What is an Activist Investor?
An activist investor invests in a company for the purpose of changing or influencing the company's decisions.
How Does an Activist Investor Work?
Carl Icahn, known as a corporate 'raider' in the 1980s, is one of the most famous activist investors. He buys a substantial portion of a company's shares and then pressures management to take actions that are sometimes uncomfortable but ultimately in the best interest of the shareholders.
Accordingly, when news hits that Carl Icahn has invested in a company, the stock's value typically rises not only because the market sees that a sophisticated investor believes the company is undervalued, but because investors know Icahn would put a lot of pressure on the company's management to run the company more efficiently and more in the interests of the shareholders (rather than the management).
Activist investors may have a variety of agendas, however -- changing the company's environmental actions, changing the company's product lines, changing the company's compensation plans, etc.
One way to tell whether a company has been or is being targeted by activist investors is to review its SEC Form 13-D filings, which disclose when an entity has acquired 5% or more of a company's shares.
Why Does an Activist Investor Matter?
Corporations that operate for a profit are legally obligated to act in the best interests of their owners -- the shareholders. What constitutes 'the best interests of the shareholders' is a matter of debate, but when activist investors become involved with a company, the company's managers must be more prepared to defend the decisions they make regarding how they have spent shareholder money. Many investors value activist investors' ability to get an undervalued company 'back on track,' as well as the fact that when he makes money doing so, the other shareholders benefit too (this effect is nicknamed the Icahn Lift).