A shareholder activist tends to improve a company’s stock price during its campaigns—and sustains those gains for three years after the campaign is announced. But when one considers the period after an activist has exited its position, the picture becomes murkier.
We examined almost 170 shareholder activist campaigns worldwide over the past ten years and found that after an activist had exited its position, three-year excess total shareholder returns (TSR) were negative in about 40 percent of the companies that had experienced positive returns while an activist held its stake. This was nearly double the number of companies (23 percent) that continued to see positive returns over the three-year, postexit period (exhibit).
There are likely several reasons why companies do not sustain returns after activists have exited. When a company’s stock price runs ahead of its fundamentals, activists may sell to realize their gains (the activist’s own investors, after all, are also seeking high returns). Moreover, even when the company’s intrinsic and market valuations are aligned, higher performance cannot be sustained forever. As the pace of earnings growth decelerates, TSR declines as well. And, of course, some activist investors aren’t playing for the long term; they make short-term fixes but don’t push for fundamental, sustainable changes. Nor are activists always right in their campaign decisions; in fact, they incurred losses in almost two out of five campaigns.
As always, broader context matters. Not only is it often impossible to measure precisely when activists begin to accumulate shares, since they can often acquire positions below an undetectable regulatory red line (such as, in the United States, more than the 5 percent of a class of covered equity shares that would require a Schedule 13D filing), but it may be that the “long run” is a lot longer than just the several-year period during which a shareholder activist first announces, and then exits, a position. For nonactivist shareholders that invest for longer periods of time, the announcement of an activist campaign could be a long-term net positive for the company, even considering a decline in TSR following the activist’s exit. Just because a shareholder activist seeks to maximize its own returns over the period in which it holds company shares does not mean that the activist campaign, and the eventual exit of the activist, destroys long-term value—or necessarily creates it.
