When it comes to investing, many investors with large amounts of capital use the principle of activist investing (not to be confused with active investing). Activist investing involves buying a large stake of a company (see the examples below as stakes depend on the company). These stakes give the investor influence over the company’s decisions and management. Activist investing allows investors to control the risk of their investment through direct influence on the board of directors. This risk management helps investors make huge profits on their initial investments. The board of directors is the body of executives that oversee the company’s management and represent the interests of shareholders. This is especially useful for hedge funds as they like to maximize profits while hedging the risk.
Who Are Activist Investors
Many hedge funds use activist strategies in order for them to have greater control on the risk of their investments. They control the risk of their investments by influencing the decisions of the board of directors. This allows investors to push their agenda on the company and make the changes necessary for a significant profit. Examples of big hedge funds and companies that use activist investing are Bill Ackman’s Pershing Square Capital Management, Daniel Loeb’s Third Point Management, Carl Icahn’s Icahn Enterprises, and Paul Singer’s notorious Elliott Management.
Elliott Management and Activist Moves
One of the most notorious hedge funds out there is Elliott Management. The hedge fund and its owner, Paul Singer, have made the news recently for aggressive moves in the management of the social media giant Twitter where they acquired a 4% stake and became one of the company’s largest investors. Paul Singer and many Twitter executives were concerned about Jack Dorsey’s role as CEO of both Twitter and Square along with the struggling stock price under his management. Jack Dorsey had also announced a six month trip to Africa which he later announced that he would re-evaluate after executives voiced their concerns. Through news about ousting Jack Dorsey as CEO, Twitter saw a surge in their stock price by 7.9%.
Activist investing can also be applied to sovereign debt as shown with Elliott Management when they had a 15 year battle with the Argentine government. Elliot Management used an activist strategy of buying distressed Argentine bonds, which are bonds of government entities that are close to or are going through bankruptcy. Argentina was in financial trouble as their sovereign debt was near default (failure to repay debt including interest or principal), which Singer took advantage of by suing the government for a full payback of their investment. Through successfully convincing the court of Ghana to seize an Argentine naval ship in training and suing the Argentine government in US courts, Elliott applied great pressure on the Argentine government and was successful in making 4 times their initial investment.
Pershing Square Activist Moves
Pershing Square, headed by Bill Ackman, is another hedge fund that is famous for its activist investing style. One of Ackman’s famous investments was his play on Canadian Pacific Railway. Canadian Pacific Railway was one of the few large players in the Pacific railway industry that has existed since 1881. However, the low stock price of $49 compared to competitors showed the weakness in the structural management of the firm.
Ackman acquired a 14.2% stake in Canandian Pacific Railway. Ackman went after the board, specifically the CEO, in order to fix the management of the company. However, this was not an easy move to make as Ackman had a very fierce proxy battle, a contest between multiple parties (usually two) for control of the company, with the board of directors at Canadian Pacific. This was due to their belief that Ackman was a new and inexperienced fund manager. Canadian Pacific controlled the Pacific railway industry for decades, which is why they were not fond of Ackman’s ideas. The broad experience and the powerful connections would naturally cause the board of Canadian Pacific to reject Ackman’s bold suggestion. Ackman’s idea was to hire the former CEO of a competitor firm and implement the structural changes necessary to increase the stock price.
Ackman ended up winning the proxy battle and the stock price skyrocketed from $49 to around $220 per share. This made Pershing Square $1.45 billion in a period of 3 years (2011-2014). Ackman is famous throughout Wall Street for his activist investments, and also for his battle with Herbalife.
Activist investing is mainly for large hedge funds and large investors as they buy large shares to have direct influence on the board. This is in order to manage risk and set their agenda on the company’s management. Hedge funds and other large investors use a variety of strategies that are based on activist principles. Activist moves can be applied to both large corporations and government entities. Some activist moves may take a long time such as Elliott Management’s battle with the Argentine government. Some activist moves take a short time such as Elliot Management’s move against the twitter board. Activist moves can be met with great resistance from the board of directors. Bill Ackman’s proxy battle with the Canadian Pacific Railway board shows the resistance that often comes with activist moves.