Activist investors employ a comprehensive research and analysis process to identify potential target companies and evaluate their suitability for activism. This process involves gathering information from various sources, conducting thorough due diligence
, and employing sophisticated analytical techniques. By undertaking these steps, activist investors aim to gain a deep understanding of the target company's operations, financial performance, governance structure, and strategic direction. This knowledge enables them to identify areas for improvement and develop a persuasive case for change.
To begin their research, activist investors typically rely on publicly available information such as financial statements, regulatory filings, and news articles. These sources provide a foundational understanding of the target company's business model, industry dynamics, competitive positioning, and historical performance. By analyzing financial statements, including balance sheets, income statements, and cash flow
statements, activists can assess the company's financial health, profitability, and cash flow generation capabilities.
In addition to public information, activist investors often engage in primary research by conducting interviews with industry experts, former employees, customers, suppliers, and competitors. These interviews provide valuable insights into the target company's operations, management practices, and market perception. By speaking with key stakeholders, activists can uncover potential issues or opportunities that may not be apparent from public sources alone.
Furthermore, activist investors may employ specialized research firms or consultants to conduct in-depth analysis on specific aspects of the target company. These firms can provide expertise in areas such as corporate governance, executive compensation, industry trends, and market dynamics. By leveraging external expertise, activists can strengthen their arguments and validate their claims with credible data and research.
Once the initial research phase is complete, activist investors perform a detailed evaluation of the target company's governance structure. This includes assessing the composition of the board of directors, analyzing executive compensation practices, and evaluating the company's shareholder rights provisions. Activists look for instances of poor governance or misalignment between management and shareholders' interests that may hinder value creation.Financial analysis
plays a crucial role in the research process as well. Activist investors employ various financial metrics and valuation techniques to assess the target company's performance relative to its peers and industry benchmarks. These may include analyzing key financial ratios, such as return on equity, earnings per share growth, and debt levels. Activists also evaluate the company's valuation multiples, such as price-to-earnings ratio or enterprise value-to-sales ratio, to determine if the stock is undervalued or overvalued
compared to its intrinsic value.
In addition to financial analysis, activists consider strategic factors that may impact the target company's future prospects. This involves evaluating the company's competitive positioning, market share
, product portfolio, and growth opportunities. Activists assess whether the company is effectively capitalizing on its strengths and identify potential areas for improvement or divestment
Overall, activist investors conduct research and analysis on potential target companies through a meticulous and multifaceted approach. By combining public information, primary research, external expertise, governance evaluation, financial analysis, and strategic assessment, activists aim to develop a comprehensive understanding of the target company's strengths, weaknesses, and potential for value creation. This research forms the foundation for their activism campaigns and enables them to articulate their proposals persuasively to other shareholders and stakeholders.