Over the years, of course, activists have expanded their repertoire. In the 1980s, they could threaten management with an acquisition and demand that the company repurchase its shares with a premium called “green mail,” which is now illegal in several U.S. states. UU.
and it is heavily taxed by the federal government. Nowadays, activists are more likely to pressure a company to accept a takeover offer, sell certain parts of its business, or improve its operations. Companies tend to resist the initiatives of activist investors, but investors have grown more powerful in recent years for a variety of reasons. Regulatory changes have made it easier for investors to communicate with other shareholders and to promote changes in the company.
And activists are managing an increasing amount of money, allowing them to threaten larger companies. Activists who seek cooperative interactions with a company often find that their board of directors and management are interested in their ideas and recommendations and are open to constructive engagement that seeks to increase shareholder value. Activist investors are unlikely to care about such companies, since they can't argue that managers don't focus enough on shareholder value; the company is allowed to think about other things. Activist investment is a unique form of value investment aimed at companies that have performed significantly lower than their peers or the market in general for a significant period of time.
Much of this growth comes from investments by large institutional investors, including pension funds and university foundations. The main defender of that view, Marty Lipton, of the law firm Wachtell, Lipton, Rosen %26 Katz, wrote a memo earlier this year in which he said that activists were looking for opportunities to demand a change in the company's strategy or portfolio that would generate short-term benefits regardless of the impact on the company's long-term prospects. If executives resist the changes, activists can initiate a public relations campaign to convince shareholders of their position. The director of insurance giant AIG, for example, said earlier this year that investors like Carl Icahn have forced the company to change the way it reports its finances, which has resulted in greater clarity.
While many traditional asset managers also pursue this objective, the vast majority of these investors focus their efforts on identifying what they believe to be undervalued stocks and on monitoring their investments in those companies from a passive stance while waiting for the share price to rise. The most aggressive step an activist can take, apart from a corporate raid, is to nominate a new candidate for a seat on the board of directors and ask shareholders to vote against the incumbent at the annual shareholder meeting in a struggle for power. He is considered the godfather of activist investors, some of whom call him Uncle Icahn, half jokingly. The characteristics of the companies targeted by activist investors include high cash balances, strong cash flows, high book and market values, overcompensation from executives, or an outside board of directors.
A company with a stable combined cash flow, but with a low return on capital, may attract the attention of an activist investor who advocates better operational efficiency and an increase in cost costing measures. A traditional securities investor's approach is based on company management, industry experts, or Wall Street research to provide relevant information on the investor's progress toward the investment thesis of the securities investor. Nowadays, the directors of many companies are forced to maximize shareholder value or face lawsuits from investors who claim that they are not managing the company properly, Lawrence Hamermesh, professor of corporate and business law at Widener University, told me. The activist's objective is to create a catalyzing or triggering event that increases shareholder value and results in an appreciation of the share price.