Activist Shareholders and Calculated Celebrity
Some of the most derided figures in modern America are so-called “activist shareholders”, usually hedge fund managers who take (stock) positions in various companies and attempt to make a profit through characteristically impatient and public methods, which include badgering corporate executives, giving colorful interviews to news media, and writing open letters (one activist, when writing to a CEO he found particularly reprehensible and finding out that he had an eponymous scholarship for Cornell students, wrote, “One can only pity the poor student who suffers the indignity of attaching your name to his academic record.”). Activist investors have drawn criticism from politicians and figures including Hillary Clinton and Warren Buffett. Figures of this sort include Carl Icahn, Dan Loeb, and Bill Ackman, all of them managers of multi-billion-dollar hedge funds.
Activist shareholder Carl Icahn, December 2013.
The goal of activist shareholders is the same as any other investor: to improve their and their clients’ financial positions, year-on-year. The difference between the average lone wolf investor and an activist investor with billions and a name behind their endeavor, however, is that they have the resources — for marketing. These “activists” make use of their celebrity and even aim to increase it, for the express purpose of being able to promote their actions and the companies that they have invested in at the moment (or, in other words, to increase the reach of the signals they send) in order to influence others around them to invest as well, raising prices and thus the profits for the hedge fund once it sells off its position.
In the modern world of television, where entertainment has blurred the line between reality TV, fiction, non-fiction, and even politics, activist investors have more power than ever. Each activist hopes to create information cascades of good will for the companies that they have invested in; he hopes that the investing masses will be influenced by their signals (which can entail making boisterous claims through, increasingly, Twitter), buy stock, and thus increase the value of the activist’s investment through basic market physics. In a world like stocks, where there is a degree of arbitrariness involved at every level and the private signals can be overshadowed by large forces like outside opinions and hype, if such an information cascade catches on, it may very well last long enough for the activist to get in and get out, making profits in the billions on even short-term investments.
What is not short-term, however, is the strategy that activist shareholders put into their image and influence, all in order to increase the reach of the signal they broadcast. For example, in the case of the nutritional supplement company Herbalife, the activist investor Carl Icahn had a standoff with fellow hedge fund manager Bill Ackman; Ackman had took a short position on Herbalife stock, meaning that he would make money if the stock dropped, and went on a media campaign where he claimed to have inside information that implicated Herbalife as being a giant pyramid scheme. Icahn disagreed; he instead bought a long position on Herbalife, meaning he would make money if the stock went up, and engaged in a public spat with Ackman by promoting Herbalife and questioning Acumen’s intentions and investing acumen. The argument reached a boiling point in 2013, when Icahn and Ackman had a conference call altercation on live television, both attacking one another personally.
Perhaps the most interesting part of the broadcast, apart from the humorous squabble, was CNBC’s live stock ticker in the background and the sound of investors on the stock exchange floor laughing. Every time Icahn spoke, Herbalife and Icahn Enterprises stock rose. As Ackman spoke, his Pershing Square Capital Management’s stock fell. Although their battle was one of words, it was easy to see who had won the battle of signals.
http://www.nytimes.com/2015/11/05/business/dealbook/activist-investors-get-a-welcome-seat-at-the-table.html?_r=0
http://www.dealstreetasia.com/stories/how-rise-in-power-of-activist-investors-is-changing-contemporary-boardroom-roles-18899/
http://www.nytimes.com/2015/11/05/business/dealbook/headlines-aside-some-activist-investors-take-the-long-view.html