IN-DEPTH: Activists focus on cost cuts as deal flow delayed
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With valuation high, the economy slowing and the M&A outlook uncertain, activist investors are returning to a familiar playbook: cutting costs.
According to DMI data, the U.S. remains the most active market for such demands with 15 companies targeted in the almost 10-month period to mid-October this year, up from 11 in 2024 and just eight in 2020. Japan and South Korea also saw increases in such demands.
The current emphasis on belt-tightening fits the macro climate, market observers told DMI.
“I think this is not a surprise and is likely to continue for the foreseeable future,” said Jeremy Lichtman, co-founder and partner at Shareholder Capital, a U.S.-based activist fund. The shift, he argues, is fundamentally cyclical. “We’re coming off of such an expansionary period, then into a period where growth has slowed. It’s time to clean it up. Time to get margins stable, margins resilient, and make sure that cash flow persists.”
That shift is also being shaped by dealmaking conditions. Christopher Ludwig, partner at Simpson Thacher, notes that the absence of private-equity buyers, long the natural exit for many mid-cap activists, has pushed investors to look inward. “Almost 70% of activism happens in the $500 million to $5 billion market cap range,” he said, “and without PE there, you need to find a way to drive value internally.”
More sectors facing cost pressure
As in past years, many of the demands have focused on consumer and industrial companies. In October, Pepsi announced it would focus on cost cutting and a portfolio overhaul amid talks with Elliott Management. U.S.-based food company Lamb Weston Holdings also detailed plans to save “at least” $250 million following a recent settlement with combined 7% stakeholders Continental Grain Company and Jana Partners.
Yet this year has also seen cost-cutting surface as a pressure point in other sectors such as healthcare, where roughly a third of such demands were advanced in the roughly 10-month period examined.
Life-sciences companies such as Arvinas, Keros Therapeutics, and Chrome Holding have all drawn scrutiny as investors question R&D intensity in a higher-rate environment. Lichtman said such companies are exposed because so much of their cost base is discretionary. “You’re playing something of a drug discovery game,” he said. “R&D gets put into focus a lot. It is a very easy area to just shut off.”
Ludwig, meanwhile, pointed to technology where many cloud software companies have been on major hiring sprees and are still seeing revenue growth but have negative free cash flow.
Similarly, banks with excessive backend costs have attracted activist attention with Holdco launching cost-related campaigns at multiple U.S. lenders this year, including Columbia Banking System, First Interstate BancSystem, Eastern Bankshares, and Comerica Incorporated.
Cutting costs before cutting deals
The rise in cost-cutting demands also coincides with a tentative pickup in M&A interest in some markets, noted Paul Kinrade, a senior advisor with Alvarez & Marsal Corporate Transformation Services.
With strategic buyers and private equity slowly reentering the market, companies under pressure often see an opportunity to reset expectations before becoming targets.
Kinrade says the dynamic is especially visible in lower-valuation markets such as the U.K., and Switzerland. “There’s a push from investors and corporates as well, to say, well, hang on, it’s suboptimal to sell now at a certain multiple,” he said. “If we actually drive the cost base down, the performance up, EPS up, cash flow up, we can get double the benefit.”
However, despite its increasing use as a lever for activists, meaningful cost reduction is rarely straightforward, with "cosmetic" cost-cutting often a challenge, as Kinrade explains.
“People have an initiative, they want to drive costs down, and what they do is say, okay, I’m taking people out of there and moving them to a function over here,” he said. “But you haven’t reduced the overall cost. There’s an awful lot of just moving pieces around the board.”
True reductions, he said, require evaluating what work is done, what value it creates, and whether processes align with strategy. “The goal isn’t cutting costs,” he said. “It’s improving the bottom line.”
Is AI the next battleground?
Many advisors expect artificial intelligence to feature more heavily in cost-cutting conversations, but caution against quick assumptions.
Kinrade said boards are already fielding AI-related questions from investors, but many companies still treat it as a buzzword. “It’s no good saying I’ve deployed AI if you’re not driving the bottom line,” he warned. “There’s too much of that going on at the moment. People think, ‘I am deploying AI,’ but it might be increasing your cost base.”
Ludwig, meanwhile, expects that AI could actually make valuing companies more difficult until the real potential of the technology becomes apparent. “People are convinced that it will save money, but how much? And where does it come from, and when will it be impactful? Being able to quantify it is extremely difficult,” he noted.
