Amazon’s recent acquisition of Whole Foods was in large part due to pressure on Whole Foods co-founder John Mackey from activist investor Jana Partners. But just what is an activist investor?
The rise of the activist investor, or activist shareholder, occurred during the 1980s. Investors like Carl Icahn and T. Boone Pickens began buying stock in companies in order to demand dramatic changes in how the companies was run. A common sign of activist investing is the filing of a 13D form with the SEC, indicating that an investor has bought 5% or more of a company’s shares. These investors have usually identified something about the company, such as mismanagement, fixable problems, or the ability to cut costs, that they believe could be altered in order to benefit shareholders. These changes may be at odds with the company’s founders, managers, or more established members of the board. An activist investor can take the form of a wealthy individual, a hedge fund, or a private equity firm.
One strategy in activist investing is encouraging a company to sell or spinoff an asset that they believe is undervalued by Wall Street. For example, in the early 2000s, the popular Canadian donut chain Tim Hortons was owned by Wendy’s. Activist shareholders Peter May and Nelson Peltz encouraged Wendy’s to spinoff the donut chain, which it did in 2005. Wendy’s shares experienced a brief boost as a result. More recently, hedge fund operator Jeff Smith convinced Darden International, the owner of Olive Garden, to spinoff its restaurants from its real estate holdings.
Other strategies urged by activist investors include changes in management, cutting costs from production or pay and pension packages, and getting a public company to go private. These changes sometimes elicit tough ethical questions, often due to potentially harsh effects on the company’s employees. Ultimately, though, an activist shareholder is trying to improve conditions for everyone that owns stock in a company.
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