Hedge Funds

How a small Wisconsin town is making some hedge funds very nervous

Key Points
  • After a century-old paper mill closed, Brokaw, Wisconsin effectively went bankrupt.
  • A new bill to be introduced in the U.S. Senate seeks to restrict activist hedge funds, one of which was blamed for the demise of the mill.
  • Critics say management, not activist investors, were responsible for the fate of the mill in a paper industry undergoing change.
Small Wisconsin town takes on activist investors
Small Wisconsin town takes on activist investors

After a century-old paper mill in Brokaw, Wisconsin, closed a few years ago, the town of 250 residents effectively went bankrupt.

Brokaw will soon be dissolved by its two neighboring towns. But it has found a new way to live on: through a federal bill named for it that would restrict Wall Street's activist hedge-funds, the type of investing firms that were blamed for the town's demise.

The Brokaw Act would require more disclosures by these hedge funds, which have been accused of promoting short-term gains over the long-term health of the companies they battle for change. Its sponsor, Sen. Tammy Baldwin (D-Wis.), plans to reintroduce the bill when the Senate is back in session after earlier attempts last year stalled.

This time, she has a Republican co-sponsor, Sen. David Perdue of Georgia, and the backing of a coalition of business leaders, including Home Depot. That has already garnered the concern of hedge-fund activists, who say if the bill becomes law it could severely restrict their ability to take minority stakes in companies and push for change.

These days in Brokaw, located over 1,000 miles from Wall Street, everyone knows what a hedge fund is.

When asked who's to blame for what happened in Brokaw, Jeff Weisenberger, 61, quickly responded: "hedge funds."

Outside of the paper mill, which still retains one of its smoke stacks from the turn of the 20th century, Weisenberger is driving a forklift. He worked for 35 years as a machinist in the mill, making $28 an hour. Today, he's helping the new owners demolish the mill, making wages that he describes as "drastically lower."

"It hurt the community when they shut down because the people here had good jobs and spent their money on toys, snowmobiles, and boats and motorcycles," said Weisenberger. "The income's gone; the people gotta go elsewhere."

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.

"Hedge-fund activists played essentially no role in the closure of the Brokaw mill," wrote Alon Brav of Duke University in a 2016 paper co-written with several other academics, who studied the case. "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."

But management believes the story of Brokaw would be much different had Starboard never taken a stake in Wausau Paper. Hank Newell was the chief executive of the paper company during much of Starboard's involvement.

Newell said that Wausau had a buyer lined up to acquire the Brokaw mill, but they balked after Starboard started publicly criticizing the company. A major customer as well as the company's lender also turned away amid the public battles with the hedge fund.

"They are predators trying to take value from those who create value," Newell said in an interview.

Sen. Baldwin's office reached out to Newell after she saw the devastation that the paper mill closure had on the town. He offered advice and suggestions for legislation that would limit the powers that activist hedge funds currently enjoy.

The bill would shorten the time period hedge funds have to disclose any stakes they have taken in a public company greater than 5 percent of its shares. Today, that window is 10 days; if the Brokaw Act passes, it would be four days. The initial version of the bill went even further, shortening it to two days.

It would also require the disclosure of short positions that surpass the 5 percent threshold.

The bill also requires coordinated groups of hedge funds to identify themselves as working together. Newell said three other hedge funds were working with Starboard, something that was not known to the public.

Representatives from Starboard and the Council for Investor Rights and Corporate Accountability, or Circa (the lobbying group that represents activist investors) did not respond to CNBC's requests seeking comment.

Additionally, the bill would force activists to disclose stakes they acquired indirectly through derivatives.

Wausau Paper sold last year to a Sweden-based company, SCA, though Newell had departed the management by then.

While the legislation won't restart the Brokaw mill or bring the town back to life, Newell said he hopes it would prevent other CEOs from having a similar fate.

"Often times I'm asked why Brokaw is the appropriate name for the legislation," said Newell. "Everything that is happening to Wausau and to Wisconsin is directly applicable to any public company operating in the United States."