Do activist investors boost shareholder returns?

Shareholder activism is on the rise, driven in part by economic uncertainty and a changing regulatory landscape. U.S. companies targeted by activist investors typically outperform their sectors initially — but the results tend to be mixed, according to Goldman Sachs Research.

Activist investors launched 148 campaigns against 120 U.S. corporations last year, a 20% increase from 2021, Goldman Sachs Chief U.S. Equity Strategist David Kostin writes in the team’s report. Our strategists analyzed more than 2,100 shareholder campaigns since 2006 where activists attempted to add value to companies listed on the Russell 3000 index. They examined the changes activist investors sought and the stock performance of the companies they targeted.    

The results of these campaigns over the years have been mixed. The median stock targeted by activist investors outperformed its sector by 3 percentage points in the week after the launch of a campaign. However, excess returns were short-lived and typically turned negative after six months.

And while 69% of targeted stocks outperformed during the first week, after one year the median stock lagged its sector by 5 percentage points; the average activist target, however, outperformed by 4 percentage points over that span. An equal-weighted portfolio of all activist targets since 2006 has generated an average annual excess return relative to the Russell 3000 of 3 percentage points.

The most common demand from activists, issued in 28 percent of the campaigns since 2006, was for companies to separate their businesses, according to Goldman Sachs Research. Other common demands included reviewing strategic alternatives, (19%), returning cash to shareholders (12%), blocking a proposed merger or acquisition (12%), or becoming a target of a potential acquisition (10%)

Our strategists found that certain financial metrics tend to be associated with companies that are more vulnerable to be targeted by activist investors:

• Slower sales growth during the past 12 months
• Lower value relative to sales
• Weaker net margin during the previous year
• Two years of underperformance

Of the more than 2,100 activist campaigns Goldman Sachs Research reviewed, 733 had sufficient data for analysis of all four metrics. Nearly 90% of the companies had at least one of these vulnerabilities, and 70% had at least two.

In 2023, some management teams were quick to capitulate to activist demands. “In several high profile attacks, companies have announced their intention to implement several of the actions proposed or advocated by activists, thereby nullifying the need for those investors to continue to agitate for change,” our strategists write.

Looking ahead, the research team found that certain industries appear more vulnerable this year, particularly given the sharp share price declines since the S&P 500 peaked on January 3, 2022. Firms in faster growing sectors like communication services (-28% return), consumer discretionary (-29%), and information technology (-14%) will likely face continued shareholder pressure, especially those with low profitability, according to Goldman Sachs Research.

And while the number of activist campaigns declined by 24% in the first quarter of this year from the fourth quarter, these investors may be emboldened in the upcoming the proxy season by new rules, our strategists write. The decline in valuations amid higher interest rates suggests activist investors will focus on profitability and idiosyncratic factors when they evaluate targets. 

Meanwhile recent rule changes by the U.S. Securities and Exchange Commission are expected to support shareholder activism this year. In particular, the “universal proxy” and amendments to Rule 14a-8 should ease the barriers for launching a campaign and, at least marginally, increasing activists’ willingness to threaten and pursue proxy contests to meet their demands, according to Goldman Sachs Research.

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