flags tend to bring about which types of activist campaigns:


See full study below.


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