ACTIVIST INVESTORS ARE NOT ALL BAD OR ALL GOOD

ACTIVIST INVESTORS ARE NOT ALL BAD OR ALL GOOD

Matt HealeyTuesday,10 September 2013

The Snap:

There has been a lot of discussion recently on the role of the activist investor. Much of this is due to the recent activities of Carl Ichan and Bill Ackman. Ichan recently gave up his bid to buy Dell and Ackman gave up his bid to influence JCPenny.

The Download:

Activist investors do serve a purpose. They keep management honest. In some cases they force management to take actions that they do not want to take, but that do benefit shareholders. In many cases the management has firm control over the board and insiders own enough shares that no one can stop them from acting in their best interests instead of the shareholders’. There are many examples of this, and so the activists are not all evil as they are often portrayed by the management or the press.

They are also not always saints. The reason for this is that while management is not always right, the activists are not always right either. In many cases, they will target a company in which management is doing a fine job. True, the management may occasionally make some mistakes, but they are human and humans make mistakes. In these cases the activist serves only to distract the management from the job of running the company. The activism can be so sever that the distraction starts to harm the business. This is particularly noticeable in small companies that do not have the resources to hire expensive lawyers who can handle the concerns so that management can continue to run the company. In the worst case situation, the distractions can prove to be fatal for the business.

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Hat Tips:

The New York TImes, ReutersImage Credit: Flickr



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