Rise of activist investing is felt at
opportunity; paper firm CEO, a threat
Nathan Wallin for
The Boston Globe
Hank Newell, former
head of Wausau Paper, blamed activist investor Jeffrey Smith for
undermining a deal that could have saved the mill.
Staff August 15, 2015
BROKAW, Wis. — For more than a century, this village on the banks of
the Wisconsin River stood as a symbol of one way the American economy
was built, a compact between a company and a community.
Paper built the houses, stores, and even the Methodist church.
Hundreds of workers streamed down Everest Avenue to work at the mill,
which hummed day and night, its signature smokestack looming over the
a former Army artillery officer named Hank Newell prepared a few years
ago to take over as Wausau Paper’s chief executive officer, he knew he
faced a dilemma. The mill seemed prosperous, as workers produced a
rainbow of colorful paper products at one of the largest such plants
in the world. Yet the company needed to sell the mill as it reshuffled
its priorities in a fast-digitizing world, and Newell wanted a buyer
who would keep the place going.
Otherwise, 450 people could lose their jobs and the village itself
might go bankrupt.
negotiation to sell the plant was at a delicate stage, Newell said in
an interview, when he received a letter that alarmed him from a New
York City hedge fund called Starboard Value. Newell soon learned that
the fund’s chief executive officer, Jeffrey Smith, was part of a new
breed known as “activist” investors, who scoop up a sizable portion of
company shares and fight to boost the price. And Smith, even as he
snapped up Wausau shares, was calling for big changes at the
followed was a clash of corporate cultures that is being played out
across America, a Main Street versus Wall Street story with a powerful
new twist provided by the growing clout of activists. It is a trend
that could eventually affect the majority of publicly traded companies
and tens of millions of workers.
Activist investors scour reams of data about the nation’s publicly
traded companies in search of targets. They look for firms that may
have piles of extra cash, or that can be reshaped quickly. They often
cast themselves as outsiders who can take a cold-blooded look at a
firm’s finances, and push for steps that can boost a company’s stock
Activists say they provide a valuable service by turning around poorly
run companies, pressing for change, and forcing out ineffective
executives. Critics of the practice, however, said that companies can
be blindsided by high-flying investors whose main goal is to quickly
profit from their stock position, regardless of the long-term impact
on companies and communities.
Nathan Wallin for The Boston Globe
The Wausau Paper mill in the village of Brokaw, Wis., the
world’s biggest producer of colored specialty paper, employed
450 people before it closed in 2012.
strategy has become one of Wall Street’s hottest trends. The number of
major activist investors has tripled to 203 in the last four years,
while the number of companies subjected to pressure from activists has
jumped from 136 to 344 worldwide during that time,
according to the publication Activist
investors are having more success than ever, not just by pressuring
companies to change, but also by winning in nearly three-quarters of
proxy fights, which typically involve battles over board seats and
thus sway over corporate strategy, according to Factset.
this is starting to resonate in the presidential campaign. Democrat
Hillary Rodham Clinton on July 24 blasted what she called “hit-and-run
a New York City speech in which
she proposed a series of restrictions on the practice.
Republican Donald Trump said in June that, if elected president, he
would like to nominate one of the nation’s leading activist investors,
Carl Icahn, to be secretary of the Treasury. (The 79-year-old Icahn
responded on his blog that he does “not get up early enough
in the morning to accept this opportunity.”)
Newell, suddenly swept up into this new world of activism, hoped that
he could persuade Smith to be patient.
Lightning struck near Newell’s home on the Wisconsin River in March
2011 — a moment of peril that proved a personal turning point as well.
was hours away at the time. He was visiting a company plant in
Kentucky that was central to his plan to remake Wausau Paper. He
wanted to pour company resources into the plant to focus on products
such as tissues and toilet paper, business lines holding up better in
the digital age. His goal was to produce such products in an
environmentally friendly way. As prosaic as the products seemed, they
were the company’s future.
short order, Newell would receive a series of rude awakenings, first
on the homefront, and then in his business world.
lightning strike near his house set off a chain reaction. Indirect
lightning can travel through a nearby house’s wiring, knock out smoke
detectors, and cause gas appliances to torch. Newell’s wife, Becky,
was asleep as flames spread toward the bedroom.
Newell’s dog, Dolly, pawed Becky’s shoulder and awakened her. Feeling
the heat from the other side of the bedroom door, she left it closed,
scrambled to the first floor window and leapt out, her life saved by
her dog and her quick wits.
Becky, who had been home alone, gathered herself, hearing the distant
sirens gradually come closer, she soon saw volunteer firefighters leap
from the trucks.
realized that a number of them were Wausau Paper mill workers who had
left their own homes, risking their lives to save hers. Hearing of the
dog’s heroics, a number of mill workers decided to donate to the local
Humane Society in honor of Dolly, who survived the fire.
Becky later related her survival story to her husband, the couple saw
it as confirmation of what they believed about how a community and its
major employer should interact; it became for them a defining moment.
had long worked in the paper industry and knew that change, sometimes
disruptive change, was a constant. But he also saw more clearly now
that they were all part of a community, not just a company, and were
in it together. That was the way Newell wanted to run the company, he
of the mill workers had questioned whether Newell was just another
drive-by executive, whether he really was committed to the small-town
was. He would rebuild his house and stay at Wausau Paper for the long
term – or so he thought — and try to preserve as many of the company’s
jobs as possible.
months later, another thunderbolt arrived, this time from Wall Street.
in June 2011 had had a cordial get-acquainted meeting with Smith but a
month later the tone had changed.
in a public letter, criticized what he called the “dismal performance”
of the company’s paper business, the focus of the Brokaw mill, urging
that Wausau get out of that product line. He also criticized Newell’s
plan to invest $220 million to modernize a Kentucky plant that
produced tissues, toilet paper, and towels.
Smith’s criticism drew headlines across Wisconsin. “Wausau Paper
shareholder concerned over lagging paper business,” said the headline
in The Wausau Daily Herald on Sept. 11, 2011.
disputes that there were concerns about the future of the Brokaw mill,
given the shift in market trends. But Newell said the mill had years
of useful life.
said that after Starboard’s criticism, the would-be buyer lowered its
offer to an unacceptable price, and then a major customer of the mill
went elsewhere. Smith, however, would later blame the problems on
management failures by Newell and others.
way, the mill was no longer sustainable. Word began to leak that the
Brokaw mill would close.
Jeffrey Weisenberger, like his father before him, had long worked at
the sprawling paper mill here on the banks of the Wisconsin River,
earning a good living. Growing up in Brokaw, Weisenberger said, was
like being in “a touch of heaven,” with the company providing nearly
all that was needed. Wausau Paper was founded here in 1899 by Norman
H. Brokaw, for whom the village is named.
Weisenberger figured the work would be there for generations to come.
By 2011, Weisenberger had put in 35 years, enough to assemble the
trappings of a good life in the Wisconsin, a place in the north woods,
boat, truck, motorcycle. He had time to fish and hunt and devote time
to the place he loved most, becoming Brokaw’s village president.
Weisenberger had heard that a New York City-based hedge fund had
started buying shares of Wausau Paper. He knew from his work as a
union shop steward that the Brokaw mill was the world’s biggest
producer of colored specialty paper, such as the brightly colored
index cards for sale at Staples. He didn’t believe the mill was at
one day in 2011 he received a call on his cellphone, while he was at a
funeral, that the mill would close.
Nathan Wallin for The Boston Globe
“I’ll never forget it,” Weisenberger said. “It was Dec. 7, ‘day
of infamy.’ It was the day I buried my father and the day I lost
fell to Newell, who was promoted from chief operating officer to chief
executive in January 2012, to complete the closure of the Brokaw mill.
It was in the end Wausau Paper’s decision — affirmed by Newell and the
board of directors — not that of Smith or Starboard Value, which did
not operate or control the firm or have insider access to corporate
financials or strategic plans.
this day, Newell believes the Brokaw mill could have remained open if
it had not been for Starboard’s public criticism that he believes
undermined his effort to sell the plant.
reason why that mill would have had to shut,” Newell said. As for
Starboard’s role, he said: “Starboard has no responsibility. That’s
part of the issue. An activist has no responsibility for the things
they say in the public domain.”
and his Starboard partner, Gavin Molinelli, who now sits on Wausau’s
board, declined to speak on the record about Newell’s version of
activist investor allied with Smith said Starboard should be praised
for trying to rescue the company and blamed Newell for the problems,
but this investor also declined to speak on the record. Wausau Paper
officials similarly declined to speak on the record and provided only
a press release that confirmed the company had tried and failed to
sell the Brokaw mill.
plant closed for good in early 2012. Then a Minnesota mill was closed,
costing 134 jobs, which Newell said was a ripple effect of the failed
Brokaw sale, but which Smith charged in another letter was another
sign of bad management.
clash between Newell and Smith escalated in their public letters;
Smith wrote that the company had a history of “failed commitments,”
while Newell cosigned a letter that said Smith’s charges were “without
any basis in fact.” Smith, meanwhile, used his leverage to get four
Starboard-backed candidates on the nine-member board of directors.
Newell’s control was becoming tenuous.
Jeffrey Smith strode to a stage at New York City’s Time Warner Center
on Sept. 17, 2013, and waxed rhapsodically to hedge fund managers and
reporters about why investing in Wausau Paper would be so lucrative.
he said, “is a beautiful,
thought things were going so well that he dropped a bombshell. He
wanted Wausau Paper to make what is known as a “stock buyback.”
HEIDI GUTMAN/CNBC/NBCU PHOTO BANK VIA GETTY IMAGES
Activist investor Jeffrey Smith publicly criticized the way
Wausau Paper was being managed.
believed that the company, then worth about $650 million, could afford
to allocate $100 million to buy back stock. In some cases, stock
buybacks jack up the price because fewer shares are available. As the
company’s single largest shareholder, holding about 15 percent of the
stock, Smith’s hedge fund stood to benefit if the share price went up.
buybacks are now common but controversial. Typically, they are done by
companies flush with extra cash, which was not the case with Wausau.
But the Wall Street audience was cheered by Smith’s buyback plan, as
well as his call for the company to increase its dividend. As he
spoke, the stock of Wausau Paper climbed upward.
followed up with
a letter to Newell on Oct. 22,
2013, in which he said he found it “particularly troubling” that
Newell “would like to prioritize growth,” at Wausau, charging that
Newell had made “value destructive capital investments.” He urged
Newell to commit “to returning a large portion of cash” to
began one section of the letter with the headline, “Wausau Should
Initiate a Buyback Now, then Increase its Dividend Substantially.” He
tied the call for a buyback and dividend hike to the company meeting
its own rosy financial projections — projections that did not pan out.
says he was stunned by the buyback proposal. He said that far from
having extra cash with which to buy back stock, the company would have
had to try to borrow money to pay for it. He said he needed the
company’s cash to pay off the debt on the $220 million tissue-making
machine in Kentucky, on which he had bet the firm’s future.
clash highlighted one of the biggest debates on Wall Street: While
some activists argue that a company’s main obligation is to its
shareholders, others say that many factors such as the impact on jobs
and communities must be top priorities.
reality is I have 25 to 30 percent of my stock controlled by hedge
funds, all articulating ‘share repurchase and dividends,’ ’’ Newell
said, noting that other activists had piggybacked on Starboard’s
investment. “And so it presents a dilemma for the company.”
while, Wausau stood by Newell,
issuing a January 2014 press release
that attacked Starboard’s plan to try to control the board. “We
believe that it is disproportionate and inappropriate that Starboard —
which holds only 15 percent our shares — should be able to designate
the majority of the board,” Wausau wrote. But the activist investors
won the day, and Newell resigned in April 2014. Shortly thereafter,
Starboard successfully nominated Smith’s partner, Molinelli, to sit on
the board and gained majority control.
circle was complete: In less than three years, Starboard had gone from
being an obscure investor to controlling the board. During this
tumultuous transition, mills were shut or sold. A chief executive was
Starboard has high hopes that profits will grow and gives itself
credit for righting the company. Those who lost jobs can only wonder
whether it was due to structural change in the paper business, poor
management, activist demands, or a combination. What is clear is that
what happened to Wausau Paper is being echoed at many other companies
as activism grows, for better or worse.
Preston Athey, who managed the T. Rowe Price Small Cap Value Fund, one
of Wausau’s largest shareholders at the time, saw the fight unfold.
His fund was a longtime “passive” investor, making suggestions and
anxious for better returns, but willing to be more patient to see if
Newell could succeed.
of this issue from Mr. Newell’s standpoint was he was not given the
time to see if the changes that he had put in place would work,” said
Athey, a T. Rowe Price vice president who no longer manages the fund.
“In a sense, it is not his fault it hasn’t been turned around, but it
is fair to say that changes had been a long time coming.”
Paper, having sold its other two Wisconsin mills, no longer has any
presence in the state aside from its headquarters.
has gone on to much glory on Wall Street.
Forbes magazine calculated that
his firm made a profit in 84 percent of its activist campaigns since
2002. One of Smith’s big successes came when his hedge fund purchased
5 percent of AOL’s stock and, after applying pressure on management to
sell patents and other assets in 2012, the value of his shares soared
250 percent, according to a report by Fortune, which
last year called him “the investor
CEOs fear most.” Starboard was named the
No. 1 activist of 2014 by the
trade publication Activist Insight.
Smith’s investment in Wausau Paper has not gone as well. He began
accumulating significant amounts of Wausau stock around June 2011,
when it was in the $6 range. It closed on Friday at $8.65.
than a year after Starboard won control of the board, the company has
not done a stock buyback or raised its dividend. Smith has held on to
the stock for four years, much longer than the short-term reputation
of activists might suggest, and has continued to express confidence
that the share price will go up.
Newell, sitting at his home down-river from the Brokaw plant, said he
is speaking out because the public should understand the impact that
some activist investors can have on companies and communities.
“Shareholders have responsibility as well as rights,” Newell said.
“When employees in small towns work their whole lives for companies at
the same place, there’s a broader social responsibility of companies
to do their darnedest so those operations survive. . . . Employees are
more than a cost. They are the biggest asset that a company has.”
case has prompted US Senator Tammy Baldwin, a Wisconsin Democrat, to
call for restrictions on activist investors, which she said she will
outline soon in legislation. She said she was “shocked” by Starboard’s
criticism of Wausau for preferring growth over a $100 million stock
of what we should be looking at is the impact of decisions of the
workforce, the impact on communities, and there’s no better example of
that than the impact on Brokaw,” she said.
Brokaw, the village’s 248 residents struggle with the
aftermath of the mill closure. The village’s sale of water to Wausau
Paper had accounted for 95 percent of its revenues, which it relied on
to pay for the water system. The village tried to make up some of the
loss by raising taxes to three times the rate of neighboring
municipalities, and the water rate to five times the nearby level.
That hasn’t been nearly enough.
Weisenberger, in his role as village president, tried to declare the
village bankrupt, but Wisconsin officials told him that wasn’t allowed
under state law. Governor Scott Walker, a Republican seeking the
presidential nomination, did not respond to a request for comment. An
aide said a provision was included in the state budget that would
allow Brokaw to be subsumed by two neighboring municipalities that
would have to pay off its debts.
other words, Brokaw would no longer exist.
longtime residents can’t accept the idea that their village might
disappear. Across the street from the mill, the Frank family is
working on a plan. For three generations, the family has sent its
members to the mill, and they have been a fixture in Brokaw since the
1920s. Ruthelle Frank, now the 87-year-old family matriarch and a
former mill employee, feels betrayed.
don’t think anybody could appreciate what this little town was and
what was destroyed,” she said.
recently heard of the website GoFundMe, which enables anyone to
finance a cause. She talked it over with her husband, Henry, who
worked at the mill for 38 years, and her children, Rochelle and
take YOU to save a VILLAGE,” the Franks
wrote on the website. They set a goal they believe would
enable Brokaw to avoid dissolving: $2.5 million. The response got
local news coverage but, as of Friday, had raised only $756, much of
it from the family.
Ruthelle is trying to remain optimistic. Maybe, she said, there’s an
investor out there willing to bet on Brokaw.
Michael Kranish can be reached at
Boston Globe Media Partners, LLC