BROKAW — The village of Brokaw will soon be dissolved into the village of Maine, forever changing the landscape of Wausau’s neighbors to the north. But the Brokaw name will live on, if a bipartisan bill to restrict hedge funds becomes law.
The Brokaw Act was first introduced in 2016 by Democratic Senators Tammy Baldwin (WI) and Jeff Merkley (OR). That bill stalled, but is being introduced in the next session. This time, Baldwin’s bill has a Republican co-sponsor, Sen. David Perdue of Georgia. The proposed legislation also has the backing of a group of prominent businesses and leaders, including Home Depot, according to a CNBC report published this week.
If the Brokaw Act becomes law, the legislation could significantly restrict the ability of hedge fund activists to take minority stakes in companies and force them to make major changes. The legislation is named for Brokaw because it is inspired by the collapse of the village, which Baldwin says happened after a “wolf pack of hedge funds” seized control of Wausau Papers, owner of the now-shuttered Brokaw paper mill.
The Brokaw Act aims to rewrite the rules of the U.S. economy by increasing transparency and strengthening oversight of activist hedge funds that are “abusing weak securities laws to gain large stakes in public companies,” Baldwin wrote.
“Congress has long recognized the potential for abuse when activist hedge funds form loose associations of wolf packs and tip allies to an impending disclosure,” Baldwin wrote. “In fact, Wall Street reforms passed in 2010 explicitly gave the Securities and Exchange Commission the power to address this problem, yet the SEC has been unwilling to use this authority.”
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 price.
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.
In Brokaw, the mill began operations in 1989, thriving for years. But by March 2012, the mill permanently closed, taking with it hundreds of jobs and the lifeblood of the village.
According to the CNBC report:
“While activist investors were involved with the mill’s parent company, their actual culpability for what happened in Brokaw is disputed.
It all started in 2011, when Starboard Value, the New York hedge fund led by Jeff Smith, took a stake in shares of Wausau Paper, the Mosinee, Wisconsin-based company that owned a slew of mills, including the one in Brokaw.
The Brokaw mill was known for making rainbow 8-by-11-inch sheets of paper that could be purchased at office supply stores like Staples and OfficeMax. Starboard said that business was in decline and dragging down the rest of Wausau Paper, which made everything from toilet paper to paper towels.
By December of that year, Wausau’s board of directors approved a plan to permanently close the Brokaw mill, eliminating 450 hourly and salaried jobs.
Those who defend the hedge funds say it was management at Wausau Paper, and not the investors, who were responsible for closing the mill. The same story had been happening all over during that time period as the American paper industry began facing greater competition from China and a more-environmentally-conscious consumer that was turning more frequently to computers and printing out fewer documents on paper.
Wausau Paper already had shut down a sulfite pulp mill in Brokaw in 2005, and two years later, closed its Groveton, New Hampshire mill, followed by the closure of one in Appleton, Wisconsin. In 2009, it closed its Livermore Falls, Maine, mill.
About 550 jobs were lost as a result of all those closures — all of them took place before Starboard arrived on the scene.”
The trouble began when Smith, 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 Wausau Paper CEO Hank 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.
No one disputes that there were concerns about the future of the Brokaw mill, given the shift in market trends. But in multiple media reports, Newell said he believed the mill had years of useful life.
After Starboard’s criticism, a potential 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.
Either way, the mill was no longer sustainable. Word began to leak that the Brokaw mill would close, a prophecy that proved to be true.
Baldwin said the proposed legislation improves disclosure and transparency while taking on “a game that is rigged in favor of predatory hedge funds who make short-sighted demands at companies to benefit themselves at the expense of a company’s long-term interests.”
The most common demands are for more debt, stock buybacks, reduced research and development, cost-cutting, layoffs and general reduction any investment in long-term growth, Baldwin said.
Not everyone agrees on who is to blame for the demise of the mill. Alon Bray, a Duke University researcher, wrote in a 2016 paper that hedge fund activists played “essentially no role” in the closure of the Brokaw mill.
“To the contrary, the paper company’s incumbent management closed the mill — just the latest in a series of management’s mill closures — amid an industry-wide decline that made the mill uneconomic to keep open,” Bray wrote.
Still, Baldwin, along with many former employees at the mill, believe the Brokaw story would have ended much differently had Starboard never taken a stake in Wausau Paper.