What is an activist investor, exactly? Well, it depends on who you ask. Defenders of activism -and activist investors themselves - will tell you that they take positions in mismanaged companies, redress the balance between greedy managers and deserving shareholders and create long-term value. Critics of activist investing maintain they are simply rebranded 1980s-style corporate raiders who are only interested in short-term gains. I actually wrote on the subject a few months ago. Here is an interview in which Ackman addresses some of these questions.
What do activists do?
Ackman began by pointing out that his Pershing Square does not take control of companies. When he was interested in Canadian Pacific Railway Ltd. (NYSE:CP), he only had a relatively small stake:
"We don't buy control of businesses, we buy a minority stake, and if you think about what an activist does - we only bought 14% of Canadian Pacific. About 86% of the shares were held by others. The only reason why we were able to get the influence we had is that other shareholders backed us. The other shareholders are big institutions that are not in it for the short term. They are major index funds and others that are not looking for a quick three-month profit, and they backed us because we have a track record of doing things to companies that create long-term value."
Ackman's argument is that large institutions would only sign off on his proposals if they were actually in the long-term interests of the company. He then pointed to the positive changes that had occured at Canadian Pacific as a result of his activism: share price appreciation, credit rating upgrades, profitability, union deals, long-term contracts and customer satisfaction.
He also believes activists who choose the short-term route are going about their business the wrong way. According to Ackman, more money is to be made by taking a minority stake in a public company and improving it than by taking over the whole thing and making it private. The guru believes businesses should be taken private only when they cannot grow anymore (and consequently do not need to tap the public markets), and then they can be sold and combined with other companies.
To close out his argument, he pointed out that when private equity firms buy out public companies, they make changes to management, strategies, cost and capital structure. When a company is sold to private equity, that means that the management and the board couldn't work out problems on their own. To me it's a little unclear to how this is different to shareholder activism - activists do all of these things all of the time. Still, Ackman seems convinced that his way is the best way.
Disclosure: The author owns no stocks mentioned.
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