The Impact of Investors on Public Companies: A Deep Dive Into Activist Hedge Funds and Semiconductor Companies
Over the past several years, I've worked alongside activist hedge funds and private equity firms to help rectify broken public companies. In my role, I assist these hedge funds in devising strategies to turnaround these struggling firms.
My expertise lies in the hardware sector, specifically semiconductor companies. This sector is free from pension-related issues, and there is no observed desire to push a company into bankruptcy. The primary catalyst for an activist hedge fund to engage in a public company is the immense potential for financial gain if the company addresses its problems effectively.
The core issue with these companies is consistently the same: incompetent management coupled with poor board governance. These problems are at their core, elementary, more like business 101 issues. The management and board should be able to identify and solve these issues on their own, but they often do not. As a result, these companies continuously underperform their competitors year after year.
A Case Study: Turning Around a Public Semiconductor Company
A clear example of an activist hedge fund's intervention can be seen with a public semiconductor company. Through careful analysis, I identified that the company could be salvaged and implemented a plan to fix its issues, which I had previously worked on at the company. Working with my business partner, Cathal, we presented our plan to an activist investor, who took a significant equity stake in the company.
Our proposal to the board of directors was either to address the company's problems by replacing the CEO and management team, or to embark on a sale process. The board elected to go the sale route. Eight months later, the company was sold to another public semiconductor company at a significantly higher valuation.
The Root Cause of Incompetence: Greed
The question remains, why does this incompetence persist, and why doesn't the board rectify these issues? Ultimately, the cause lies in greed. Despite improvements brought about by Sarbanes-Oxley, many boards prioritize their own salaries rather than making the right decisions for the company.
In these situations, the CEO typically handpicks a board that will support them, even though the board has fiduciary responsibilities to act in the best interest of the company. The board only becomes activated when an activist investor forces them to reconsider.
Activist Investors and Shareholder Influence
An activist investor can gain enough shares to influence the company and implement the necessary changes. When faced with such an activist, the management and board are left with the choice of resisting or cooperating. If the company decides to fight, the activist will request shareholders to vote for a new board of directors. Typically, the activist wins because the company has underperformed its competitors in the sector.
If the company chooses to cooperate, they usually agree to management and board changes, often firing the existing CEO and bringing in a new one to implement the new strategy. The results are usually positive for shareholders, but there is employee turnover. The new management team implements changes from the top down, resulting in high turnover of senior management. Lower-level employees are more likely to stay, leading to a motivated and capable team once the changes are implemented.
Conclusion
Activist investors are often involved because the board of directors has failed to operate in the best interest of shareholders. If these boards had truly prioritized the shareholders, the companies would have already been fixed on their own.
To understand more, read 'What Are The Five Skills You Need To Be A Great CEO - Brett J. Fox'.