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Narrator:
In June of 2024, Elliott Investment Management revealed it had a $1.9 billion stake in Southwest Airlines, equal to about 11% of the company. Elliott believed there was opportunity for a turnaround at Southwest, which had seen its stock price cut in half since 2021. Elliott published a plan for changes, including to Southwest's leadership.
The hedge fund's stock holdings were large enough to call for a special shareholder meeting to try and bring those changes to life. And in July 2024, Southwest started announcing operational changes, like adding premium seats and new red eye flights. By October, Southwest and Elliott agreed to a settlement, which included replacing six board members, five of which Elliott handpicked.
Elliott's efforts to reshape Southwest Airlines is a form of what's called activist investing. Activist investing can take many forms, but the goal is the same: to influence how a company is run. Activist investors commonly do this by becoming a large shareholder.
Often being a large shareholder entitles them to appoint or take seats on the board of directors, which gives them greater access and influence with the company's leadership.
Famous activist investors include Carl Icahn, Bill Ackman, Paul Singer of Elliott Investment Management, and so on. More recently, activist investors making headlines were Ryan Cohen and his influence on GameStop as well as Macellum Capital Management and Kohl's. So, what do activist investors do? And do they add value or extract it?
Activists invest in a company if they think they can increase shareholder value by enhancing the company's profitability, efficiency, or structure. For example, in the mid-2000s, Daniel Loeb became a major shareholder in Ligand Pharmaceuticals and wrote a famously scathing public letter accusing the CEO of mismanagement. Loeb joined the board and appointed a new CEO who quickly reduced employee headcount and moved the company headquarters from an expensive San Diego office building.
Over the next two years, sales increased dramatically, producing $218 million in cash. By the time Loeb cashed out, he had nearly doubled his $50 million investment. Total revenue for Ligand in 2021 was $277 million, and the company had 155 employees.
Sometimes activists are less disruptive, like when Carl Icahn's investment fund owned $2 billion of Apple and used his influence to convince Apple CEO Tim Cook to use its excess cash to start a share buyback program to boost the stock price.
Another approach activists take is shorting company shares and then revealing an underlying problem that causes the stock to fall so they can profit. Short-selling activists are often seen as enemies by investors. However, they sometimes act as private investigators and expose malfeasance.
For example, electric car company Nikola was touted as a green alternative to fossil-fueled commercial trucks. It raised $12 billion in an initial public offering in June 2020 and exuberant investors helped its market cap eventually reach an intraday peak of $34 billion before even one truck was sold.
As suspicion about the company's claims rose, Hindenburg Research took a short position on the company and then issued a report documenting how management had mislead shareholders. The report prompted an SEC investigation, which resulted in Nikola founder and CEO Trevor Milton being indicted by federal prosecutors, and the company's stock plummeted. Hindenburg never disclosed how much they made on the trade but said it was their largest win.
Short sellers aren't the only activists with a bad reputation.
Activists often push for companies to make hard decisions like selling parts of the business, laying off workers, or relocating to areas with lower costs. In the '80s, activists known as corporate raiders would buy up companies and sell off the parts because they were worth more than the whole.
Many activists would argue that companies often become bloated and inefficient, failing to provide value to their customers and risking failure or bankruptcy. They might say that it's better to trim the fat, even if it's painful, rather than let the company die.
This leads us to the question of what kind of track record do activists have in adding value to a company?
There are a lot of studies around activist investing and its benefits and drawbacks. Many studies have found that activism has provided strategic, operational, and financial solutions in many cases that have led to increased and sustained company valuations. For example, one influential study found that companies targeted by activist investors saw short-term share price gains of about 7% on average. Another found that activists increased factory productivity and improved company research and development, leading to greater innovation.
However, there isn't a consensus on the benefit of activism. While some studies have found long-term benefits to a company, others have found that activists are often too focused on the short term or that shareholder value tends to find the greatest increases if the company is bought out by another company. Others have expressed concerns that activism gains come at a social cost such as workers being laid off.
When it comes to activist investing, the evidence suggests that they tend to add value to individual companies but they're not always a success. If an activist targets a stock you own, research their goals, plans, and time frame before tagging along for the ride.
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