Before this recent decade, shareholders who disapproved of a company’s management and direction would simply offload their shares and reallocate their capital into firms they believed shared their core values as investors. However, as hedge funds over the last twenty years have amassed billions and billions of capital and resources, investors are no longer dumping their shares if they simply disagree with a firms’ direction.
Due to this changing preference in shareholder activism, all companies are on high alert for activism that may happen. It does not matter if your company is a small cap in the Russell 2000, midsize cap in the S&P 500, or a heavyweight large cap in the NASDAQ or Dow; activists are increasing their role in determining appropriate share value for investors.
Hedge funds have the unique advantage of asserting their large capital into buying as many shares of a company as possible to take the reins of control and land seats on a board to create value for shareholders. Activists can also help create value for shareholders by orchestrating hostile takeover of other companies to maximize shareholder value. By doing so, a company that may already have solid earnings and market share can garner even more market share and increase their profits even more, which leads to better results for shareholders.
Activists play an integral role on boards of directors for many companies. Although there may be fights among activists and current management, activists bring new ideas to the table and often lead to innovation a company may have never considered before. For example, splitting a company into two divisions is often a controversial and heavily debated topic among activists and management teams in many companies. However, if management asks for an independent third party to analyze the situation to determine if splitting would create value for the company and shareholders and the third party concurs with the activist, then shareholder value will be created. Activists play an important role in bouncing new ideas off management teams and ensuring proper value for a firm is maximized for all shareholders.
Activist will likely remain a market noise from this point forward. It is important to note that hedge fund is increasingly added to their plates the role of activism in addition to their duties of maximizing returns on capital. Paying attention to activism in equities and companies you follow will continue to be a major storyline and plot for many years to come in the markets.
