How do activist investors impact companies and their stock returns?

Activist investors: CEOs hate them, bankers love them and retail investors don’t know what to think of them. Last week, it was revealed that activist Elliott Management took a stake in PayPal — sending the stock up 15% since.

PayPal’s stock moved up; that should be good, right? That depends…

Do activist investors improve investment returns?

Activist investors take a large enough stake to try and influence management and key company decisions. But their involvement doesn’t always end on a good note.

• A 2015 study showed activist returns averaging 12.4% — lower than the 13.5% from the S&P 500.
• There’s one instance where activists show higher returns — when the company is sold. Average returns jump from 12.4% to 94.3%.

We’ve seen several high-profile activist campaigns recently, like Ryan Cohen’s investment in GameStop and Bed Bath & Beyond this year.

Activist spotlight: Elliott Management

Elliott Management is one well-known activist and has taken stakes in popular companies like Twitter, Pinterest and AT&T. PayPal, being their latest conquest.

Past performance: A 2021 CWA report analyzed Elliott’s investments and showed them performing worse than the S&P 500 since the financial crisis.

• Elliott held its investments for an average of 1.8 years.
• Severe losses started after two years.
• Elliott-involved stocks would lose money on average after three years.

However, there is evidence of short-term improvement. The report linked the long-term underperformance to increased debt, lower wages, reduced investments and more stock buybacks.

These factors put companies under more financial pressure while extracting money to shareholders.

Investors: How should you feel about activists?

News of activist involvement shouldn’t give investors immediate cause for concern — but their involvement does deserve extra attention. In the past 10 years, companies targeted by activists have performed worse on average.

The S&P U.S. Activist Interest Index — an index of stocks targeted by activists — has also underperformed the S&P 500 over the past 10 years by a wide margin.

Activists get involved with a company with one primary goal — to profit — and what happens after they exit isn’t their concern.