1. What is activist investing?
Activist investing is an investing strategy that investors purchase large number of public companies’ stocks so that they obtain seats on the board of the company. Their goal is to affect the company’s management and promote material changes. Activist investors believe the company will worth more if only follow their plans. Activist investors are usually private equity firms, hedge funds and investment individuals.
2. Why has it become so prevalent?
1) Macro Factors
The US economy has been in a time of low interest rate. With the low growth of the macro environment, companies are making bold moves to stimulate their performance. Meanwhile, It’s getting harder and harder for companies to manage their cost due…show more content… “Activist hedge funds have, as an asset class, sharply outperformed their non-activist peers and market indices, generating a nearly 20% annual return since 2009, relative to 7.5% for hedge funds as a whole” (Citi Group). The outperformance promoted more and more money flow into activist funds. And even traditional investments are making transitions to be more active.
3. Pros And Cons
Pros: 1) Management work harder under pressure from activist investors. Activist investors are powerful. They have the ability to replace the existing management. Under this pressure, management tends to work harder to meet activist investors’ demand of return. 2) Activist investors may bring creative ideas to the table. Activist investors often see the potential of the invested company and have ideas about how to improve the company’s management and create better profit for shareholders before getting in. They usually bring energy and opportunities for the company.
Cons: 1) Activist investors look for short-term profit at cost of long-term health of the company. Activist investors employ hostile tactics that increase leverage and enlarge payouts to stockholders. In short, shareholders get better return. But in long run, they increase the risk and hurt the company’s