Shareholder activism is a method used whereby shareholders invest in a public company for the purpose of influencing or changing a company’s behavior, financial structure, business strategies, and overall management. Individual activists or hedge fund activists will plant themselves in the company to push their own agenda – one that is typically in favor of boosting share prices and efficiency. Activists aim to enhance company value, monitor governance, and improve company efficiency, which is imperative for a healthy, competitive free market.
Lately, around the globe, there has been a rise in shareholder and hedge fund activism in some of the largest companies. Third Point, an investment adviser firm in New York founded by Daniel Loeb, purchased 40 million shares costing $3.5 billion (equivalent to 1.3 percent of overall) in Nestle with the aim of influencing the company’s methods of business to enhance organic growth, efficiency, and shareholder returns. In a public announcement, Third Point explained that they invested in the company because the company is:
“ripe for improvement and change: a conglomerate with unrealized potential for margin improvement and innovation in its core businesses, an unoptomised balance sheet, a number of non-core assets, and a recent history of meaningful underperformance versus peers.”
Third Point’s investment in Nestle is a positive example of how shareholder or hedge fund activism can be utilized to create a more efficient and successful company. Third Point has set forth a four step agenda, which consists of pushing operating margins from 15.3 percent to the high-teens or low twenties, increasing Nestlé’s net debt to produce greater share buybacks, divesting some of the 2,000 brands that are not Nestlé’s core focus (such as U.S. confectionary brands), and monetizing their 23% stake in L’Oreal. Shareholder activists set out plans, such as this, in order to influence a business’s strategy, which management takes into consideration when planning next steps. However, in certain instances when a company is underperforming, activists have the opportunity to actually change the management.
Shareholder activists in the U.S. and U.K. have become bolder, by tackling large businesses in an effort to boost share prices. This aggressive tactic has been successful for some businesses and unsuccessful for others. Recently, the Chief Executive of Avon resigned following pressure from activists to restructure business strategies and management after the company saw a $45.5 million loss in the second quarter of 2017, a 3 percent decrease in revenue, and a 40 percent drop in its share price. Similarly, William A. Ackman, CEO for Pershing Square Capital Management owns an 8 percent stake in Automatic Data Processing Inc., ADP, and is determined to see the company under new management despite that the deadline for nominating new directors has passed. This type of activism can be beneficial such as with Avon, however, it runs the risk of creating tension amongst shareholders