Activist Investing: How You Can Change a Corporate Giant

by JT McGee

Activist investors look to maximize shareholder value.As a shareholder, you own a piece of a company. Often, investors overlook their shareholder rights as a mere secondary benefit—owning a piece of the future profits is enough, why should small investors have a say in the going-ons of a company? Because you own it, darn it.

Activist Investing 101

No one earns the title “activist investor” like Carl Icahn. A billionaire, he’s one of the world’s richest people with a net worth estimated at $12.5 billion in 2010. Clearly, the title of corporate raider isn’t affecting his ability to make money.

Activist investors like Icahn look to maximize shareholder value from the outside. By purchasing up large blocks of stock, Icahn secures voting rights which enable him to force changes to a company.

The process is fairly simple:

  1. Secure a large block of ownership

  3. Make public your intention to change corporate policy

  5. Launch a “proxy war,” in which shareholders agree to come together to vote alongside each other for change in the company’s organization.

Changing the corporate structure usually involves board seats. In 2008, Icahn went after Yahoo. He launched a proxy war after Yahoo founder Jerry Yang turned down a $31 per share offer from Microsoft. Yang earns “moron of the century” award for passing up the offer. (Sidebar: This is why I don’t buy shares with founders running the show. The company, to a founder, is always priceless.)

Thanks to the proxy war, Icahn earned himself a seat on the board of directors. He also won two other seats, which were given to people Icahn would nominate himself. The board grew from 8 to 11 seats, giving Icahn 27% (3/11) of the board of directors.

Icahn’s after Clorox

Recently, Icahn stole the show for his $10 billion bid for Clorox. He offered a small 12% premium over the current value of the stock, but according to his offer, he’s not really interested in buying the firm.

He told Clorox to look for other suitors to maximize shareholder value. If they don’t find a suitable buyer by July 30, he’ll buy the company in its entirety. It looks like Clorox will reject Icahn’s bid, and decide not to look for other suitors, but the strength of an activist is clearly demonstrated by recent price action:

Icahn's activist tender offer for Clorox affects stock's price.

Activist Investing Starts with Graham

While Carl Icahn may be the man we all know as an activist investor, the trend started with none other than value investor Benjamin Graham.

Benjamin Graham took on one of the giants of history, Standard Oil. In a proxy fight that started in 1926, Graham realized that Northern Pipeline shares were selling for just $65 a share, even though they had $95 in cash on hand for every $65 share.

Two years later in 1928, he jumped at the chance to take on the company. With 38% of shareholders on his side, and the Rockefellers owning an opposing 23% of the vote, Graham joined the board of directors. That same year, the company, which Graham had purchased previously for $65 per share, paid out a $50 per share distribution.

By all accounts, Graham had earned an annual return of 30% per year by the time it was done. Not too shabby, and entirely worth the work to take on a corporate giant. Thanks to his emphasis on value, he had nothing to lose—each of his $65 shares entitled him to ownership of $90 of cash on hand in the Northern Pipeline bank accounts. But to realize his earnings he had to take on the most powerful family in the world. He did. He won. Activist investing was born.

Individual Investor to Activist Investor

You don’t have to have a billion bucks to become an activist investor yourself. The internet–which has allowed us to better understand the securities markets, and search for those that are undervalued–enables investors to band together to force corporate change.

One smart entrepreneur saw an opportunity to help investors band together, forming While I know little about the site, I do know they’ve had at least one massive success with a company by the name of On2 Technologies. Google offered to buy the company, but a band of owners representing an 11% stake rejected the offer. Google would later make a second bid, this one 25% higher, and it was approved. Investors win.

In 2007, a Youtube video went viral. No, there were no dancing hamsters or doped up post-dentistry kids in this video. Instead, a shareholder voiced his concerns about Yahoo’s business model. Several investors banded behind the YouTube sensation, and he is credited with ousting then-CEO Terry Semel.

Tools for Success

Activist investors have a myriad of platforms for changing corporate structure. Here are a few that you should use should you decide to take on corporate giants:

  1. PRLog – A free press release service, this is, by far, the best way to make a splash in your bid to take on a corporate policy. Press releases often show up on individual stock pages in Yahoo Finance, as well as the less popular Google Finance. BusinessWire, which guarantees visibility on Finance sites, charges $425. Contacting bloggers is free, of course, and then there’s always NPR, which allows you to submit stories for free.

  3. Conference Calls – Yahoo keeps a record of conference calls for individual securities. There’s no better way to get under the skin of an executive team than to grill them publicly on a conference call. If you haven’t previously dialed into a conference call, they’re a lot of fun. You have to identify yourself as an investor, media, or analyst, and stirring the pot in front of analysts/media can ruffle some feathers.

  5. Shareholder Resolutions – While submitting a vote to shareholders is non-binding, it does help to bring the matter to the attention of shareholders. Honestly, I see things I’m supposed to vote on all the time, and had other investors not taken the time to submit, I probably wouldn’t ever see it. These tend to get really stupid though, like when activists get all climate-changey and stuff. Joe Blow Pollution Co. doesn’t care about South American penguins, bro!

  7. Major Holders – Major investors have to publicly announce their ownership of a particular company. Most major and institutional holders hold a majority of the stock, and a majority of the vote. A call to their office about your proposal may score you the votes you need immediately. A study of exchange-traded funds shows that they are very likely to vote alongside shareholder proposals that go against company management.

Becoming an Activist

I own shares of stock in a company that has a tiny market cap (ha, go figure), and cash on hand representing 65% of the marketcap. There’s a lot of backstory to the company, and I may introduce it to my readership later, but shareholders are ticked with the status quo.

This year, I may just have to experiment in my own activism and chronicle it here. I own so little of the company that it would be a waste of time to take on the board, but it promises to be both educational and fun. If nothing else, maybe it’d make for good blog content. Besides, who wouldn’t want to have “corporate raider” on their resume. 😉 We’ll have to see if I’m still fired up enough at the end of the year.

Photo by: Murple Jane.

{ 4 comments… read them below or add one }

Jeff Reed July 18, 2011 at 13:41

Interesting topic JT. Maybe you could go to the annual shareholders meeting to voice your concerns (if it is held in a desirable location of course). Vacationing while ticking off corporate brass could be fun and maybe tax-deductible.

I sometimes wonder what would have happened if Ben Graham had access to the web in the 1920’s. Would he have owned the world? Would we have avoided the Great Depression?

It could be a new Twilight Zone episode.


JT July 19, 2011 at 08:47

I like the way you think regarding vacationing and tax deductibility. Boo-ya!

Ha, Graham probably would have owned the world. Think of how much faster Graham and his associates could have torn through form 10-Ks and 10-Qs! As for avoiding the Great Depression…maybe not so much, but who knows.


Hunter July 18, 2011 at 13:52

The Internet has definitely changed a lot of things and gave voice many different types of activists. Never actually gave thought to becoming a share holder activist.


JT McGee July 20, 2011 at 10:02

I haven’t given it much thought, either–until I posted this article, that is. There’s something about external and internal activists that really interests me. Bain Capital, for example, made billions taking companies private, reorganizing them, and then exiting a few years later. Icahn has made his billions with activism, too.

The internet has given everyday average folk like us a lot of leverage. We should use it as best we can.


Leave a Comment


Previous post:

Next post: