Demands by U.S. activist investors can send a target company’s stock surging, and new data from investment bank Lazard shows that these corporate nudges generate considerable market index-beating gains in the days after demands are announced.
According to Lazard’s annual review of shareholder activism, activism drives median share price outperformance of 200 basis points in the five days following campaign launches. More seasoned activists that have launched campaigns for more than a decade saw up to 700 basis points of five-day market-beating stock pops.
The report found that the market learning that an activist is launching a campaign, regardless of who the activist is or what specific demands are being contemplated, is enough to drive short-term stock price outperformance. However, data also show that all activists are not created equal and that the share prices of some target companies sink after an initial pop.
The report did not identify any activists or their target companies, but said some target companies’ stock prices have outperformed the market by 4,000 basis points in the days after demands became public. Global campaigns hit a new high last year and the number of investors relying on the strategy also grew.
Activist investors often ask for better allocation of capital, streamlined operations, and sometimes the sale of the company. Refreshing senior management and the board was also a popular request. Calls to fire a chief executive officer resonated with other investors who proceeded to buy the stock.
The campaigns that included a demand for CEO change outperformed all other campaigns with median 5-day market outperformance of 3.2% compared with 2.3% for campaigns that didn’t include such a demand. In addition, 14% of targeted companies saw their chief executives leave within one year of an activist’s making demands compared with the broader market turnover rate of 9%.
While there is often a strong stock price pop following the launch of an activist campaign, the stock price does not necessarily retain the gains. Long-term results reflect a wider dispersion of relative performance, with many targeted companies underperforming their market benchmark.