With dealmaking slowing, activist hedge funds target companies’ top brass

By Svea Herbst-Bayliss

NEW YORK (Reuters) – Activist hedge funds that often push companies to sell themselves or divest divisions are increasingly calling for top executives to be replaced, a change in tactics driven by a slowdown in mergers and acquisitions (M&A).

These investors called for the removal of personnel at 60 U.S. companies last year, a 46% year-on-year increase, according to data from research firm Insightia. That was the most since 2017, the data show.

The trend reflects an overall decline in M&A activity as higher interest rates put the brakes on economic growth, fund managers and their advisers say. The total value of M&A fell 37% to $3.66 trillion last year after hitting an all-time high of $5.9 trillion in 2021, according to Dealogic data.

The push to oust executives also highlights the hedge funds’ frustration with companies’ stock performance after the S&P 500 Index tumbled 20% last year, said Ken Squire, who tracks activists at research firm 13D Monitor. Last year, activist investors’ portfolios were down an average 17%, according to Hedge Fund Research, a poor showing after three years of double-digit gains.

“In down to flat markets, a failing CEO has few places to hide,” said Squire.

Hedge funds that have successfully called for top executives to leave in recent months include Soroban Capital Partners, which helped oust railroad operator Union Pacific Corp’s CEO Lance Fritz, Ancora Holdings, which contributed to the exit of department store operator Kohl’s Corp’s CEO Michelle Gass, and Sachem Head Capital Management, which targeted Pietro Satriano, the CEO of food distributor US Foods Holding Corp.

    “When performance is poor, activists won’t sit still,” said Avinash Mehrotra, co-head of Goldman Sachs Group Inc’s mergers and acquisitions group in the Americas and global head of its activism defense practice.

According to Goldman Sachs data, one out of four S&P 500 companies have an activist investor in their stock. There are also challenges to companies that are being negotiated behind closed doors.

“For every publicly announced situation, our team is actively defending against two to three campaigns that will hopefully never see the light of day,” Mehrotra said.

To be sure, the activist hedge funds are not abandoning their playbook of calling for companies to sell themselves or their assets, even as the chances of a deal have become more remote. Such requests in the United States were up 19% last year, according to Insightia.

(Reporting by Svea Herbst-Bayliss; Editing by Anna Driver)