Starboard Value, the king of activist hedge funds, has hit a rough patch
Is the tide turning for activist hedge funds? Judging from one of the largest player’s recent woes, the answer may be yes.
Only a few years ago such funds, which take large positions in public traded companies and then aggressively call for major changes to unlock value, were being touted as a panacea for underperforming companies. In 2015, The Economist called them “Capitalism’s Unlikely Heroes.”
But the bloom may be off the rose. Activist funds are facing more resistance from stakeholders who may be skeptical that proposed “reforms” are really in their interest. Most notably, leading activist hedge fund Starboard Value, which boasts more than $7 billion in assets and has muscled its way into more board of directors seats at publicly traded companies than any of its peers, has found itself in an unaccustomed place: on the losing side of a high-profile proxy battle – not once, but twice.
In March 2022, shareholders of specialty chemicals maker Huntsman Corp. declined to elect any of Starboard’s five nominees to board seats, opting to elect all 10 candidates endorsed by Huntsman’s current management team. And in September 2021, software company Box Inc. easily defeated Starboard’s slate of board candidates, ending the hedge fund’s bid to assume control of the company.
Huntsman was able to push back against Starboard’s arguments by pointing to impressive revenue, earnings, margin growth and management’s promise to enhance shareholder value through share repurchases. Box also posted solid earnings shortly before the shareholder vote, but it probably didn’t go unnoticed by shareholders that Starboard’s record of influencing or running software companies after assuming board seats has been anything but impressive.
Over the past five years, Starboard has assumed board seats on four software companies: Comscore, Symantec, Commvault, and eHealth. The average return for the four stocks since Starboard’s involvement is -37.8%; the longest holding, Comscore, has lost 94% of its value since Starboard began lending its expertise in July 2017.
It’s a sharp contrast to Starboard’s most famous success story. The activist hedge fund took over Darden Restaurants, owner of the Olive Garden chain, by winning all seats on its board in October 2014. The sweeping shareholder coup was preceded by a now-legendary 294-page presentation by Starboard that called in granular detail for changes such as reducing the number and frequency of breadsticks served in the Italian restaurants. In the years after Starboard’s power play, Darden performed significantly better, boosting the hedge fund’s reputation. Darden stock is up nearly 200% under Starboard’s management.
It could be that the intricacies of the software business are more complicated than counting breadsticks. Starboard essentially took over security software company Symantec (now Norton LifeLock) in November 2018, and Starboard Managing Member and Head of Research Peter Feld continues to sit on its board. Yet after a series of asset sales and restructurings, Norton stock is almost flat since then – a period during which the broad stock market is up nearly 50%, even including this year’s correction.
A High Stakes Game
The playbook for Starboard is fairly standard: the hedge fund declares a stake in a company in an SEC filing, then quickly moves to force change – often with a letter or presentation outlining its diagnosis of the company’s supposed underperformance. In January 2022, for example, Starboard declared a 7.3% stake in aerospace and defense tech giant Mercury Systems. At the same time, it demanded the company drop its shareholders’ rights plan and pushed for greater corporate control. The next step, if history is any guide: Starboard will nominate its own slate of nominees for Mercury Systems’ board and present detailed proposals promising impressive returns if Starboard gains control.
But observers are starting to question who benefits from these attacks: shareholders, or the activist hedge fund?
While the push for profits from an activist shareholder may sound like a win-win situation for companies and their staff, this often means prioritizing short-term wins over longer-term strategies for business success. The self-serving approach taken by Starboard and other activists has led to less than stellar track records of creating flourishing businesses. The Harvard Business Review reported that once activist hedge funds take over a company, “activists reduce employee headcount by an average of 12%, while R&D gets cut by more than half.”
Experts who specialize in helping companies fight hedge funds like Starboard Value warn that activist investors risk losing everything when they remove key experienced directors or upend long-term COVID recovery strategies. Overreaching for a win in the post-pandemic crisis, says Sabastian Niles of Wachtell, Lipton, Rosen & Katz to CNBC, will ultimately mean Starboard (and others like it) will be remembered as “failing to meet the moment.”
Indeed, history may look back at this moment as a turning point when shareholders woke up to the failure of activist hedge funds to keep their promises and, like consumers dealing with spam marketing, hit “unsubscribe.”