How do activist investors make money?

Key takeaways: Activist investors make money when the companies they invest in become more valuable. By pushing for strategic, operational, financial, or governance changes, activists aim to unlock hidden value, improve corporate performance, and ultimately increase the price of the shares they own.

This is the second article in a series covering everything you need to know about shareholder activism. The first article took an in-depth look at exactly what shareholder activism is, who the main players are, and common tactics involved.

Activist investors are often associated with proxy fights, boardroom battles, and public campaigns targeting corporate management. However, these activities are not the source of their profits.

Activists do not make money because they win board seats or force companies to adopt their recommendations. Instead, they make money the same way any equity investor does: by purchasing shares that increase in value over time.

The difference is that activist investors seek to influence the factors that determine a company’s value, rather than simply waiting for the market to recognize an opportunity on its own.

A useful example is Elliott Investment Management’s campaign at eBay in 2019.

Alongside fellow activist investor Starboard Value, Elliott argued that the online marketplace operator was undervalued and that several strategic changes could unlock significant shareholder value.

Over the following years, eBay sold non-core assets, returned billions of dollars to shareholders through share repurchases, and sharpened its focus on its core marketplace business. The campaign provides a useful illustration of the various ways activist investors seek to generate returns.

Buying undervalued companies

Most activist campaigns begin with the belief that a company’s shares are trading below their intrinsic value.

Activists search for businesses they believe possess strong assets, attractive market positions, or significant earnings potential that is not fully reflected in the share price.

They then acquire a meaningful stake and advocate for changes designed to unlock that value.

For example, an activist may believe a company is worth $50 per share while the market values it at $35. If changes implemented during the campaign help to close that gap, the activist profits as the stock price rises.

Elliott’s investment in eBay was based on the belief that the market was undervaluing the company’s collection of assets and cash-generating capabilities. In a public letter to management, the activist argued that eBay’s share price did not fully reflect the value of businesses such as StubHub and its Classifieds Group.

The firm’s thesis was that unlocking this value could significantly increase shareholder returns.

Creating catalysts

Traditional value investors may wait years for the market to recognize an undervalued company.

Activists, by contrast, often seek to create the catalyst themselves. A catalyst is an event that causes investors to reassess a company’s value.

For example, after disclosing its investment, Elliott publicly called for a strategic review of eBay’s business and outlined a series of actions it believed could improve performance and unlock value. The campaign itself became a catalyst, drawing investor attention to assets that management had previously left largely untouched.

Other examples of catalysts include leadership changes, strategic reviews, asset sales, spin-offs, mergers, or significant capital returns.

By pushing for these actions, activists aim to accelerate the process of value realization rather than relying solely on market sentiment.

Activists can also benefit from what is sometimes called the “activist premium.”

Investors often interpret the disclosure of a new activist stake as a signal that change may be coming, leading to immediate share-price appreciation.

While this reaction alone rarely justifies an activist’s investment thesis, it can provide an early boost to returns before any operational or strategic changes are implemented.

Improving capital allocation

One of the most common areas of activist focus is capital allocation.

Capital allocation refers to how a company deploys its financial resources.

This can include investing in growth projects, acquiring other businesses, repaying debt, paying dividends, or repurchasing shares.

Many activists argue that companies destroy shareholder value when they pursue low-return projects, make poorly conceived acquisitions, or allow excess cash to accumulate on their balance sheets.

As a result, activists frequently advocate for share buybacks, dividend increases, debt reduction, more disciplined spending, or improved return on invested capital.

Research has often found that campaigns focused on capital allocation generate stronger shareholder returns than those centered solely on governance or management changes.

Indeed, Elliott argued that eBay should return more capital to shareholders and improve its use of cash. In the years that followed, the company repurchased substantial amounts of stock, reducing its share count and increasing the value of remaining shares.

This illustrates how activists can generate returns not only through operational improvements but also through changes in how a company deploys capital.

Unlocking value through asset sales and spin-offs

Activists often target companies that operate multiple businesses under a single corporate structure.

In some cases, investors believe the market values the combined company at less than the sum of its individual parts. This phenomenon is commonly referred to as a conglomerate discount.

To address this, activists may push for asset sales, business divestitures, corporate separations, or spin-offs.

In 2020, eBay sold its StubHub ticketing business to Viagogo for approximately $4 billion. Later that year, the company also agreed to sell its Classifieds Group to Adevinta in a transaction valued at more than $9 billion.

These deals reflected Elliott’s argument that eBay’s individual businesses were worth more separately than they were as part of a larger corporate structure.

The goal is ultimately to allow investors to value each business independently, potentially resulting in a higher combined valuation than existed before the separation.

Benefiting from mergers and acquisitions

Many activist campaigns eventually involve some form of merger and acquisition (M&A) activity.

An activist may encourage a company to explore strategic alternatives, conduct a review of its options, or pursue a sale to a larger competitor.

If an acquirer is willing to pay a premium above the current share price, shareholder can benefit immediately.

While not every activist campaign ends in a takeover, M&A activity has historically been one of the most powerful mechanisms for unlocking shareholder value.

Driving valuation multiple expansion

A company’s share price is influenced not only by its earnings but also by the valuation investors assign to those earnings.

For example, two companies may generate identical profits, but investors may assign a higher valuation multiple to one because they have greater confidence in its management, strategy, or growth prospects.

Activists often seek to improve investor confidence by strengthening governance, improving transparency, or simplifying corporate structures.

As confidence increases, investors may be willing to pay a higher valuation multiple for the same level of earnings, resulting in a higher share price.

As eBay simplified its business and sharpened its strategic focus following the asset sales, investors gained a clearer understanding of the company’s earnings potential.

Activists often argue that this increased clarity can contribute to a higher valuation multiple over time.

Why board seats and CEO changes matter

Board appointments and executive changes often receive the most media attention during activist campaigns. However, these actions are usually a means to an end rather than the ultimate objective.

Activists generally seek board representation because it provides influence over corporate decision-making.

Similarly, calls for leadership changes are typically driven by a belief that new management can improve execution, capital allocation, or strategic direction.

The objective is not change for its own sake, but rather improving the company’s value and shareholder returns.

Elliott did not initially launch its eBay campaign as a boardroom battle. Instead, the activist focused on strategic and capital allocation changes.

However, the possibility of board nominations and a proxy contest helped increase pressure on management, ultimately leading to a settlement that saw Elliott Managing Partner Jesse Cohn gain a seat on the company’s board.

Not every campaign succeeds

While activist investing can generate significant profits, success is far from guaranteed.

Companies may resist proposed changes, other shareholders may refuse to support the activist’s agenda, or operational improvements may fail to materialize.

In some cases, activists exit investments without achieving their objectives, resulting in limited gains or even losses.

A well-known example is Pershing Square Capital Management’s investment in J.C. Penney. The activist’s Founder-CEO Bill Ackman gained significant influence over the retailer and supported a major strategic transformation led by former Apple executive Ron Johnson.

The changes were intended to modernize the business and improve long-term performance. Instead, customers rejected many of the reforms, sales declined sharply, and the company’s share price collapsed. Ackman eventually exited the investment at a significant loss.

The campaign highlights an important reality of activist investing: even when investors gain board representation and successfully implement changes, there is no guarantee those changes will create value.

As with any investment strategy, outcomes depend on the quality of the underlying thesis and the effectiveness of execution.

Key takeaways

Activist investors make money when the value of their shares increases.

Their campaigns are designed to unlock value through better capital allocation, strategic changes, improved governance, operational improvements, or corporate transactions.

While boardroom battles often attract headlines, the ultimate goal of activism is usually much simpler: buying undervalued companies and helping them become more valuable.