In a joint statement announcing their $1.8 billion merger on March 11, Men’s Wearhouse and Jos. A. Bank said they expected to realize between $100 million and $150 million in synergies over the next three years. Synergies, of course, is a euphemism for layoffs. So, too, is “streamlining,” “redundancies,” and a host of other corporate buzzwords frequently employed in the aftermath of a merger or acquisition.
The deal between the two men’s formalwear retailers came about largely because of a fierce activist investing campaign by the hedge fund Eminence Capital. And, experts say, the expected job losses at the combined company is just the latest example of the sad aftermath of activist investing campaigns for employees at the companies they target.
Experts say that the underlying rationale behind most activist investing campaigns, which is to make companies more efficient in order to maximize shareholder value, often results in rampant job losses, stagnating wages, and increased hours for employees. Not unlike private equity firms before them, activist hedge funds will agitate at companies with an eye toward finding ways to squeeze every last drop of extra cash out of their operations.
Another recent example is the case of Juniper Networks, a competitor of Cisco and the target of two activist investing campaigns from Elliott Management and Jana Partners. In February, Juniper agreed to cut $160 million in costs under pressure from the two hedge funds, and, sure enough, announced it would lay off 570 employees — roughly 6% of its workforce — less than two months later.
And last year’s messy activist investing saga between hedge fund titan Bill Ackman and J.C. Penney resulted in massive layoffs throughout the troubled company.
According to a 2013 study on activist investing’s impact on target companies, “employees of target firms experience a reduction in work hours and stagnation in wages despite an increase in labor productivity.” Results show “a de facto but implicit wage reduction: productivity-adjusted per hour wages decrease by 6.1%.”
“You can see employee productivity goes up, but you don’t see higher wages,” said Alon Brav, professor at Duke University’s Fuqua School of Business, and one of the authors of the study. “It looks like employees don’t benefit, they don’t share in the fact that the company will do better. Shareholders will do better and the efficiency will go up. We see more done per hour of work, but we don’t see wages going up on average.”
With regards to the Men’s Wearhouse–Jos. A. Bank merger, for instance, Vitaliy Katsenelson, chief investment officer at Investment Management Associates, said: “They’re going to have redundancies in real estate, and they’re going to close the stores they don’t need. If you look at the stores, you see that a lot of their stores are within a quarter-mile of each other, you don’t need two stores right next to each other. It sounds cold, but that’s reality.”
A deteriorating labor market also serves as a point of leverage for activist investors, said Steve Isberg, associate professor of finance at the University of Baltimore’s Merrick School of Business.
“Activist investing is about taking the cash flow that’s generated by a business and reallocating it, and the more they can squeeze out of employees they more they can get for shareholders,” Isberg said. “Over the last few years, activist investors have really been taking advantage of the condition of the labor market.”
Isberg pointed out that the Men’s Wearhouse–Jos. A. Bank case is poised to be a prime example of how an activist fight can take advantage of this labor market and will spur job reductions and situations in which workers will be asked to do more, but for the same wages. At the time the merger was announced, both companies said they would leverage the advantage of Men’s Wearhouse’s operations. Couple that with the fact that Men’s Wearhouse needed a credit line to make its final offer, and it’s a surefire sign of job losses to come, Isberg said,
“They’re going to roll most of the supply chain operations of Jos. A. Bank into the supply chain of Men’s Wearhouse,” Isberg said. “They pushed it to a point where they needed a credit line. Where are you going to be able to squeeze that value? It’s at the operational level. They’ll automate as many of the business processes as they can and they’ll cut any redundancies, so you’ll see a lot of job reduction and it sounds like that’s going to be the Jos. A. Bank supply chain that’s going to take the hit there. The Jos. A. Bank managers will slowly disappear over about a year or so and you’ll start to see the change. That’s typically how things work.”