One of the traits that distinguish hedge funds from mutual funds is the active investment style wherein funds buy large stakes in public companies and push the management to drive changes that under normal circumstances are hard to come by. One such instance is the technology company Juniper Networks, which came under pressure early this year from two activist hedge funds Elliott Management and Jana Partners to cut costs, return money to shareholders, and trim product line. The result was swift with the management of Juniper Networks agreeing last week to take measures to cut costs including layoffs of 6 percent of employees.
Unlocking Value
Often hedge funds playing the activist role say their intention is to unlock value in the targeted company. Elliott Management played the same card with Juniper Networks. The fund took a 6.2 percent stake in the company and laid out specific demands that include aggressive stock buybacks, dividend payment, cost reduction and exiting certain product segments to boost the value of the stock. The fund claimed the changes, if made, would boost the stock value by up to 70 percent. Prior to the intervention by Elliott Capital, shares of Juniper Networks, which makes networking gear, underperformed the Standard & Poors 500 Index in the last three years.
Job Cuts Announced
Juniper Networks is among the companies in the Silicon Valley that are very generous in their pay packages and perks. It paid its software engineers more than tech giants Google, Apple or Facebook. According to a finding by Glassdoor, Juniper Networks paid the highest salary in 2013 for software engineers by any tech company. Its software engineers earned an average annual base salary of $159,990 last year. By comparison, second placed Linkedin paid only $136,427 for its software engineers.
Given this background, the six percent layoff announced is significant. At the end of last year, Juniper Networks disclosed an employee headcount of approximately 9,500, which suggests that the company will eliminate close to 600 positions. The company said majority of the reductions are immediate and added that a significant proportion of elimination is middle management positions. Prior to the changes announced, the $23 billion hedge fund run by Paul Singer published a nearly 30 page presentation with a list of changes it wanted within the company.
Relevance to Job Market
There are critics who label hedge funds, especially those engaged in activism, as short sighted. But because much of hedge fund compensation is tied to performance, they are incentivized to make concentrated bets to boost returns. This reward-based compensation structure within the hedge fund industry can be either a turn on or turn off for prospective applicants. Some may stay away from it, thinking that the job will be stressful, while others may find the performance-based reward structure appealing and seek a position in the hedge fund industry.
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