Do activist investors create long term value?

Subscriber question

​This question is slightly broad. You can almost think of it like “do CEO’s create long term value?” some do and some definitely don’t. It depends on many things. Generally speaking most of the actions activist investors push for are to create value and with the exception of some actions, it is to create long term value. Pushing for the below are generally good for long term value:

Changing bad management/board

• Disposing of under-performing assets to unlock capital for the performing business/assets
• Separating disparate companies from each other allowing them to be managed independently and to allow their performance to be measured independently
• Urging a company to sell it self to a strategic buyer which will create a more competitive successor company

Actions that can increase risk resulting in diminished long term value are usually related to increasing debt:

• Dividend/share-buyback (increasing debt load to pay a special dividends or large share buybacks to shareholders), there is usually no long term value creation for the company itself resulting from this action. This doesn’t mean it is a bad move. It does usually create immediate value for shareholders, whether it is through increase share price or increased dividends. A lot of times companies have room to add debt to the capital structure and pay shareholders back some of their money so the shareholders can use it for other investments to increase value in different asset (don’t forget it’s the shareholders’ capital and for a company to holding on to it is not always the best capital allocation decision) Apple is a good case for this action. That being said, if the company levers it self up too much for shareholder payouts, this can leave the company vulnerable to downturns in the economy or secular changes to it’s business.

If one is focusing on an event-driven investment strategy (waiting for the activist's actions to be executed and then exiting once the stock price has appreciated), then the question of long term value creation for the purposes of investment strategy don't apply.