Companies' Top Executives Are Being Targeted By Activist Hedge Funds As Dealmaking Slows

The activist hedge funds that often aggressively push companies to sell themselves or divest divisions are increasingly demanding that top executives be replaced as a result of a slowdown in both mergers and acquisitions (M&A), a change in tactics that is being driven by a slowdown in mergers and acquisitions (M&A).

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It is estimated that 60 U.S. companies called for personnel to be removed from their ranks last year, a 46% increase year-over-year, based on data compiled by research firm Insightia. This is the highest number since 2017, according to the data.

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Fund managers and their advisers say that the trend reflects an overall decline in M&A activity as higher interest rates put a brake on economic growth as a result of high-interest rates. Dealogic data indicates that the value of M&A fell 37% last year from $5.9 trillion in 2021, when it hit an all-time high of $5.9 trillion, to $3.66 trillion last year.

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This push to force out executives is also a manifestation of hedge funds' frustration with their stock performance after the S&P 500 Index fell 20% last year, according to Ken Squire, who tracks activists at the research firm 13D Monitor. The average activist investor's portfolios plunged 17% last year, according to Hedge Fund Research, after three years of double-digit gains for the activist investor portfolios.

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"CEOs who are failing in such a downturn have few places to hide when the markets are flat or declining," said Squire.

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Several hedge funds have been successful in calling for top executives to exit the company in the last few months, including Soroban Capital Partners, which helped outfly Union Pacific Corp's CEO Lance Fritz, Ancora Holdings, which contributed to the resignation of Kohl's Corp's CEO Michelle Gass in recent months, and Sachem Head Capital Management, which targeted Pietro Satriano, the CEO of the food distributor US Foods Holding Corp.

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Avinash Mehrotra, co-head of Goldman Sachs Group Inc's mergers and acquisitions department in the Americas, and global head of the firm's activism defense practice said that “when performance is poor, activists will not remain silent.”

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One in four companies in the S&P 500 has an activist investor, according to Goldman Sachs data. The private negotiations that are taking place behind closed doors can also pose challenges to companies.

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"We are actively defending against two to three campaigns for every publicly announced situation, and we would like to believe that these campaigns will never become public," Mehrotra explained.

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Despite the fact that the chances of a deal becoming a reality seem to have dimmed in recent months, activist hedge funds have not abandoned their playbook of calling for companies to sell themselves or their assets. Insightia reports that such requests were up 19% in the United States last year as compared with the previous year.