The gutting of DST Systems and what it means for Kansas City

It wasn’t so much a question of if the layoffs were coming. It was a question of when.

DST Systems, one of the largest private employers in Kansas City — indeed, one of the great business success stories in the history of the city — had been acquired, in January, for $5.4 billion. The buyer was a Connecticut-based firm called SS&C. That SS&C was a competitor was especially bad news for DST employees. Many positions in Kansas City would become redundant after the two companies merged.

It didn’t happen right away. For five months, DST employees went to work with the faint sound of knives sharpening in the distance. How many heads would roll? Who would be saved?

The answer arrived first thing on the morning of Tuesday, June 26. In one building — DST maintains several offices scattered across downtown — workers were asked to gather their most critical personal belongings and led to a conference room that had been reassembled into a sort of layoff assembly line: last names beginning with A–D here, E–L there, etc. Directing the proceedings were human resources representatives with unfamiliar faces — contract workers who specialized in layoffs, perhaps, or SS&C employees flown in for the occasion. Having been informed their positions had been eliminated, effective immediately, employees were instructed to turn over their work badges, company credit cards, and any other DST property they possessed. They were told the remaining personal contents in their desks and offices would be packed up by their managers and shipped to their homes. Employees were then handed a large white envelope containing the details of their severance packages and escorted off the premises by plainclothes security. Armed guards stood alert in the lobby.

The number of DST employees let go is believed to be right around 1,000, though no official numbers were released. Many of the newly jobless repaired that day to nearby bars like the Quaff and the Peanut, establishments that have long relied on DST for their customer base. They ordered drinks, shed tears, and talked about their time — in many cases, decades — at the company, the friendships formed, the memories shared. Local media stopped by, having heard about the layoffs, but few of the now-former employees were willing to speak freely. Most had signed severance agreements barring them from talking to reporters. All had been very specifically reminded on their way out the door not to discuss the day’s events with the media.

Nevertheless, I have interviewed more than 25 current and former employees at DST Systems, both prior to the layoffs of June 26 and after. Their individual experiences vary — some are devastated, some are relieved, some who survived remain tense — but in the aggregate they tell what amounts to the same tale. It’s a story about a firm that lost its way after its founder departed. It’s a story about how public markets in this age of unrestrained capitalism prevent hometown companies from doing good in their hometowns. It is, above all, a story about the grotesque expanse of inequality that lies between the winners and losers in corporate America in 2018.

The winners: DST executives who engineered the sale and are now cashing in on compensation agreements granting them unimaginable wealth.

The losers: everybody else.

•     •     •

If you have lived in Kansas City long enough, you likely know somebody who works at, or used to work at, DST Systems.

Headquartered in Kansas City since its founding in 1969, DST was until recently one of the largest employers in the metropolitan area, with nearly 5,000 local employees and another 8,000 worldwide. (The number of local employees is likely down below 4,000 now, though DST has not released the exact number of layoffs and did not respond to repeated requests to comment for this story.)

DST’s impact on Kansas City over the last 50 years has been almost immeasurably immense. The company epitomized a Midwestern version of business success: large, quiet, boring, conservative, sturdily led. DST began as a unit inside another venerable local company, Kansas City Southern Industries; it created software to monitor freight on Kansas City Southern railroads. Before long, it began deploying its technology to track mutual fund transactions.

This innovation proved revolutionary in the emerging world of information processing systems. DST grew rapidly and was eventually spun off and taken public in 1995. Its clients today include financial services giants like American Funds, T. Rowe Price, Fidelity, and Invesco. It also maintains records for firms in the healthcare and insurance industries.

The man who started DST and built it into a 13,000-person global operation is a Kansas Citian named Tom McDonnell.

“There are few people in the history of Kansas City who have made an impact, particularly in the downtown area, that surpasses what Tom McDonnell has done through DST,” former Mayor Emanuel Cleaver said of McDonnell.

It would not be difficult to make the case that downtown Kansas City owes its current renaissance more to DST Systems than it does artists reimagining lofts in the 1990s or the construction of the Power & Light District in the 2000s. In the 1980s, when businesses were fleeing downtown for the Kansas suburbs, DST went the other way, reinvesting in the urban core. The company, which eventually launched its own real-estate subsidiary, transformed the west side of downtown, buying up old buildings around Quality Hill in which it housed its growing workforce. In all, DST revived — through historic rehabs and new construction — almost 40 buildings in downtown Kansas City.

“DST made a commitment to downtown at a time when downtown was on its heels — and long before the revitalization that started in the last decade,” says Joe Reardon, president and CEO of the Greater Kansas City Chamber of Commerce. “The company’s decision to keep its headquarters downtown, renovating a number of different buildings, its support for the development of Quality Hill, its renovation of a number of historic buildings in that district, paved the way for the vibrant downtown we see today.”

Buying up all that property was a business strategy, and, given the prices buildings fetch downtown these days, it can safely be deemed a wise one. But civic purpose was also baked into those plans. In the late 1980s, the company turned several old Quality Hill buildings into a campus for nonprofits. It received tax increment financing (TIF) from the city, yes, but at a time when TIF was being used in Kansas City the way it was intended: to correct blight so daunting that developers actually needed an incentive to build.

And DST often reinvested that TIF money in its neighbors. The Kansas City Business Journal reported that, in 1992, DST used 30 percent of its TIF proceeds to “make grants to others in the district who needed help improving building facades and streetscapes.” Phil Kirk, the former chairman of DST Realty, put together the deal that transformed a crumbling Bank of America building at 10th and Baltimore into what is today the Central branch of the Kansas City Public Library.

“It was, on the whole, a very positive use of TIF,” says Kansas City Public Library director Crosby Kemper, an otherwise vocal TIF skeptic. “Phil and Tom saw the value in reviving downtown through a public institution like the library.”

DST Realty was also instrumental in the efforts to renovate Union Station and the surrounding properties along the Pershing Road corridor, such as the National Archives, the Kansas City Ballet, and the one-million-square-foot IRS processing center. Roughly half of the land on which the Power and Light District, Sprint Center, and H&R Block headquarters now sit was purchased piecemeal by DST Realty in the early 2000s and sold back to the city in 2004. But DST hardly turned a profit on the deal. It sold those 25 parcels to the city at cost.

“That was a critical piece that gave us ability to assemble land, remediate it, and get ready for construction,” city manager Wayne Cauthen told the Star at the time.

Suffice it to say that Cordish Companies — the Baltimore-based owner of the Power & Light District as well as One Light, Two Light, and other Lights soon to rise into our skyline — does not share this spirit of civic solidarity. The company recently demanded (and received) from the city a 100 percent property tax abatement for 25 years on a 300-unit luxury apartment building and a $17.5 million tax break for a parking garage.

Being a publicly traded company — as DST has been since 1995 — does not lend itself well to the kind of community-oriented approach DST took under McDonnell, though. When you are a public company, your duty is to your shareholders, and most of those shareholders 1.) do not live in the community in which your business is based and 2.) wish to see consistent, ever-rising profits. Handing out subsidies to the coffee shop next door, or buying up distressed assets and selling them at cost are, in the eyes of sociopathic capitalists, unnecessary acts of philanthropy. It’s the type of thing that can draw the attention of corporate raiders and activist hedge funds, entities that buy up stock in a company and then use their power to demand the short-term maximization of profits.

Over the years, DST has fended off hostile investors, some of whom were, as the Kansas City Business Journal put it in 2011, “put off by the significant amount of assets on [DST’s] balance sheet that aren’t reflected in earnings, such as its $1 billion portfolio of publicly traded securities and nearly 3 million square feet of real estate, including office space.”

In other words: these investors didn’t like the fact that DST was investing in piddly Kansas City buildings that failed to show quick quarterly returns.

“That’s the real problem with a company like DST going away,” Kemper says. “For a long time, Tom had a sympathetic board. He’d made the company very profitable, and they had money to spend. But when you lose control of a company that size, you lose control of your ability to invest in your city. Those outside shareholders didn’t understand the long-term value of DST’s investments in the city.”

In 2009, McDonnell stepped down as president of DST. He stayed on as CEO until 2012. His departure was widely viewed as related, at least in part, to demands of a board that did not share his enthusiasm for investing in Kansas City’s future.

“I think the new board is driving toward the idea that executives have less community involvement and work just for the shareholders,” Kirk told the Business Journal at the time.

McDonnell was replaced — as president, and then as CEO — by Steven Hooley, who notably does not hail from this community. Hooley comes from Boston, where he worked for a company that DST later acquired. Talk to enough people who’ve worked at DST Systems, and a distinct and unyielding impression swirls into focus. Under McDonnell, DST was generally perceived to be a community-oriented local company where employees enjoyed job security and relatively generous benefits. After McDonnell — the Hooley era — the civic goodwill dissipated, benefits were scaled back, retirement funds were mismanaged, workers felt exploited, and layoffs always loomed. The baseline of shared prosperity and civic obligation at DST faded away. Things would never be the same.

•     •     •

In 2010, not long after Hooley assumed the role of president at DST, the company announced it would be laying off approximately 750 workers — the first substantial round of cuts in its history. It was the height of the Great Recession, and the company’s revenues were down three percent.

“That was a very uncertain financial time for most companies, and I think we all understood the need for the move,” a current employee says.

But DST also began to hack away at costs in subtle ways that did not make it into begrudging press releases. DST had long provided free health insurance to employees. (“It was the best coverage I’d had since I served [in the military],” one former employee says.) In 2012, DST eliminated this policy. Employees now paid a premium for more expensive coverage. Those costs have risen every year since.

“Last year, my policy increased $90 per month,” a recently laid-off employee says. “Which is a lot when you’re getting the same coverage. I don’t know if McDonnell and [Tom] McCullough [the longtime COO who retired in 2009] were eating that cost before, and Hooley and the new team decided to stop eating it and instead pass the costs along to us, or Hooley made some kind of change to the plan that was not visible to the employees. But whatever it was, we have seen an increase in our healthcare costs each of the last six years.”

Salary increases were delayed and reduced. Certain paid holidays were eliminated. Employees could no longer carry paid time off (PTO) over from year to year. Employees who reached their 20th year with the company were no longer rewarded with a sixth week of vacation. And so on. And as the layoffs piled up, those who remained found themselves assigned to workloads that previously required three employees.

“We would have these annual performance reviews, and we’d be told by our superiors that we weren’t meeting expectations,” a former employee says. “They put me on a probationary period. I was verging on suicidal territory just trying to keep up with my work and the two other people whose work I inherited after they were laid off. Finally, I was able to prove to management that I had done 143 percent more work than the previous year. They gave me a two percent raise.”

Says a former supervisor on the development side: “They would fire a bunch of senior-level software engineers and outsource their jobs to Bangkok or Hyderabad. All of a sudden, I’m spending my whole day teaching an entry-level person in India how to do my job. And then they [DST] come for my job. That’s it in a nutshell.”

The company de-emphasized recruitment, training, and research and development, employees say. Interns who showed promise had no position to step into. Job openings remained unfilled for months and months.

“It turned into a total sweatshop mentality,” says an employee who started with DST in the early 1990s. “They were turning it into this revolving-door type of place where they hire young, entry-level people, work them to death until they leave, and get new ones. Like replacements in a war.”

Then there was the retirement plan debacle. DST has long had a unique retirement plan. Half is a participant-directed 401(k) — meaning employees decide for themselves where to invest. The other half is a profit-sharing plan that is managed by an investment advisory firm appointed by DST — meaning ordinary employees have no control over where that pool of money is invested.

It’s this latter half that is currently the subject of a class-action lawsuit in the Southern District of New York, owing to the fact that the firm DST appointed to manage its profit-sharing plan — Ruane, Cunniff & Goldfarb Inc. — invested heavily in Valeant Pharmaceuticals. At the end of 2014, 30 percent of DST’s profit-sharing plan was invested in Valeant. (At one point, according to the lawsuit, almost 50 percent of the profit-sharing plan was invested in Valeant.) Another way of saying this is that, at the beginning of 2015, a full 15 percent of every single DST employee’s retirement benefits was tied to the stock performance of Valeant Pharmaceuticals.

There is a reason why prudent investors — in particular, managers of retirement plans and pension funds, on which thousands of people rely for their livelihoods — diversify their investments across multiple companies and industries. If you have a disproportionate share of your assets in one stock, and that stock tanks, you are screwed. Call it “Investing 101: Don’t Put Too Many Eggs In One Basket.”

SEC guidelines, in fact, require mutual funds investing more than a quarter of their assets in one industry to disclose that strategy to investors. Even DST’s own plan statement warns employees about diversifying their 401(k): “If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified,” it reads. And yet DST’s profit-sharing plan invested more than that in a single stock: Valeant Pharmaceuticals.

Valeant was a Wall Street darling until, very suddenly, it wasn’t. Its strategy of buying pharmaceutical companies and then jacking up the prices of the drugs it acquired — in one case, it raised the price of a heart drug 525 percent overnight — was predatory and repulsive, but the financials looked great on paper. Valeant’s stock rose sharply as it continued its acquisition spree and triple-digit percent price hikes.

DST was there from the beginning. Its profit-sharing plan began investing in Valeant in 2010, the same year Valeant’s new CEO Michael Pearson embarked on this aggressive strategy. By July 2015, Valeant’s stock was trading at $258 a share. DST’s position in the company — that is, the value of the profit-sharing plan — was worth $415 million.

Then came the fall. Spurred by public outrage over the drug price hikes, multiple federal agencies and state prosecutors began investigating Valeant. The probes revealed massive fraud at the company. Valeant had also amassed $30 billion in debt — three times its revenue. Investors fled. The stock tumbled.

Investing 101 (or, perhaps, 201) would advise retirement plan managers to realize gains before they evaporate. So, as Valeant’s share price grew, a prudent manager of DST’s profit-sharing plan would have sold off a portion of Valeant, realized the gain, and reinvested it. But the managers at Ruane, Cunniff & Goldfarb Inc. did no such thing. They let it ride. Then Valeant’s stock dropped to $15 a share, and DST’s retirement plan lost nearly $400 million in value in a few short months.

The class-action suit, filed in the Southern District of New York, alleges breach of fiduciary duty on the part of DST Systems and Ruane, Cunniff & Goldfarb. (It describes the latter as “a battered investment manager that has been mired in litigation and plagued with redemptions, dismal performance and director resignations in the face of poor investment performance.”) The suit details the firm’s “opaque” and “shockingly reckless” investment in Valeant and goes on to accuse DST brass of having conflicts of interest that resulted in the plan participants — DST employees — paying Ruane, Cunniff & Goldfarb a “grossly excessive” 1 percent flat fee to manage the profit-sharing plan.

“Flat fees for traditional asset management mandates are exceptionally rare,” the lawsuit states. “DST’s $750 million institutional account easily could have negotiated a much lower fee [with Ruane, Cunniff & Goldfarb].”

James Miller, one of the attorneys for the plaintiffs in the case, tells The Pitch: “The DST profit-sharing plan was largely being run as a clone of Seqouia Fund, which Ruane runs for high-net worth individuals who can absorb the losses that come with risky investments. So DST was paying Ruane this high management fee, and Ruane was in turn investing DST retirement funds imprudently — as though the money belonged to high-net-worth individuals, rather than the employees of DST.”

To sum up: the DST board wildly overpaid money managers — to the tune of “tens of millions of dollars,” according to the lawsuit — using the retirement accounts of its own employees. Those money managers then lost hundreds of millions of dollars after investing DST employees’ retirement funds in a company that turned out to be the Enron of the pharmaceutical industry. It gets worse from here.

•     •     •

On May 31, 2017, DST received $2 million from the Missouri Department of Economic Development in support of DST’s pledge to create 400 jobs in Kansas City.

“This will mean 415 new, good-paying jobs with a company that embodies innovation, and represents the best of corporate citizenship,” Kansas City Mayor Sly James said at the time.

Not exactly. For starters, a year before, DST had laid off approximately 150 people in Kansas City.

One month after Missouri wrote that $2 million check, a company-wide email informed DST employees that staff reductions were taking place in multiple DST departments and locations, including Kansas and Missouri. This was, evidently, due to DST’s recent purchase of a DST-adjacent company called BFDS. The sale was a family affair. Before Steve Hooley became CEO of DST, he was the CEO of BFDS, from 2004 to 2009. At the time of DST’s purchase of BFDS, its CEO was Jay Hooley — Steve’s brother.

“Many, though not all, of the reductions were the result of synergies and duplication of work between the BFDS and DST organizations,” Vercie Lark, head of financial services division at DST, wrote in an email to employees at the time.

Steve Hooley described the purchase of BFDS using word choices that approach corporate satire: “As part of our integration strategy, we believe we can bring these two organizations together in a way that drives significant enhancements to the client experience, improves our ability to execute on key initiatives, and unlocks meaningful synergies that enhance value for DST and its shareholders.”

Yet more layoffs — in financial services and DST’s health and enterprise services organization — were announced internally in October 2017. Then came the announcement of the sale to SS&C in January.

After the deal was finalized, in April of this year, Hooley and other executives began announcing their departures from DST. In 2017, Hooley earned $7.5 million in total compensation — an amount more than 100 times as large as the median DST employee’s salary.

But selling DST, and selling out Kansas City, is where the real money is. By virtually every metric, DST became a worse company after Hooley was appointed to lead it. But that matters not in the diseased swamp of corporate America. Hollowing out DST entitled Hooley to obscene wealth: $38 million in stock options, plus another $28 million in golden parachute compensation. Various bonuses cited in its Securities and Exchange Commission proxy statement could add millions more to Hooley’s payday. He now enters the ranks of the super-rich.

A handful of other high-level executives also cashed in. According to SEC filings, chief financial officer Gregg Givens left with stock holdings totaling $8.5 million, plus another $7 million in golden parachutes compensation. General counsel Randall Young’s stock-and-parachute combo totaled $12 million. Beth Sweetman, the chief HR officer who administered all those layoffs and benefits cuts, walked with more than $5 million — $3 million in stock options, $1.9 in severance, and a $600,000 stock grant. She worked at the company for less than five years.

The Worker Adjustment and Retraining Notification Act, or WARN, requires companies to give 60-day notice to Missouri officials before eliminating more than 500 jobs. Though DST refuses to comment on the number of people it laid off June 26, it is known to be well over 500. Despite this, the company gave no WARN notice to the state.

Nor did anyone at DST contact TeamKC, whose mission involves connecting displaced local workers with new jobs in order to keep them in the KC metro. As the Star noted in a July 9 article, other local companies, such as Sprint and Teva Pharmaceuticals, have worked with TeamKC following layoffs. DST’s senior director of global talent acquisition, Douglas A. King, is even a member of the TeamKC advisory board. But neither King nor anybody else in a leadership role at DST apparently even considered the value of offering outplacement services to the thousand Kansas Citians whose jobs had been eliminated.

Correction: at least one DST employee was extended this courtesy. In addition to his millions in stock options and golden parachute compensation, chief financial officer Gregg Givens received a $25,000 lump-sum cash payment for “anticipated outplacement counseling services.”

Best of luck to Gregg.

•     •     •

What now for DST? What now for KC?

As a 2015 Washington Monthly article noted, “Empirical studies have shown that when a city loses a major corporate headquarters in a merger, the replacement of locally based managers by ‘absentee’ managers usually leads to lower levels of local corporate giving, civic engagement, employment, and investment, often setting in motion further regional decline.”

At DST under Hooley, much of this has already come to pass. It will continue now that DST has been bought by an East Coast firm; SS&C has openly stated that layoffs at DST will be ongoing through December. Even the Chamber of Commerce is having a hard time putting a positive spin on the situation.

“We certainly hope the company’s commitment to Kansas City continues,” Reardon says. “However, since the company’s headquarters is now in Connecticut, there is a chance that we could see that commitment diminish.”

The most realistic-seeming outcome for DST I’ve heard predicted came from a rank-and-file guy who’s been at the company for 20 years. He survived the June layoffs and describes the aftermath as chaotic: understaffed teams, massive knowledge gaps, confusion about the details of the restructuring.

“Most folks think SS&C had no idea what exactly they were buying when they bought DST,” he told me. “That may be true. But the long-term contracts DST has for many of its clients are probably appealing — they will cover the bills on some of SS&C’s other ventures. But if we stay the course, it’s going to be a hard sell in a few years to get those clients to renew. When that happens, SS&C will probably just break it up and sell whatever is left.”

He described DST as a place where “once-cutting-edge technology became embarrassingly outdated” and innovation died on the vine. Many others I spoke to for this story had a similar perspective: at some point, DST fell behind and could never get back to where it once was. Even relatively low-level employees expressed great frustration about this. Why couldn’t DST spend more money on research and development? Why couldn’t it innovate? Why would a company that wanted to thrive cut the benefits of its workers? Why would it lay off so many people? Why would it dismantle the sense of community that had been fostered over the previous 40 years?

The answer — that, as a public company in the United States of America, DST operates inside a broken and depraved capitalist system that is foundationally incapable of factoring human lives into its decision structure; that the economic violence inflicted upon these workers was not the unfortunate byproduct of naive or hapless leadership but rather a deliberate strategy rooted in banal greed — was at once too simple and too dizzying to contemplate.

“When I started [at DST], I naively figured that we worked for our clients and their satisfaction was the most important thing,” that same rank-and-file employee told me. “But as time went on, and the Toms [McDonnell and McCullough] left the company, it was obvious that Hooley’s only concern was the bottom line, the board of directors, and the stock price.” Still, he continued, “At the end of the day, I’m guessing DST probably isn’t any better or worse than most big companies.”

He might be right about that. But that doesn’t make 99 percent of us any less doomed.

Email: Twitter: @davidhudnall