Activist Investors: A Small Case Study

What is an activist investor? An activist investor is an individual or group that is able to buy a large percentage of shares in a public company and then aims to change the management or the direction of the company. Activist investors have been involved with many companies, big or small, including DuPont, Amgen, Proctor & Gamble, eBay, and even Apple. Their goal is to pressure companies they invest in to make the changes they want and thus unlock shareholder value.

Companies however, do have a defense mechanism called the poison pill which allows investors who aren’t the acquirer (activist investor in this case), to buy shares at a discount so it becomes expensive for the acquirer to complete the takeover.

Taking a look at Timken, a steel and bearing manufacturer in Canton, Ohio, Relational Investors, an activist investor fund, has been able to acquire an activist stake in the company and pressure it to split itself in two. Although this has led to a large increase for the shareholders, Timken is now facing buyout pressures from various firms. Ward J. Timken Jr., now the head of TimkenSteel states that as a public company, if a buyout offer is attractive enough, the board would consider it unless management is able to propose a plan that would generate equal or greater value. This is because as a public company, the board and top executives have a fiduciary duty to maximize the profits and investor returns of shareholders.

Looking at the buyout of Timken objectively, we can see that shareholders would most likely profit as firms compete for the acquisition of Timken, potentially bidding up the price. However, the community of Canton will suffer and the management may not exactly be too happy with no longer maintaining control of the company. Though the future of Timken is uncertain and that a buyout may end up hurting the community, we can observe that activist investors are an effective force in investing across small and large companies.

-Kevin Tsao