"A hedge fund in New York takes control of a great Wisconsin business, shuts down a factory and 450 people lose their jobs. The town of Brokaw goes bankrupt. It's not right. We cannot let these predators devastate our communities, so I am working to stop these Wall Street hedge funds from destroying another town."
--- Sen. Tammy Baldwin, D-Wis., remarks in a campaign ad, "Predator," released March 27, 2018
"Hedge fund" has become an all-purpose phrase in politics for capitalism run amok, destroying the lives of ordinary citizens. In this reelection campaign ad, Baldwin highlights her support for a proposed law - the "Brokaw Act" - which seeks to restrain activist investors by the use of measures including shortening the window for disclosure of the purchase of a substantial chunk of stock.
The proposed legislation and the ad revolve around a tale of woe of Brokaw, a former village in the Wausau area of Wisconsin. (It was absorbed by a neighboring village after the loss of its main customer for water.) But the story is not as simple as Baldwin suggests, according to public records and interviews. The Fact Checker obviously takes no position on the merits of the bill or whether activist investors are a harm to the economy.
Starboard Value LP is an activist hedge fund based in New York, focusing on identifying undervalued companies and pushing management to make changes that would enhance shareholder value. Often, that could mean selling or closing lines of businesses. Starboard has been especially successful at using a relatively small stake in a company to convince other, less aggressive shareholders to follow its advice and oust boards that oppose its strategy.
In 2011, Wausau Paper was struggling because demand for fine-quality paper had declined sharply as Americans relied more on computers to transmit messages and documents. In 2007, 2008 and 2009, the company closed paper mills in New Hampshire and Maine and another facility in Wisconsin in response to market pressures, eliminating a total of 489 jobs. The company's bathroom tissue business, by contrast, was booming - and presumably would still thrive in the digital era.
Wall Street noticed the company's dilemma. On Oct. 28, 2010, influential paper-products analyst Mark Wilde of Deutsche Bank had highlighted the disparity in a research note to investors. The note said that the company should focus on tissue and exit the paper business: "WPP continues to plow times & cash into paper despite a decade of woeful performance . . . value & options around paper are steadily shrinking."
Starting in May of 2011, Starboard began acquiring shares in the company, and on July 28 revealed it had taken a 6.9 percent stake. In a letter to company executives, it echoed the point made earlier by Deutsche Bank, saying the company was "undervalued" primarily because of the paper business. "Despite the continued underperformance of Wausau's Paper business, we believe the business has considerable value," the letter noted, suggesting its specialty paper brands might "garner higher multiples."
Meanwhile, three days later, on July 31, this was the headline in the Wausau Daily Herald: "Memo: Wausau Paper's Brokaw mill caught in 'perfect storm.'" The article quoted an internal company memo as saying that the mill was operating at a "significant financial loss" and that "we are facing an unprecedented perfect storm of rising input costs, declining demand and ever more aggressive competitors."
On Oct. 3, Starboard said it had 7.5 percent of the company stock and urged a sale of the paper business, as well as timberlands and hydroelectric assets, to become a "pure play" tissue business. The letter noted that the company had already spent $151 million restructuring the paper business in recent years, and "we have serious doubts that the recently announced headcount reductions in your Brokaw facility will be enough to turn this segment around."
On Oct. 26, the company announced it was considering selling the Brokaw mill. But then on Dec. 7, the company announced it had sold its writing paper and color brands and its timberlands - and would shut down the Brokaw mill.
"Today's announcement reflects the outcome of a strategic review of alternatives for the Print & Color business, begun early in 2011," the company statement said. "Our decision to exit Print & Color was ultimately driven by dramatic and irreversible market demand decline and the need for consolidation to bring these markets properly into balance."
At the time, Starboard still held less than 10 percent of the company stock, compared with 10.2 percent held by company directors and executive officers, according to the 2012 company proxy statement.
The sales of the brand names yielded $49 million, but the shutdown of the mill cost $23 million in cash, company documents say.
Now let's look back at Baldwin's claim: "A hedge fund in New York takes control of a great Wisconsin business, shuts down a factory and 450 people lose their jobs."
But Starboard did not have control of the company, let alone even a board seat. The company would gain board seats long after the Brokaw mill was shut down. When the Brokaw decision was made, Starboard did not have a voice in the boardroom - a point made at the time by Wausau Paper. Indeed, the company even said it had been thinking of dumping the paper business before Starboard started buying shares.
Hank Newell, who was transitioning to become chief executive at the time of plant closure, has argued that Starboard's aggressive criticism of the company helped undermine the prospects for saving the mill. "Did they have control of the mill? Absolutely not. Did they direct the actions of the company? Absolutely not," he told The Fact Checker. "Did they create the conditions that led to the closure of the mill? Yes."
According to Newell, a prospective buyer reduced an offer for the plant and a major customer ended a contract after Starboard made its concerns about the paper business public. "But for the action of this activist investor, that would not have occurred," he said.
But other former company executives tell a different story. A member of the leadership team, who spoke on the condition of anonymity because of the sensitivity of the issue in Wisconsin but was no fan of Starboard, said there were companies potentially interested but no purported offer had been subject to due diligence; that would have revealed how old the plant equipment was. Eventually one of the potential bidders, Neenah Paper, ended up just purchasing Wausau's brand names for use in its own mills.
"It would have been the eventual outcome regardless," the former executive said. "It was a market dynamic as opposed to a hedge fund strategy."
The Brokaw mill specialized in making fine paper, especially colored paper. But the company had not invested enough in new technology. "The machines were very costly to run compared to other machines to make that paper," said Perry Grueber, who had been Wausau's head of investor relations at the time. "The market for these products was too competitive and our costs were too high."
Grueber said the "presence of the activist investor had an impact, but I would not weigh it at the top."
Indeed, a 2016 study by Duke University business professor Alon Brav and two colleagues concluded: "Hedge fund activists played essentially no role in the closure of the Brokaw mill."
Starboard eventually did win control of the board, advocating for stock buybacks and ousting Newell, in the pattern of activist investors. But all of that came after the plant's closing. Wausau Paper was eventually sold in 2015 to Sweden-based SCA (now Essity) at barely a double-digit premium over the stock's trading price the previous year.
Starboard executives declined to comment on the Baldwin ad.
"The ad reflects the facts and tells the all-too-true story of Wisconsin workers who've seen firsthand the devastation that our hard-working communities experience when predatory Wall Street hedge funds exert their influence and control over great Wisconsin businesses," a Baldwin campaign spokesman said.
The Pinocchio Test
The loss of hundreds of factory jobs is obviously a tragedy.
But contrary to statements the senator makes to the camera, Starboard did not control the company at the time and was not part of the executive decision-making to close the factory. We can find no Starboard statements calling for the closure of the factory - and company statements at the time said it had no role. One former executive claims the hedge fund's activities undermined the value of the assets, leading to the closure of the plant, but other company executives disagree.
Baldwin too quickly looks for a corporate villain when economic and competitive pressures almost certainly played a more important role. We were tempted to award Four Pinocchios, but Starboard, as a minority investor, was certainly advocating for major changes at the time. Baldwin earns Three Pinocchios.