An activist investor is an individual or institution seeking to gain a controlling stake in a company to instigate changes.
An activist investor is an individual or group, such as a hedge fund that buys a significant stake in a public company to influence how the company is run, for instance by obtaining access to its board of directors.
Activist investors hand-pick firms if they feel the company has untapped value or potential. They analyze certain business fundamentals to identify those companies that are undervalued.
A company could find itself a target of activist investors if it has excessive cash reserves or its operating costs are deemed wasteful. In such a case, activist investors could seek to gain control of the firm to distribute dividends to shareholders better or improve its efficiency by turning it into a private company.
The practice of activist investing is often called value investing because the target company’s stock is often viewed as undervalued. The primary goal here is capital appreciation. Activist investors acquire a huge stake in a company and begin implementing a specific plan that they believe will unlock its value.
When an activist investor uses aggressive publicity campaigns, provocative resolutions and prolonged proxy wars, these are guaranteed to generate headlines. However, in most cases, a cooperative approach is used. The investor will engage the board in constructive negotiations that increase shareholder value.
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