A Big Week For Activism

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What's going on?

Two big American companies have had encounters with a major “activist investor” this week, albeit with somewhat different results…

What does this mean?

In the past, activist investors would usually only be able to target smaller companies where they could more affordably buy a significant ownership stake and use their position to advocate for change. But two events this week have shown how that’s changed.

For one, following months of public pressure, Trian Fund Management was given a board seat at industrial behemoth General Electric on Monday. Then, on Tuesday, shareholders of consumer goods giant Procter & Gamble (P&G) voted on whether to give Trian a board seat at their company. P&G urged shareholders to vote against Trian (in short, they feel Trian’s presence would not be helpful) – and Trian narrowly lost the vote (according to the preliminary result). But the fact that such a large company could be challenged, and only narrowly win, is important.

Why should I care?

For markets: P&G’s stock price (unlike its management) likes a bit of activism.

P&G’s stock is up more than 8% this year, outperforming many of its rivals, partly because it has been under pressure from Trian (e.g. it has already begun implementing some of Trian’s suggestions). Investors appear to think that Trian has some good ideas! This was further borne out when P&G’s stock dropped about 2% on Tuesday following the news that Trian had lost the shareholder vote.  

The bigger picture: All companies, big and small, must heed the influence of activist investors.

In general, activists often try to “trim the fat” at companies by demanding fewer levels of management or other cost-cutting measures. The approach is sometimes criticized as being too focused on the short term. But, whatever the impact, virtually all public companies now must consider whether their current strategies would stand up to an activist challenge.

Originally posted as part of the Finimize daily email.

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