Activist investors’ approach: engagement
An activist entity purchases a material stake in a company, marshal other influential investors for their campaign, and then aim to strengthen their own goals for the company. They achieve their goals by winning a seat on the board to enhance their own agenda throughout boardroom discussions, setting up a new executive team with the new team focused on reducing costs leading to higher profit margins, and through corporate reorganising including selling poor business units. According to Deloitte, generally, activist investors inform their clients about the plan, and their large clients provide funds to obtain a stake in the target and offer support. This process is known as a side car investment vehicle and is becoming progressively popular. Nonetheless, the risk of information gets leaked when more investors are involved. A meeting with a management team starts once the activist investor has revealed the position or the target has gotten to know about the activist’s position (faultlessly 5 per cent or more). During this meeting, the activist investor shares their expectations, opinions, or thoughts about possible enhancements. The next move will depend on the acceptance of the target’s management team to executing changes and conceding demands for board representation. Often, activists may have to accept low set of demands including a lower number of board seats. Nevertheless, a target’s management can often be less that welcoming to activist investor’s demands and often campaigns can be opposed. There may a chance to sell early as the benefits might be priced into the stock rapidly, but this will depend on market reaction to any plan revealed to the public. Activist investors evaluate various metrics and performance measures involving a larger benchmark group of companies, margins, valuations, shareholder return etc.