Elliott Investment Management, a prominent activist investor firm based in West Palm Beach, Florida, has reportedly made a multi-billion dollar investment in Salesforce. Salesforce Inc is an American software public company based in San Francisco, California.
The decision of Elliott Investment Management to invest large sums of money in Salesforce is seen as a highly significant corporate move by Wall Street. Activist investor funds such as Elliott Management are renowned for taking control of the board and making operational changes in corporations where they have significant interest and stake.
A few weeks ago, Starboard Value, another activist investor hedge fund based in the United States announced that it has purchased a significant stake in the software company. Even though both activist investor groups have not told what they intend to do at Salesforce, the latest news from the software company suggests that they are trying to appease the new activist investors.
A few days after investment by Elliott Management, the software company on Friday announced that it will be bringing in three new members to the board of directors. The latest shuffling of the board of directors suggests that two new activist investors are already building pressure on the company.
Who are activist investors?
Activist investors, also known as activist shareholders, are high-net-worth individuals or groups (such as hedge funds or investment firms) who purchase a significant stake in public companies with the goal of bringing changes to the leadership or operations of the company. The goals of activist investors keeps varying according to the issues faced by companies or the general ideology followed by the investing group.
Activist investors who are focused on financial activism purchases a significant stake in a company where there are issues with operations and leadership. Once they are in a position to influence the leadership of the company, activist investors start to propose changes in the working of the company.
These changes in operations or modifications in the allocation of resources are generally aimed at making the company profitable and top in its industry/sector. Activist investors are generally known for forcing companies to make changes that will ultimately benefit the shareholders and stakeholders.
How do activist investors build power and pressure on large companies
Activist investors in general purchase large amounts of shares of the company which they are targeting. They keep on buying shares in the company until they have significant voting power in the business structure. An activist investor will have to ideally hold 2.5% to 10% of a company’s outstanding shares in order to get into leadership posts.
Following the acquisition of shares, activist shareholders will start changing the composition of the director board of the company by recommending loyal individuals to the board. After this, these investors will lobby with other shareholders and various stakeholders and force the company to make changes in operations or even change the entire leadership of the company.
If they are not able to get other shareholders on their side, these activist investors will keep on buying stakes until they have humongous voting power to force the changes. Since this whole process of acquiring a significant stake in public companies require large amounts of money, only investor groups with such money power act as activist investors.
What is the difference between activist investors and value investors?
Activist investors and value investors are highly significant parts of the investor community. Even though both of these groups are aiming at booking profits through investment, their approaches to the goal differ very much.
Value investors purchase a stake in a company and make investments after conducting a detailed research about future prospects of the business. Such investors follow a long term investment strategy hoping that the company which is undervalued today will realize its full potential and witness unprecedented growth in the future.
Meanwhile, activist investors follow a totally different investment strategy to make profits. These investors target companies that have great potential but are currently facing drawbacks in operations, leadership quality, or accessing resources. Once a company is under the radar, activist investors start to purchase stakes in the company up to a point in which they have a significant influence on deciding how to run the company.
Later, activist shareholders start to implement their plans which will ultimately lead to the growth of the company. Once the company attains good growth projectile, share prices of the stock will grow. This will give activist investors an option to sell their stake for profit and move into the next assignment.
Activist investors in the tech sector
Activist investors make news headlines when there is a financial crisis faced by companies. In calmer times when stock markets are growing without many issues, activist investors tend to be silent. For example, the high involvement of activist investor campaigns reduced drastically between 2018 and 2021 as companies were financially sound.
In 2022, the economic impacts of Russia Ukraine war and the decline in demand had deep impacts on the financial positions of the tech companies. Multinational tech giants suffered huge losses in stock market as shares prices crashed. All these economic situations forced companies to cut down costs by laying off employees in high numbers.
As expected, activist investors became relevant again in the tech sector. They began acquiring stakes in tech companies are started demanding cost cuts and additional layoffs. The number of attacks launched by activist investors jumped by more than 30 percent in 2022.
According to studies, in 2022, 21% of activist campaigns globally took aim at tech, up from 14% in 2018-21. Stock market experts and tech analysts are of the opinion that activist investors will continue targeting tech companies and demand additional cost-cutting in areas such as marketing and hiring.