Starboard Value’s Garlic Breadstick Tactics Are Not a Win for Software Vendors

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Software companies are increasingly in the crosshairs of activist investors: hedge funds that quickly accumulate a large stake in a publicly traded company, then lobby its management to give them seats on the board of directors or even total control. The idea is that shaking things up – usually through restructuring and cost cutting – can help shareholders by unlocking hidden value.

But some experts warn that the methods of activist hedge funds are the exact opposite of what software companies need to thrive.

In a 2020 article, a study by management consulting firm Bain Inc. found that employee retention was the single most important factor that set apart successful software companies. And any tech company must constantly invest in innovation to stay ahead of its competitors – or at least keep up with them.

But activist investors, desperate to boost their profit margins by cutting costs, tend to dramatically cut payrolls and research and development spending as soon as they gain control.

As respected business scholar Roger L. Martin wrote in a Harvard Business Review article – titled “Activist Hedge Funds Are No Good for Businesses or Investors, So Why Do They Exist?” – a study “shows the truly sad and unfortunate results for companies after hedge funds shut down, after a median holding period of just 423 unpleasant days. During this period, the workforce is reduced by 12% on average, while R&D is reduced by more than half…”

In a software company, this is a recipe for failure.

This may be why shareholder software firm Box Inc. rejected the slate of board nominees for leading activist hedge fund Starboard Value in September 2021, opting for continuity of a management team. who had built a positive corporate culture and a track record of innovation.

The alternative would have been to trust the management of Starboard, which has performed poorly in recent software buyouts.

Take comScore. In 2017, Starboard announced that it had bought a large stake in the Virginia-based media monitoring software company and sued it to force a board meeting; ComScore (NASDAQ:SCOR) settled the lawsuit in September 2017, giving Starboard four seats on the board. Results are down 93% since the company took over. See how comScore’s stock price has performed over the past five years:

Most recently, in March 2021, Starboard announced that it had accumulated a stake in online health insurance vendor eHealth (NASDAQ: EHTH) and named four directors to its board. Two months later, the company settled with Starboard and accepted a new director appointed by Starboard. Whatever Starboard brought to the table, shareholders have seen their investment devastated ever since. Here is the chart of the eHealth stock price over the past year:

And let’s not forget cybersecurity software provider Symantec, which agreed to give Starboard nominees multiple board seats in September 2018. The company’s (since renamed NortonLifeLock) share price has held steady. since then – while the S&P 500 has provided investors with a total return of around 50%.

Whatever “special sauce” Starboard and other activist investors bring to companies, one thing is clear: it is distinctly unappetizing when paired with software.

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