The aims of activist hedge funds may seem harmless, even
virtuous. But who are they really benefiting? Growing evidence suggests that
the only true winners are the billionaires who run these funds.
So why are public pension funds – some supported by taxpayer
dollars – investing in these instruments of economic destruction?
Research indicates that state pension funds have
invested in activist hedge funds. Public records show that New Jersey’s pension
fund has investments in the activist funds Starboard Value and Jana Partners.
Florida’s pension fund also has invested in Starboard Value.
Governor Ron DeSantis’ role as chair of the pension fund
makes him a Wall Street player of sorts, as evidenced by his recent comments
about Elon Musk’s buyout of Twitter – which were followed by Musk’s sudden, and
not necessarily coincidental, conversion to the Republican Party.
Even nonprofit foundations established to benefit
society are lending support to these predatory activist investors. Are the Ford
Family Foundation, the Dr. Scholl Foundation and the Edward & Sandra Meyer
Foundation aware of what’s being done with their money?
The fact is that when activist hedge funds pounce on a
company, the result tends to be disastrous for everyone but the activists: poor
long-term returns for shareholders and a loss of jobs for employees.
The activist sales pitch seems compelling at first.
Replacing an apparently lackluster board with new thinking – and lighting a
fire under management – which may seem like a good way to boost shareholder
But it’s increasingly clear that activist hedge funds
are the successors to leveraged buyout specialists of a generation ago:
quick-buck seekers operating out of their own, usually short-term interest. So
when a prominent activist hedge fund like Starboard Value goes after a dizzying
array of companies in a matter of months – including Huntsman, GoDaddy, Papa
John’s, Commvault Systems, Kohls, LivePerson, eHealth, On Semiconductor, ACI
Worldwide, Aecom, Cerner, Elanco Animal Health, Merit Medical Systems, Onyx
Acquisition, and Warburg Pincus Capital – alarm bells should be ringing for their
shareholders and employees.
It’s no coincidence that some of the largest activist
funds are run by multi-billionaires: Carl Icahn of Icahn Capital Management
(net worth $16.7
billion in mid-May 2022, according to Forbes), Paul Singer at
Elliott Management ($4.3
billion), Daniel Loeb of Third Point ($4.2
billion) and Bill Ackman of Pershing Square Capital Management ($2.9
Activist investors like these are out to turn a fast
profit – the polar opposite of the long-term commitment it takes to build a
thriving company with a healthy culture that serves customers, employees,
shareholders, and other stakeholders.
For these billionaires, the quickest path to a
short-term windfall comes from slashing costs to attract a company sale. That’s
bad for three reasons.
First, selling the company to a competitor or a private
equity firm isn’t always in the best interests of customers – who lose the
ability to choose among competing providers of goods and services – or employees.
And it rarely serves the country’s need for dynamic markets that foster
innovation and entrepreneurial energy.
Second, drastic cost-cutting usually means layoffs and
corner-cutting that lowers employee morale and customer satisfaction.
Cost-cutting can also mean abandoning ongoing investments in new products or
markets that have yet to bear fruit but are essential for the company’s
long-term prospects. In fact, one study showed that the average company taken
over by activists suffers a 50%
drop in research & development spending
during the time the hedge fund is in charge.
Third, a recent
study also showed that companies targeted by activist hedge
funds tend to be poor corporate citizens, finding that “as soon as an activist
hedge fund takes ownership of a company’s shares, the company is likely to
firmly place on hold their efforts to be more environmentally sustainable and
The bottom line is that shareholders don’t do well, either. The same study found that after a short-term uptick in company value, “the value of the companies targeted by activist hedge funds steadily drops [and continues] downwards five years after targeting.”
That’s why it’s troubling that state pension funds and
some philanthropic nonprofits support these activities. Does Gov. DeSantis
really think his populist image will be helped by associating with activist
funds that lay off workers and handicap companies?
Short-term benefits for billionaires, long-term losses
for employees, shareholders, and society. Seems like a very raw deal.