Quantfury Gazette

AVIS (NASDAQ:CAR) doesn’t stand for ActiVist InveStor

by
Nathan Crooks
Quantfury Team
Avis

Avis Budget Group (NASDAQ:CAR), one of the largest car rental companies in the world, is dishing up a tough lesson to those who follow public companies with so-called “activist investors” inside, reminding them of the pitfalls that can emerge when large shareholders try to be managers.

Shares of Avis, which saw record revenue of $12 billion in 2023, fell 36% in February amid concerns about some very large macroeconomic headwinds the company is facing: higher interest rates and the falling value of used cars. The troubles are impacting one longtime activist investor that had about $3 billion of shares in the company at the end of December.

SRS Investment Management, which began investing in Avis way back in 2011, has seen its flagship fund lose 8% this year. Its founder, Karthik Sarma, launched a proxy battle in 2018, saying a “culture of complacency” at the car rental company had prevented it from holding management accountable “for its recurring failure to deliver on operating and financial targets.”

Sarma, a Princeton graduate and former McKinsey consultant, eventually obtained a board seat in 2020 and saw one of his analysts become CFO. They then rode a wave of surging post-quarantine travel, accelerated by a meme-stock trading boom, to profits worth billions, at least on paper. The company doubled down and went on a buying spree just as prices were skyrocketing because of global supply chain problems, growing its fleet by 40% in one quarter in 2022.

There’s an age-old investing saying that goes “buy low, sell high.” Avis did the opposite, unloading 50,000 cars as the market bottomed a few years later. Investors would have been wise to note a 2022 study published in the Yale Law Journal that outlined how activists often make things worse, not better, at companies they target, “mistakenly shaking things up at firms that only appear to be underperforming.”

It’s a message that doesn’t seem to have made it to many boardrooms, either. Lazard reported that shareholder activist activity reached a record high in 2023, with 252 new campaigns globally and 122 board seats won. Barclays said in a separate report that 46% of all campaigns last year pushed for mergers or the outright sale of a company or division, despite widespread knowledge that most deals don’t end up creating value.

Choose your activist investor company carefully.

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