Active investors often target "value" companies, those with low market valuations relative to their book values yet demonstrating strong operational performance, as evidenced.
Even if these companies are operationally sound, they are not favorably perceived by the public when compared to their peers. This underscores the importance of benchmarking performance and current strategy against those competitors to determine whether value-generating opportunities are being overlooked.
Evidence from activist intervention indicates that targeted firms generally experience a swift improvement in performance. After one year total payout and book value leverage increase, while improvements on Return on Assets and operating margins are registered on the second year from activists engagement (Alon Brav, 2008)
Activism that focuses on alterations in business strategy, such as refocusing and divesting non-core assets, yields the most substantial positive effects. External investors can effectively enhance value when they detect significant allocative inefficiencies. In contrast, while the market does respond positively to capital structure-related activism—including debt restructuring, recapitalization, dividends, and share buybacks—the impact is not statistically significant.
Given value is created through strategic measures, the ex-ante due diligence is where the foundation is laid. Due diligence is a critical process for identifying value-generating opportunities. From a theoretical standpoint, transparent disclosure of private information is estimated to double the number of companies targeted by active shareholders, as a clear understanding of the business’s financials and operational data allows investors to identify potential value-generating opportunities, with expected returns estimated to increase by 0.7 percentage points (Rui Albuquerque, 2022).
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