Times are tough in software land: The king of activist hedge funds is having a hard time

ByLance T. Lee

May 14, 2022

Is the tide turning for activist hedge funds? Judging by one of the greatest player’s recent misfortunes, the answer may be yes.

Only a few years ago, these funds, which take large positions in publicly traded companies and then aggressively call for major changes to unlock value, were touted as a panacea for underperforming companies. In 2015, The Economist called the “unlikely heroes of capitalism”.

But flowering can be out of the rose. Activist funds face more resistance from stakeholders who may be skeptical about the real value of the proposed ‘reforms’. Most notably, leading activist hedge fund Starboard Value, which boasts over $7 billion in assets and fought his way into more publicly traded company board seats than any of his peers, found himself in an unusual position: on the losing side of a very publicized – not once, but twice.

In March 2022, shareholders of specialty chemicals maker Huntsman Corp. declined to elect any of Starboard’s five nominees for board seats, opting to elect the 10 nominees approved by Huntsman’s current management team. And in September 2021, software company Box Inc. easily defeated Starboard’s slate of board nominees, ending the hedge fund’s bid to take over the company.

Huntsman was able to push back against Starboard’s arguments by pointing to impressive growth in revenue, earnings and margins and management’s promises to improve shareholder value through share buybacks. Box also posted strong earnings shortly before the shareholder vote, but shareholders likely didn’t notice Starboard’s record of influencing or running software companies after taking on board seats. administration was anything but impressive.

Over the past five years, Starboard has served on the boards of four software companies: comScore, Symantec, Commvault and eHealth. The average return of the four stocks since Starboard’s involvement is -37.8%; the oldest holding company, ComScore, has lost 94% of its value since Starboard began lending its expertise in July 2017.

It’s a stark contrast to Starboard’s most famous achievement. The activist hedge fund took over Darden Restaurants, owner of the Olive Garden chain, winning all of its board seats in October 2014. The sweeping shareholder coup was preceded by a now legendary Presentation of 294 pages by Starboard which called, in detail, for changes such as changing the number and frequency of breadsticks served in Italian restaurants. In the years following Starboard’s power play, Darden performed significantly better, bolstering the hedge fund’s reputation. Darden stock is up nearly 200% under Starboard leadership.

It could be that the intricacies of the software industry are more complicated than counting breadsticks. Starboard essentially took over security software company Symantec (now Norton LifeLock) in November 2018, and Starboard’s managing member and head of research, Peter Feld, continues to serve on its board. Yet after a series of asset sales and restructurings, Norton stock has been almost flat since then – a period in which the broader stock market rose nearly 50%, even including the correction of This year.

A high stakes game

Starboard’s playbook is pretty standard: the hedge fund declares a stake in a company in an SEC filing, then quickly moves on to forcing change – often with a letter or presentation outlining its diagnosis of underfunding. assumed performance of the company. In January 2022, for example, Starboard reported a 7.3% stake in aerospace and defense technology giant Mercury Systems. At the same time, he demanded that the company drop its shareholder rights plan and pushed for greater control of the company. The next step, if history is any guide: Starboard will nominate its own slate of nominees to the Mercury Systems board of directors and present detailed proposals promising impressive returns if Starboard takes control.

But observers are beginning to wonder who benefits from these attacks: the shareholders, or the activist hedge fund?

Although the pursuit of profits from an activist shareholder can seem like a win-win situation for companies and their people, it often means prioritizing short-term gains over longer-term strategies for business success. business. The selfish approach taken by Starboard and other activists has led to a less than stellar track record of building successful businesses. The Harvard Business Review reported that once activist hedge funds take control of a company, “activists cut the number of employees by 12% on average, while R&D is cut by more than half” .

Experts who specialize in helping companies battle hedge funds like Starboard Value warn that activist investors stand to lose everything when they cut key experienced directors or upend long-term COVID recovery strategies. Going too far to win in the post-pandemic crisis, says Sabastian Niles of Wachtell, Lipton, Rosen & Katz at CNCBC, will ultimately mean that Starboard (and others like it) will be remembered as “failing to meet the moment.” “Indeed, history can look back on this moment as a watershed moment when shareholders became aware of the failure of activist hedge funds to deliver on their promises and, like consumers faced with marketing spam, clicked ‘unsubscribe.’

Media Contact
Company Name: Star Board Value
Contact person: Media Relations
E-mail: Send an email
Address:201 Las Olas Blvd East
City: Fort Lauderdale
State: FL 33301
Country: United States
Website: https://www.starboardvalue.com

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