January 1, 2023 — What is an Activist Investor? Author John O’Connell explains!
By John O’Connell, author, “Rise of the Activist Investor”
Chapter 1 (more available on Amazon)
Eileen slowed to a walk as she exited the Beltline. Sun streamed down on Freedom Park as she crossed Moreland Avenue. Checking her Apple watch, Eileen noted with satisfaction
that her pace on her 45-minute run beat her typical training run. With the Publix Atlanta Half Marathon coming up in six weeks, she didn’t want to fall off her target pace.
Bounding up the steps of her apartment, she opened the door and proceeded to the kitchen for her morning coffee. Pushing the button on her Keurig machine, she savored the aroma of the Breakfast Blend that was brewing.
Checking her watch, Eileen noted that she had a few hours before she had to get ready for her shift at Emory University Hospital. A nurse on the Neurointensive Care Unit, she typically worked night shifts to earn the night differential, a small increase in her hourly pay.
The Keurig machine signaled that her coffee was ready. As she savored her first sips, she reached for her iPad to check the latest on the markets at the start of the week.
As she checked for news on GameStop, one of her largest positions, she smiled, remembering all the happy hours she spent in the Brunswick Square store, where she had worked during her undergraduate days at Rutgers University. Eileen grew up in a gaming family, so GameStop was a natural fit for her when she needed some cash to supplement her scholarship and loan package at the School of Nursing, where she earned a Bachelor of Science degree in Nursing in 2018.
A Beginning with GameStop
She remembered her freshman year when she struggled to keep up with her friends. As the oldest of three girls, she was the first one in college and her parents did not have much spare cash for her to spend at Starbucks and Brothers Pizzeria.
On a weekend home, she confided in her mom.
“Mom, I’m really strapped for cash,” she said. “Maybe I should get some more loans.”
Her mom shook her head. “Bad idea, sweetie. Those payments will kill you when you get out of school. Have you thought about a part-time job?”
Eileen was unenthusiastic. “My roommate has a work study in the Science Library, and she’s bored out of her mind,” she said. “Plus, she hardly makes any money.”
“There’s got to be a better alternative,” her mom mused.
Her glance fell on their Nintendo Wii in the family room. The family got a Wii when Eileen was in middle school. They all played Wii Sports and Rock Band. They even had the drum set, micro- phone and keyboard for Rock Band and played the AC/DC track pack constantly.
“How about GameStop?”
“What about GameStop?” Eileen asked, puzzled.
“Working at GameStop! You would love it,” her mom predicted.
“There’s one not too far from school.”
“Wow,” Eileen replied, as her face lit up. “That would be fantastic—making money, getting a gaming discount. Thanks, Mom!” Eileen immediately pulled out her iPhone and navigated to the GameStop website. It took her 10 minutes to fill out an initial employment application, her thumbs flying through the application fields.
For Eileen’s family, a visit to the local mall wasn’t complete without a visit to GameStop, a retailer that bought and sold used computer and game system games. The company’s business model was built around purchasing used games and gaming systems from their customers in return for store credit to buy new games or for cash. Typically, GameStop sold those trade-ins at a discount since they were used. For Eileen, her dad and her sisters, snagging a great game that was a year or two old for $30 or so was a great deal since new games cost twice as much. One of Eileen’s favorite pastimes was trolling the discount bins with her dad to find games that they didn’t already have.
For GameStop, the mid-2010s were a golden era when they dominated video game sales for the PlayStation 4 and Xbox One. In fact, during the summer of 2014, GameStop announced in their Q2 earnings report, and analysts confirmed, that more than 50 percent of all games sold for those game systems were sold by GameStop.1 As more gamers turned to streaming, the company pivoted into digital sales by selling downloadable game content (DLCs), season passes and currency cards.2 DLCs and season passes unlock additional game content. That content can include additional gameplay, such as additional missions or maps in the game, or different outfits for characters. For example, different outfits are called game skins and can include content like Batman’s original 1966 costume. Currency cards are used in online games as digital currency to buy game time or items in the game. They were made popular by games like World of Warcraft and EVE Online. As far as Eileen was concerned, you could not work in a better place than GameStop if you were a gamer.
Eileen’s interview was two weeks later, and she was hired on the spot, and just in time for the Christmas rush. They gave her all her employment paperwork to fill out at home. She called her mother from the car driving back to her dorm.
“I got the job!”
“That is awesome!” her mom replied.
“They give you a 10-percent discount on games and gear,”
Eileen reported. “And I can check out any used game for free for three days.”3
“That is a great perk,” her mom commented.
“Yeah!” Eileen said. “I’ve got a bunch of paperwork to fill out and bring back on Saturday when I start my first shift. They’ve got a 401(k) too, should I do that?”
“Do they match your 401k?” her mom asked.
“They do,” Eileen confirmed. “The manager said that they match contributions 100 percent for the first 3 percent that she saved and 50 percent for the next 2 percent.”4
“So that means that if you contribute 5 percent of your salary, they will put an additional 4 percent of your salary into your retirement,” her mom explained. “It’s a good idea, honey.”
“But, Mom, I kinda need the cash,” Eileen confessed. “The whole reason I got the job was to have more spending money. And I’m 18! Do I really need to worry about retirement at this point?”
“I understand all that, but think about it this way—you are only putting in 5 percent,” her mom said persuasively. “That’s only 40 cents out of your $8 an hour. In return, they are adding 32 cents an hour for free. That money adds up by the time you need it. And you won’t miss it if you start day one and never see that money.”
“You’re right,” said Eileen. “I won’t miss it if I don’t have it. I’ll do it. You need to help me with the investments though.”
That night Eileen and her mom picked some aggressive growth
funds, since her mom said that she was so young she could weather ups and downs in the market.
GameStop was a great job. Not only did she make more money than an on-campus job, she also gained access to hundreds of games. Eileen made full use of her three-day-free employee-check- out perk and played new games every weekend. Being in the store regularly meant that she had first pick of any of the good games traded in by customers so that she could try a ton of great games. She had fond memories of playing the Assassin’s Creed series, Rise of the Tomb Raider, and Fallout 4.
Fallout 4 was released in November 2015 and was an open world adventure game set in a post-apocalyptic environment around the city of Boston. Eileen bought the game the day it came out and played it daily. She was stuck trying to get behind a locked door in the game. She first learned about Reddit and Discord because of the game. She remembers the conversation with her coworker, Chris.
“I found the Vitale pumphouse last night and the locked door. I know something cool is in there and I cannot find the damn code.” she said to Chris.
“Did you ask anyone?” Chris asked.
“I’m asking you,” she smiled. “Did you find it?”
“I have not, but you should ask on Reddit,” Chris said. “Reddit, what’s that?” Eileen inquired.
Chris sighed, smiling, “You’ve been here like a year and you’re still a noob.”
“Reddit’s a website, like a message board,” he continued. “You join these boards called subreddits. There’s millions of them. Each subreddit is dedicated to a specific topic. Some dedicated to specific games. You can post your question on the Fallout 4 subreddit and see if anyone knows where to find the code.”
Eileen made a mental note to try Reddit. She wanted whatever was behind that door.
“You know,” Chris said, “We’ve got a Discord server where a bunch of us talk about the game if you’re interested.”
“OK, so what’s Discord,” she asked. “And I’m not a noob.”
“Discord uses VoIP, Voice over Internet Protocol, so that you can chat with friends while you play the game,” Chris explained. “You can use a headset with a mic and chat while you play any game, so it’s not like game chat where you can only talk to people playing the same game as you. You can also post text messages onto the server for when people are not online. Discord servers can be private too, like ours. Then you don’t need to have trolls in your chat.”
“Sounds good to me,” Eileen replied enthusiastically. “Thanks, Chris.”
She joined the Fallout 4 subreddit the next day where a Redditor, a fellow Reddit user, told her where to find the code for the secret door.
She also joined Chris’s Discord server. She enjoyed Chris’s Discord server for chats and subreddits for discussions about games and game tactics. Chris’s server had grown to other GameStop employees from nearby stores, and she joined the server every Monday night.
One January night the conversation moved from gaming to discussing GameStop’s sales.
“Our store is doing great. We’re selling a ton of DLCs and game time. I downloaded Robinhood and started to buy the stock,” said Jillian, a store manager from Northern New Jersey.
Robinhood was a relatively new app, which was released in March 2015, that enabled individual investors to buy and sell stocks.5 Eileen had heard about Robinhood from some friends at school but did not know much about it.
“How easy is it?” Eileen asked.
“Super easy! You download the app, create an account, connect it to your bank and transfer some money into your Robinhood
account,” Chris answered. “Then you can buy stocks.”
Several of the other members of Chris’s Discord server were buying the stock as well using Robinhood. Eileen downloaded the Robinhood app the next day and bought some GameStop shares. She continued to buy shares every two weeks with a portion of her paycheck.
Digital game delivery was on the rise when Eileen was in college. The Xbox One and PlayStation 4 had been out for a couple of years by the time she started her junior year in 2016. Eileen saw firsthand how digital game delivery started to hurt the GameStop business. Fewer people were coming to the store to buy new games while their trade-ins of old games were still high. Sales during the 2016 Christmas season were way down in her store.
The start of 2017 brought a one-two punch to GameStop. First came the earnings announcement from the 2016 Christmas season. GameStop sales fell 16 percent in the last nine weeks of 2016, and the stock was down 16 percent year-over-year in January 2017.6
The second blow to GameStop’s stock was at the end of February when Microsoft announced Xbox Game Pass. Xbox Game Pass is an all-digital program where Xbox One owners could pay $10 per month to have unlimited access to over 100 Xbox One and backward-compatible Xbox 360 games. Now you did not have to buy games through Xbox Live or GameStop, you could just rent them with Xbox Game Pass. GameStop shares dropped nearly 8 percent the day that Microsoft announced the service.7
Jillian brought up the stock change on their weekly Discord chat with Chris and their friends.
“Did anyone sell their stock with the drop in price this week?” she asked.
“Yeah. I saw it. I didn’t sell,” Eileen responded.
“I’m under water, but I’m sticking with it,” replied Jillian. “Under water?” Eileen asked, puzzled.
“I paid more than the stock is worth, but I know the price will come back,” Jillian said. “Nothing good came out this holiday season. Call of Duty: Infinite Warfare isn’t that good. The Switch comes out in March, and I’ve got people asking in my store how many units we’ll have.” Jillian replied, referring to the newest Nintendo handheld gaming device.
“I’m holding on to it too,” Eileen agreed. “Game Pass is still missing a ton of good games in my opinion. People are still buying DLC and game cash. And the Switch should be awesome.”
“I am buying other stocks though.” said Jillian. “You should diversify with other stocks now too in case it doesn’t come back that well. I’m on some other subreddits about stocks that I have or follow.”
“Good idea. I’ll check some out,” replied Eileen.
Eileen believed in GameStop wholeheartedly and thought that it was a great company. She wanted to invest in other companies that she believed in. She diversified her Robinhood account with shares of other companies that she liked and shopped at like Ulta Beauty and Bed Bath & Beyond.
Eileen started to become more educated on her investments as well. She learned from other Redditors how to read financial statements and how to understand the company’s direction from their annual report.
Eileen graduated in the summer of 2018, quit GameStop after working there for four years and moved to Atlanta to start her career in nursing. She was totally focused on graduation, accepting her job offer, the big move to Atlanta, adjusting to working nights and making new friends. In other words, her life took priority, and her stock portfolio was along for the ride.
In the meantime, her favorite company stock, GameStop, was on a wild ride.
Paul Raines, the man who was the CEO since Eileen’s family bought their Wii and her whole time working at GameStop died in March from cancer.8 Michael Mauler, the CEO who took over
from Paul, resigned in May after being on the job for only three months and the stock price fell 4 percent.9 GameStop co-founder Daniel A. DeMatteo stepped into the role as interim CEO. GameStop confirmed in June that they were interested in selling the firm to a third party.10
GameStop sold their Spring Mobile business, which owned and operated 1,289 AT&T wireless stores, to Prime Communications for $700 million in November 2018.11 Eileen thought that this was a great move by the management team to sell the failing wireless business from the company before a buyer bought the core GameStop business.
Eileen finished her five-month rotation with her preceptor, her nursing mentor, and settled into her steady night shift schedule. By December, she began to pay attention to her investments again.
First on her list was her GameStop 401(k). One of her old sorority sisters, Jenna, had launched her financial advisory career. Eileen opened an account with Jenna’s firm and transferred her old GameStop 401(k) to an individual retirement account (IRA). They were both starting their careers at the time, so Jenna was happy to get Eileen’s business even though the amount in her 401(k) was small. Jenna recommended some mutual funds and a health care exchange traded fund (ETF) for Eileen’s IRA. Eileen took Jenna’s advice and crossed moving her account off of her to-do list.
Next was her Robinhood stock portfolio. Her night schedule gave her time to focus more on her stock portfolio in the afternoons before her shift. She still had her GameStop stock, and her portfolio of stocks included nine other company stocks. She was active on the subreddits for four of the stocks that she held, including Ulta Beauty. That subreddit included discussions about everything from the company to makeup tips.
She started to become active on Reddit’s r/WallStreetBets subreddit to follow discussions about her other stocks.
WallStreetBets is a subreddit where Redditors discuss stock and options trading. The subreddit is known for highly speculative and aggressive trading styles. It’s often riddled with profanity, uses slang, and throws caution to the wind in many of the investment strategies. After spending some time on the subreddit Eileen realized that she could find some great information by wading through the sludge on the site.
Chris’s Discord server had shut down a long time ago. So Eileen reached out to her old coworkers and invited them to a new Discord server that she started to discuss investing and their GameStop stock. Many of them still held the stock and they started to chat about the stock weekly before Christmas.
While Chris had run his Discord server like a meeting room with a set time when everyone would show up, Eileen’s server was more like an open room where people could drop in on the couch and say, “I’m here. What’s up?”
The start of 2019 found her little Discord server’s membership growing. What started as a small group of ex-coworkers had grown to more than 30 people. Her server had active discussions about the company that they all loved, GameStop.
Eileen woke up one sunny January morning and jumped onto her Discord server to find several of the members discussing the GameStop board of directors.
“The board needs to be held accountable,” Jillian said. “They’ve driven the company into the ground over the past five years.”
“They saw that the wireless business was a loser and they got rid of that in November. That sale adds over $700m to the balance sheet,” said Courtney. 12
“They also said that they would sell the company, and they pulled back on that yesterday. The stock got hammered and is down 27 percent,” Jillian said.13
“Well, Tiger Management sent the board a letter last May ask- ing them to turn the company around. Maybe the board has a plan.” Courtney replied.
“Wait, what letter?” asked Eileen.
“Here’s the link to an article.” Courtney pasted the link in the chat window. “Tiger says that they do not want to be an activist investor and will sell their shares if the board does not get a plan. Maybe they have one and not selling is part of it. I need to drop for work. Catch y’all later.”
Eileen read the CNBC article from May 2018 that discussed a letter sent to the GameStop Board of Directors. The article outlined a letter from Tiger Management to GameStop’s Board of Directors urging it to “launch a strategic review and revive shareholder confidence in the sustainability of the GameStop business model.”14 The article said that the Tiger Management team’s letter outlined that it had “no intention of becoming an activist investor.”15
Eileen wanted to know more about this letter. What was an Activist Investor? What did this letter mean and how did Tiger Management send it to the GameStop board?
Introducing the Activist Investor
Activist investors are investors who purchase large numbers of a public company’s shares to affect a significant change within the company. Potentially, they can change a company’s direction, board of directors, investments and even the management team. They usually accomplish this by securing seats on the company’s Board of Directors. The activist investor can offer proposals through their board members that help to change the company. This can even include changing the CEO if enough board members feel that the CEO is not carrying out the will of the shareholders and the board. Remember that the CEO reports to the board of directors and the board of directors is elected by the shareholders.
Becoming an Activist Investor was once a role exclusive to ultra-wealthy investors who could buy enough shares to affect change in a company. That has changed with the advent of new technology that puts investing into the palm of your hand on your smart phone and enables investors to communicate at scale on social media platforms like Reddit, Discord, Facebook and more. We will discuss the technologies and regulations that enable activist investing in this book.
There are numerous routes to shareholder activism. Today, many investment options exist that allow you to align your core values with your investing decisions. Until recently, individual investors—also known as retail investors—couldn’t practice activist investing because they didn’t have the ability to buy enough shares within an individual company to drive effective change. However, during the past five years, changes in market access, technology and communications capabilities have created an ideal environment for retail investors to wield their shareholder power.
Retail investors already proved the might of that power in 2021 when they forced the short seller squeeze on nearly a dozen stocks, most notably GameStop. Several years ago, the ex-employees and shareholders of Proctor & Gamble used their voting power to change the agenda of another activist investor. These examples show the power of the shareholders. They also show that an activist investor or group of investors with less than 5 percent of a company’s outstanding public shares can drive change.
Today, we are in the early stages of a paradigm shift in pow- er on Wall Street from institutional and ultra-wealthy investors who practice activism to retail shareholders who can crowdsource activist changes through social media with other investors who share their beliefs and values.
Over the next 16 chapters, I will explain activist investing and what motivates activist investors. I will provide you with examples of activist investing in action and show you how to become an activist investor. You’ll learn how buying corporate stock, commu- nicating with your fellow shareholders and using your power as a shareholder can drive change in the world’s largest companies. Our journey together combines stories, history and action steps.