by: Edward Magi, Analyst - Financials & Real Estate
Activist investors have made headlines in years past for both ingenuity and disruption in the decision-making processes for public companies. According to Bloomberg, over 800 public companies were targeted by activists in 2019, a smaller amount than the prior year, as investors have made “safer” bets focusing on larger companies. Some recent high-profile instances of activist investing include AT&T’s adoption of key measures by Elliot Management Corp. in October and Carl Icahn’s battle with the board of Occidental Petroleum. The influence of these types of investors can be instrumental to the foresight of companies, but what exactly is activist investing? And how influential can these investors be?
Activist investing is a strategy in which an individual or group purchases a large number of shares in a publicly traded company in order to obtain seats on the board to influence the decision-making process. These investors will likely target companies which they feel can be redirected in different ways, but the goal is to put the company on a better path to increase shareholder return. Whether the company is at risk of bankruptcy, or has had proven success like AT&T, there may be entrance opportunities for an activist investor to step in and improve longevity and financial viability.
During their summer workshop in New York City, the Skyhawk Investment Group met with members of Barington Capital. The company is a fundamental, value-oriented activist investment firm that was founded in January 2000. Barington invests in undervalued publicly traded companies that it believes can appreciate significantly in value as a result of a change in corporate strategy or improvements in operations, capital allocation, or corporate governance. Representing Barington were James Mitarotonda (Chairman, President, and CEO), Jared Landaw (Partner, COO, and General Counsel), and Christopher Pappano (Partner and Head of Risk Management). These men have extensive background in areas of public company management, law, restructuring advisory, and much more.
The theme of the discussion was centered around strengths and weaknesses of management in public companies. Knowing where to find background information on the management of companies is imperative to the equity research process. As a group that has actively invested in many companies in different industries, Barington has built a wealth of knowledge allowing them to make targeted decisions to lead companies in the right direction. So, once they’ve performed enough research on the company and those leading it, they will act on their convictions.
We learned that the activist investor has several plans of action. Often, they assist existing management in making improved strategic decisions. Other times, they will act to eliminate the management of a company of whom they’ve determined to be incompetent for the role. Some qualities they stressed to be important were the compensation structure of the company, the background of the leaders, and how transparent the company is both internally and to investors.
Assessing the management team of a prospective investment and learning how to spot their capabilities is vital during the decision-making process. For investors of all backgrounds, understanding the need for this knowledge will assist us in our research for finding viable investment opportunities. After our meeting with Barington Capital, the team grew a stronger appreciation for this qualitative style of analysis and plans to apply it in more depth toward our own investments. Though the team will not be taking any activist stakes, we believe that applying the same insight that activist investors do is imperative when looking for opportunities.