Strategic Turnaround Equity pushes for change at Comforce

Activist hedge fund Strategic Turnaround Equity Partners LP, which is managed by Galloway Capital Management LLC, is keeping quite busy lately. The New York-based hedge fund has several campaigns underway to press for changes at three public companies.
Several affiliated investors along with Galloway Capital own over 5% of Comforce Corp., a Woodbury, N.Y.-based staffing, consulting and outsourcing company for high-tech and healthcare jobs. On Dec. 10, Galloway Capital sent a letter to Comforce’s chairman expressing frustration with the company’s board and management and urged its directors to explore “strategic alternatives” such as hiring an investment bank to explore various options to increase shareholder value. These alternatives include: selling the company, disposing of assets or setting up a stock buyback program, among many others.
As with past target companies, Galloway pointed out that it may take some other actions if no response is forthcoming — and so far Comforce hasn’t responded. Actions Galloway may consider, according to a Dec. 11 Securities and Exchange Commission filing, include “seeking board representation, making proposals … concerning changes to the capitalization, ownership structure or operations.”
Separately, Galloway Capital is also engaging United American Healthcare Corp., a Detroit-based provider of healthcare services in Western Tennessee. According to an Oct. 31 filing with the SEC, Galloway and several affiliated investors own over a 7.28% stake and may try to raise their position in UAHC and could consider some of the same measures that it outlined in the Comforce filing.
Several months ago Galloway filed a 13D in Fibernet Telecom Group Inc., a New York-based voice and data traffic company that the hedge fund believes needs to take steps to improve shareholder value. Since launching the effort in June, Fibernet secured a credit line and launched a stock buyback program.
Strategic Turnaround portfolio managers Bruce Galloway and Gary Herman said they believe the current market environment offers good opportunities to deploy capital in undervalued public companies with the potential to realize significant future gains. — Ron Orol
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

CTW Investment pushes for Kellwood sale

An activist labor-backed pension fund investor on Wednesday called on the board of Kellwood Co. to consider a sale after the clothing company in October rejected an unsolicited $21 a share acquisition offer for the business by Sun Capital Securities Group LLC.
CTW Investment Group, based in New York, is seeking to have St. Louis-based Kellwood’s board set up a special committee of independent directors to explore strategic alternatives such as a sale. “The combination of long-term poor performance combined with poor governance is what has attracted pension fund resistance,” said CTW director Michael Garland.
CTW owns 200,000 Kellwood shares, significantly less than 1% of the company’s outstanding shares. Kellwood has a $451 million stock market capitalization.
A key problem for institutional investors, including CTW, was the legal counseling work provided in the past by a Kellwood director, Jerry M. Hunter, a partner at Bryan Cave LLP in St. Louis. Hunter’s payments as a Kellwood director may not have breached recently approved New York Stock Exchange listing requirements, but Garland and other investors consider his business relationship with the company a conflict of interest.
According to CTW filings with the Securities and Exchange Commission, roughly 49% of participating shareholders voted against Hunter at Kellwood’s June 2007 meeting. Garland said that if broker votes weren’t included, that number would rise to roughly 54%. Broker votes are votes submitted by brokers for management’s slate on behalf of retail investors that fail to cast a vote one way or the other. In 2005, the majority of participating shares gave Hunter a vote of no-confidence. (The company subsequently moved Hunter off key board committees.) — Ron Orol
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Shareholder opposes N.J. bank merger

Washington Township, N.J.-based Oritani Financial Corp.’s plan to buy rival New Jersey bank Greater Community Bancorp for roughly $187 million simply isn’t a good deal, according to a large investor that launched a public campaign on Monday to block the transaction.
John Soldoveri, an owner of 10.1% of Totowa, N.J.-based Greater Community Bancorp, reported on Monday in a Securities and Exchange Commission filing that he’s opposed to the deal.
“Mr. Soldoveri does not believe the merger is in the best interests of [Greater Community Bancorp’s] shareholders, and intends to take action to oppose the merger, including but not limited to making public statements in opposition to the merger and voting his shares against the merger,” reported Soldoveri’s SEC filing. “[Soldoveri] also reserves his right to take other steps in opposition to the merger.”
In the terms of the Oritani Financial-Greater Community deal, announced last month, Greater Community shareholders are entitled to receive $21.40 per share or approximately $187 million. Greater Community has a $160 million stock market capitalization. — Ron Orol
See Schedule 13D filingSee press release announcing deal

Atlas Mining to explore activist's suggestions

Atlas Mining Co.’s chief executive has agreed to work with an activist hedge fund that has expressed concerns about governance problems and a declining stock price at the natural resources and exploration company, according to an investor’s government filing on Thursday.
Activist investor IBS Turnaround Fund sent a letter to Atlas Mining management on Dec. 12 explaining that “governance changes need to be made” at the company. It wants Atlas Mining to expand its board from three to five and for two independent directors to be nominated. If Atlas Mining wants, IBS Turnaround has two recommendations for independent directors, the letter states. According to the filing, Atlas Mining is listening. “Subsequent to sending the letter, IBS had conversations with the CEO of the company regarding IBS' recommendations. The CEO has indicated to IBS that he agrees with IBS' recommendations and would pursue the matter with the board of directors,” the filing reported.
IBS Turnaround on Thursday reported owning an 11.6% stake in the Kellogg, Idaho-based company. Atlas Mining has a $41.7 million stock market capitalization. — Ron Orol

Ramius battles with Federal Signal

Two days after Federal Signal Corp.'s CEO unexpectedly resigned, high-profile investor Ramius Capital Group LLC on Friday launched an activist effort at the Oak Brook, Ill.-based manufacturer of tools, security systems, water blasters and industrial vacuums.
In a Securities and Exchange Commission filing, Ramius and other investors reported a 7.4% Federal Signal stake and noted that not only are managers “engaged” in discussions with the company’s management and board, but they are also talking to shareholders and other interested groups, including operators of different business units about “potential changes” to improve shareholder value.
For now, that’s it. But Ramius has upped its activist efforts at other companies, and it indicated in the SEC filing that such an approach may be in the cards as well at Federal Signal. “[Ramius] may in the future take such actions with respect to their investment in [Federal Signal] as they deem appropriate including, without limitation, seeking board representation, making proposals … concerning changes to the capitalization, ownership structure or operations,” Ramus and its group wrote in the SEC filing.
Federal Signal, which has a $543 million stock market capitalization, disclosed Wednesday that Robert Welding would retire as CEO effective Jan. 1, after four years in the corner office. Board member James Goodwin, former UAL Corp. CEO, will become interim CEO until a replacement is found.
Ramius has other activist efforts underway, including proxy contests to put directors on the board of restaurant operator Luby’s Inc. and paint and plastics company A. Schulman Inc. — Ron Orol

Blogger wages shareholder activist campaign

Zac Bissonnette is engaging in what he considers to be a unique kind of technology-based “citizens activism” at Adams Golf Inc., a Wilmington, Del.-based designer and distributor of golf clubs.
Bissonnette, who owns less than 1% of Adams Golf, has been pressing for governance and executive compensation changes at the company he considers undervalued. His blog, bloggingbuyouts.com, which is part of AOL LLC's Weblogs Inc., has been a mechanism to promote his agenda. (Bissonnette makes sure to disclose in his blogs that he owns a stake in the company.)
He considers himself a long-term governance-focused investor that believes shareholders owning less than the 5% stake in companies — the threshold needed to make public 13-D filings with the Securities and Exchange Commission — shouldn’t be discouraged from seeking to get their opinions heard. Technology, he said, may be helping him and other small investors get their message across to other investors.
“I really believe that the Internet is already starting to and will, much more so in the future, make it easier for very small shareholders to effect change through reasoned arguments on blogs and message boards,” Bissonnette said. “If you think about it, you really shouldn't need to be a 13-D filer to have your concerns heard. If your ideas make sense, they should be listened to.”
Since Bissonnette launched his efforts at Adams Golf, a large investor, John Gregory, acquired an 18% Adams Golf stake. After that, Adams Golf announced its intention to up-list to the Nasdaq, a positive development, said Bissonnette. “I had also advocated this development in my posts and asked the CEO about it on the conference calls,” he said.
Adams Golf has a $53 million stock market capitalization. — Ron Orol
See Oct. 31 story from BloggingbuyoutsSee Oct. 18 story from BloggingbuyoutsSee June 12 story from Bloggingbuyouts
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Activist offers to work with Brink's

After launching a proxy contest to put candidates on the board of Brink's Co. last month, an activist hedge fund on Wednesday indicated it would be happy to work with a consulting firm hired by the armored-car transport company’s board to examine strategic options such as a sale.
Clay Lifflander, portfolio manager at MMI Investments LP of New York, wrote in a Securities and Exchange Commission filing Nov. 30 that the hedge fund is seeking to install four director candidates because he believes the armored-car company lacks industry experience on its board.
Lifflander said in a Wednesday letter to the managing partners of Monitor Group, a consulting firm hired recently by Brink's to examine strategic options, that he and others at MMI Investments would “gladly make ourselves available to discuss these issues, with the understanding, of course, that you cannot and would not be expected to discuss any material nonpublic information regarding the company.”
MMI Investments has been engaging Brink’s since 2003 and has lately pushed for a sale of the company. In 2005 the hedge fund began publicly agitating for Brink’s to sell its marginally profitable BAX Global subsidiary, an international heavy-freight and logistics operator, which was subsequently sold for roughly $1.1 billion.
MMI Investments continues to own an 8.4% Brink's stake. — Ron Orol
See TheDeal.com: Activist investor seeks changes at Brink's
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Farallon May Question Linktone Deal

Hedge fund Farallon Capital Management LLC wants to have a second look at a deal involving the combination of a Chinese and Indonesian company. On Tuesday, the San Francisco-based fund and a group of investors made an activist regulatory filing at telecom and media phone company Linktone Ltd., a telecom and media services company that announced Nov. 29 that Jakarta-based media company PT Media Nusantara was buying more than 51% of its shares.
According to a Schedule 13D Securities and Exchange Commission filing, Farallon owns a 9.9% stake in Linktone and is considering discussions with shareholders, directors or other officers of the company. “[Farallon] may engage in communications with, without limitation, one or more shareholders of the company, one or more officers of the company, one or more members of the board of directors of the company or any other persons regarding the company, including but not limited to its operations and the company’s agreement with PT Media Nusantara Citra for PT Media Nusantara Citra to purchase not less than 51% of Linktone’s outstanding shares,” the filing reported.
According to a Linktone press release, PT Media Nusantara will buy its stake in Linktone using a combination of existing American Depository Shares, and a subscription for newly issued shares.
Linktone of Shanghai, China, has a $79 million stock market capitalization. It develops, markets and distributes consumer telecom applications services, including wireless entertainment services. Farallon was founded in 1986 and manages capital for high-net-worth individuals and institutions made up primarily of college endowments and foundations. It had about 120 employees. — Ron Orol
See SEC filingSee Nov. 29 press release from Linktone
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Costa Brava wins Telos case

The litigation strategy seems to have worked for activist investor Costa Brava Partnership III LP. Late Monday, the Boston-based hedge fund won a civil suit it launched in December 2005 against Goodman & Co. LLP, the independent auditor for Telos Corp., a networking and information technology company that provides services and equipment to the U.S. Department of Defense.
According to a Costa Brava release, a seven-member jury returned a verdict Monday in the Circuit Court for Fairfax County, Virginia, in favor of Costa Brava’s claim that the Norfolk-based public accounting firm “aided and abetted a breach of fiduciary duty by Goodman’s client, Telos Corporation.”
"Costa Brava is pleased that there now has been a public finding by an impartial jury that Goodman aided and abetted a breach of fiduciary duty by Telos and its directors,” said Costa Brava managing partner Seth Hamot in a statement.
The activist hedge fund alleged in the suit that Telos hired Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. The dispute centered on Telos’ 2004 annual filing audited by Goodman.
It resigned as Telos’ outside auditor in July, according to an Oct. 26 SEC filing made by Telos. Costa Brava is seeking damages in excess of $17 million, an amount that an investor spokesman said should be tripled to $60 million.
According to an Oct. 25 filing with the SEC, Costa Brava owns a 15.9% Telos stake. The activist fund also has a separate complaint pending against Telos in the Circuit Court for Baltimore City in the State of Maryland.
A source familiar with the company pointed out that Telos’ previous accountant, PricewaterhouseCoopers, refused to go along with the accounting alterations that would hurt Costa Brava and other investors. — Ron Orol

Activist focuses on Emageon

Activist investor Oliver Press Partners LLC on Monday hiked its insurgency at Emageon Inc., a Birmingham, Al.-based medical information services technology company.
Oliver Press Partners reported Monday in a government filing that it informed Emageon that it plans to nominate director candidates to the compan's board and will consider bringing other proposals for consideration at the company's next annual meeting.
The hedge fund also reported Monday that it had raised its stake in the IT company to 14.2%, up from the 12% it reported July 30 when it first made a filing with the Securities and Exchange Commission. In that filing, Oliver Press Partners reported that it thought the company was undervalued and that it had preliminary discussions with Emageon's management to see about the possibility that one of its principals might join the IT compan's board.
OPP intends to work with the company to explore all available strategic options for increasing the value of the Shares. OPP intends to exchange views with the Company's management and board and possibly other shareholders concerning the strategic direction of the company, Oliver Press Partners wrote.
Another fund, Accipiter Life Sciences Fund LP, on Nov. 29 reported owning an 11.9% Emageon stake.
Emageon has a $95 million stock market capitalization.
Ron Orol
See Schedule 13D filing from SEC Edgar

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Luby's, Ramius continue to spar

Dissident activist investors Ramius Capital Group LLC and Luby's Inc. intensified Thursday their dispute over the future of the Texas-based cafeteria-style restaurant operator.
In the latest series of letters to shareholders, Luby’s argues that Ramius’ nominees have fast-food restaurant experience that isn’t relevant to Luby’s “casual dining concept.” The company also lashed out at Ramius, arguing that it has “little to no experience in the restaurant business.”
The Luby’s effort was in response to a Ramius letter arguing that its candidates are better qualified to represent the best interests of Luby’s shareholders, in part, because they have 73 combined years of restaurant industry experience and “a 50-year combined track record in corporate finance.”
The hedge fund managers plan to nominate Stephen Farrar, a senior vice president at Wendy's International Inc.; William Fox, a consultant and formerly a chairman at an investment fund; Brian Grube, former chief executive of Fresh Enterprises Inc.'s Baja Fresh Mexican Grill; and Matthew Pannek, who served as CEO of Magic Brands LLC and Fuddruckers Inc. between May 2006 and August 2007.
Ramius also complains about Luby’s decision last month to grant Christopher Pappas, Luby’s president, and Harris Pappas, his brother, an exemption from Luby’s poison pill, allowing them to own a larger percentage of the company’s shares, instead of the 15% allowed for each other shareholder. While the Pappas brothers argue that increasing their personal financial stake in the company demonstrates their commitment to making sure the company’s share price improves, Ramius is concerned that the greater ownership will mean more votes for management-backed directors (and less for them) at the contentious meeting.
Another point of contention: The Ramius group also expressed concern about the privately owned Pappas restaurant entity owned by the two brothers. “As shareholders of Luby's, we are extremely concerned that the time commitment associated with running the Pappas restaurant entities, which are privately owned by you and your brother Harris, is preventing Luby's management from taking the steps necessary to unlock value at Luby's,” the Ramius group wrote. “While we are sympathetic to the difficulty of managing both businesses, the shareholders of Luby's are not interested in the Pappas restaurant chain.”
But Luby’s contends that the Pappas brothers’ stake in the business means they are committed to improving share value. “No one has more at stake in Luby’s than Chris and Harris Pappas, and your board is extremely pleased with the company’s progress under their leadership and with their continued commitment to Luby’s,” Luby’s Oct. 31 filing reported. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Activist investor Ramius hounds A. Schulman

Ramius Capital Group LLC on Thursday followed up on the activist effort of another investor and launched a proxy contest to nominate four candidates to the board of paint and plastics company A. Schulman Inc. The New York-based activist investor argues in a letter to investors that A. Schulman violated its settlement and commitment to another activist investor, Barington Capital Group LP.
The Akron, Ohio-based company announced on Nov. 16 that it formed a special committee to consider strategic alternatives such as a sale. A. Schulman also announced that its chief executive, Terry Haines, was stepping down.
After launching proxy contests to elect directors to A. Schulman’s board in both 2005 and 2006, Barington settled with the company by adding either candidates put forward by themselves or agreeing with company directors and executives to bring on other independent directors. In 2006, Barington chief executive James Mitarotonda, a member of A. Schulman’s board, became a member of a special committee with other independent directors to follow through on a business plan that would cut costs and seek to improve the long-term prospects of the business. Mitarotonda and other directors on the special committee are involved in the selection process for the company’s new CEO. The new CEO has been chosen, but his or her name hasn’t been disclosed yet, according to Ramius’ filing.
But after A. Schulman’s announcement in November, Ramius, a 7.4% shareholder, has begun to expedite its agitation campaign. “We believe these settlement agreements are nothing more than a 'smokescreen' for management’s and the board’s failure to maximize stockholder value and have created a long history of broken promises,” Ramius partner Mark R. Mitchell stated in a letter to management. — Ron Orol
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

SuttonBrook takes an interest in United Rentals

Faced with a deal that has fallen through, a large hedge fund said Tuesday it will be taking on an activist role at equipment rental company United Rentals Inc.
Last month, buyout shop Cerberus Capital Management LP, backed out of its planned $7 billion (including debt) acquisition of the Greenwich, Conn.-based equipment rental company. Since then United Rentals has filed a lawsuit seeking to pressure Cerberus to complete the deal.
Now, on Tuesday, SuttonBrook Capital Management LP reported with the Securities and Exchange Commission a 5.83% United Rentals stake and may consider a “extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the company or any of its subsidiaries,” among other options such as board changes or dividend policies. These are boiler plate comments, but indicate that SuttonBrook doesn’t plan to be a passive investor in United Rentals. “[SuttonBrook] review on a continuing basis the investment in the company,” the filing said. — Ron Orol

Costa Brava's revenge against Telos

Activist investor Costa Brava Partnership III LP may be getting close to a big payout, as it pursues a two-pronged litigation approach to extracting share value.
The Boston-based hedge fund launched a civil lawsuit in December 2005 against Goodman & Co. LLP, the independent auditor for Telos Corp., a networking and information technology company that provides services and equipment to the U.S. Department of Defense. That suit may soon come to a conclusion — the trial began last week on Nov. 26.
The activist hedge fund alleges in the suit that Telos hired Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. The dispute centers on Telos’ 2004 annual filing audited by Goodman. The accounting firm, Goodman, has denied any wrongdoing. It resigned as Telos’ outside auditor in July, according to an Oct. 26 SEC filing made by Telos. Costa Brava is seeking damages in excess of $17 million, an amount that an investor spokesman said should be tripled to $60 million.
According to an Oct. 25 filing with the SEC, Costa Brava owns a 15.9% Telos stake. The activist fund also has a separate complaint pending against Telos in the Circuit Court for Baltimore City in the State of Maryland.
A source familiar with the company pointed out that Telos’ previous accountant, PricewaterhouseCoopers, refused to go along with the accounting alterations that would hurt Costa Brava and other investors. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

More Activists Converge on Brinks

An activist hedge fund manager on Friday stepped up its five-year effort to effect share improvement change at Brinks’ Co. by launching a proxy contest to put four candidates on the Richmond, Va.-based armored car transport company’s board.
Clay Lifflander, portfolio manager at MMI Investments LP of New York, wrote in a Securities and Exchange Commission filing that the hedge fund is seeking to install director candidates because he believes the armored car company lacks industry experience on its board.
“We believe the director slate we’ve nominated is well qualified, with a breadth and depth of business experience to maximize value for all Brink’s stockholders,” Lifflander wrote. “We are not seeking control of the board. We simply believe that the board as currently composed has demonstrated that it lacks the security industry perspective, strategic alternatives acumen and stockholder representation necessary to protect and maximize the value of Brink’s stockholders’ investment.”
MMI Investments, which has an 8.4% Brinks stake, is seeking to nominate John Dyson, the chairman of MCM Capital Management; Peter Michel, former chief executive of Brink's residential security monitoring unit; Robert Strang, the CEO of Investigative Management Group; and Exide Technologies director Carroll Wetzel.
“Our nominees fill major gaps in the experience and skill set of the current directors, particularly as the board has limited direct Wall Street experience and no expertise in the security industry, other than chairman, CEO & president Michael Dan,” he added.
MMI Investments has been engaging Brink’s since 2003 and has lately pushed for a sale of the company. In 2005 the hedge fund began publicly agitating for Brink’s to sell its marginally profitable BAX Global subsidiary, an international heavy freight and logistics operator, which was subsequently sold for roughly $1.1 billion. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Activists Take On Multimedia Games

One activist hedge fund manager is following up the efforts of another at Multimedia Games Inc., an electronic casino and lottery game maker.

Late Wednesday, activist fund manager Dolphin Limited Partnership said in a release it sent a letter to Multimedia’s board encouraging it to seek a sale or merger as a way of maximizing profits. Dolphin owns about 900,000 shares of Multimedia, about a 3% stake.

Dolphin’s efforts come after hedge fund manager Emanuel Pearlman began pressing the company to consider share-enhancing changes last year. In October, 2006, Multimedia Games agreed to name Pearlman and another of his allies as directors after the dissident shareholder agreed to cancel a proxy contest intended to nudge the company into a formal auction.-- Ron Orol

Activist investor targets J.P. Morgan, Bear Stearns over subprime

Fallout from the subprime mortgage crisis may lead to a director shuffle at both Bear, Stearns & Co. and J.P. Morgan Chase & Co. At least that’s what activist institutional investor American Federation of State, County and Municipal Employees’ director Richard Ferlauto hopes to achieve with proposals that would seek to eventually elect directors at both these companies.
AFSCME is submitting so-called shareholder access proposals, which is a two-step process for getting a shareholder director candidate listed on corporate proxies. AFSCME, holding a significant stake in a corporation for at least one year, submitted a bylaw proposal seeking to nominate director candidates at the two companies. If the bylaw measure isn't removed and it passes, AFSCME would then be able to nominate a candidate for the company’s board on the company’s proxy card in the following year’s election.
Ferlauto is arguing that shareholders should be able to put a director candidate on corporate boards because management at these companies mismanaged risks associated with subprime mortgages, leading to shareholder losses.
But it looks like Ferlauto isn't going to get his way — at least in the short term. The SEC on Wednesday adopted rules allowing companies to remove such proposals from their proxy statements. These companies are expected to use the agency’s authority to remove the AFSCME measures. In an interview with The Deal, Ferlauto says he will challenge a decision by either of these corporations to remove the proposal. — Ron Orol
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

ValueAct cultures a larger stake in MDS

Activist investor ValueAct Capital Management LLC continues to hike its presence in MDS Inc., a Mississauga, Ontario, life sciences company. On Tuesday the fund reported in a Securities and Exchange Commission filing that it owned a 16.8% MDS stake and reiterated that it will continue to “evaluate alternatives” and “monitor” the company’s operations, liquidity requirements and business prospects.
The activist fund also indicated that it may discuss its thoughts on the company’s operations with others. “Consistent with its investment research methods and evaluation criteria, [ValueAct] may discuss such matters with management or directors of [MDS], other shareholders, industry analysts, existing or potential strategic partners or competitors, investment and financing professionals, sources of credit and other investors,” ValueAct wrote in its filing.
ValueAct in May doubled its MDS stake to 6.6%. Since then it has continued to hike its investment. The California-based activist fund’s efforts come after investors in 2006 pressured MDS to make board changes. MDS is completing a corporate restructuring that may include divestment of a major lab diagnostic unit. ValueAct has agitated for changes at a number of companies, with a specialization in the life sciences sector, and at times seeks to acquire businesses. — Ron Orol

Battle Continues at Sparton

Electronic manufacturing services company Sparton Corp. continues to face opposition from shareholders led by activist investor Lawndale Capital Management LLC.
Evidence of investor dissent at the company’s Oct. 24 annual meeting was disclosed in the company’s most recent quarterly statement on Nov. 9. According to a Sparton Securities and Exchange Commission report, roughly 30% of participating shareholders voted to oppose the re-election of three incumbent director candidates Sparton had up for election — not enough to block their election to the board.
Activist investor Andrew Shapiro, director of Lawndale in Mill Valley, Calif., noted that the near-30% opposition represents close to a majority of noninsider shares (roughly 40% of Sparton’s shares are held by “insiders,” primarily Sparton’s management and the heirs of John Smith, who, together with his younger brother, obtained control of the company in a proxy contest roughly 60 years ago). The noninsider investors voted “withhold” on the election of management-backed director nominees, David P. Molfenter, W. Peter Slusser and Bradley O. Smith, according to Sparton’s quarterly report.
“Lawndale considers this vote, comprising close to a majority of all the noninsider shares, to be a very strong mandate for change. We will continue to press change at Sparton and are evaluating our options,” Shapiro wrote in a filing on Monday.
The result follows Shapiro’s decision last month to take his insurgency at Sparton up a notch by publicly reporting to the SEC that he planned to oppose the re-election of the three incumbent candidates. At the time, Shapiro hiked his stake in the Jackson, Mich.-based company to 9.8%.
Shapiro had been complaining that the company has misallocated capital. “To date the series of ventures has culminated in the destruction of shareholder value best illustrated by Sparton’s stock depreciating 61% over the past decade through September 2007,” Shapiro wrote in a letter to Sparton’s board on Oct. 11. Shapiro also lashed out at Sparton chief executive David W. Hockenbrocht. “The truth is that fiscal 2007 was not an isolated event, it was just worse than usual. Clearly Mr. Hockenbrocht and this board are out of touch. Shareholders have suffered long enough.”
The activist investor also accused the company of maintaining an imprudent and large allocation of Sparton employee pension plan’s assets in Sparton’s own stock. “The allocation at June 30, 2007, of 44% of the pension plan’s equity holdings to Sparton’s own stock, so as to entrench insiders who are simultaneously liquidating their personal holdings, has eviscerated the employees’ retirement plan and we believe is a direct violation of Mr. Hockenbrocht’s fiduciary duties to the pension plan’s beneficiaries as well as to the company’s other constituencies," Shapiro wrote. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Ramius Strikes Back

The battle for the future of Luby’s Inc. intensified Monday after activist hedge fund managers Ramius Capital Group LLC sent a missive to the cafeteria operator's investors pointing out their concerns about the Houston company’s governance.
The activist investor group launched a proxy contest on Oct. 17 to nominate four director candidates to Luby’s 10-person board at the company’s annual meeting scheduled for Jan. 15.
Luby’s, an operator of 130 cafeteria-style restaurants in Texas, on Oct. 31 launched its own campaign, hoping to maintain control of the company's destiny, and the support of its institutional investor base.
The activists on Monday took issue with the company’s granting Christopher Pappas, Luby’s president, and Harris Pappas, his brother, an exemption from Luby’s poison pill, allowing them to own up to 28% of the company’s shares, instead of the 15% allowed for each other shareholder.
While the Pappas brothers argue that increasing their personal financial stake in the company demonstrates their commitment to making sure the company’s share price improves, Ramius is concerned that the greater ownership will mean more votes for management-backed directors (and less for them) at the contentious meeting.
According to Luby’s Oct. 31 proxy statement, the two Pappas brothers invested an additional $11.2 million in Luby’s as a result of exercising stock options granted in 2001, increasing their ownership stake to 24% from 17% of shares outstanding. “No one has more at stake in Luby’s than Chris and Harris Pappas, and your board is extremely pleased with the company’s progress under their leadership and with their continued commitment to Luby’s,” the filing reported. Luby’s also plans to invest more in existing restaurants, expand a culinary contract service business and build between 45 and 50 new stores, based on a new prototype, over the next five years.
Ramius also raised a red flag at Luby’s classified board structure, prohibiting dissident shareholders for taking control of the board. “For six out of the past seven years, Luby’s proxy has included a non-binding shareholder proposal to declassify the Board. Each year, management recommended against the proposal. For five out of those six years the shareholders voted in favor of declassifying the Board. In each instance, the Board chose to ignore the shareholders’ choice and followed management’s recommendation instead,” the Ramius release wrote. — Ron Orol

Active Investor seeks Steven Madden Sale?

Activist investor Clinton Group Inc. expanded its campaign at Steven Madden Inc. on Friday, praising the shoe retailer for setting up a strategic review committee but hinting that perhaps a sale to a strategic or financial buyer might be in the best interest of the company.
According to a Securities and Exchange Commission filing, Clinton Group sent a letter to Steven Madden chairman and CEO Jamieson A. Karson on Friday outlining a number of ideas for improving shareholder value. The activist investor hiked its stake to 6.1% from 5.1% and reiterated that a leveraged stock repurchase would “improve the efficiency of [Steven Madden’s] capital structure and create immediate accretion for shareholders.”
But Clinton Group also said it wasn’t “wedded” to any one particular approach for improving shareholder value. Another strategy, it wrote, could be to auction of the business.
“We would support a sale of the company if the acquisition price reflected Steve Madden’s promising, long-term business prospects. We believe that a sale at the right price could be the sensible culmination of years of hard work that has made Steve Madden the strong operating franchise and best-in-class brand it is today. We think there are potentially multiple buyers who would be interested in the company. Steve Madden may be a logical target for a strategic buyer interested in diversifying its footwear portfolio, or a financial buyer who could steward growth in a flexible, private context,” Clinton Group wrote in its letter.
But the Clinton Group went to extra lengths to explain that their effort at Steven Madden was not a hostile campaign. According to the fund’s letter, Clinton Group looks forward to “working constructively” with the board and strategic review committee.
The Clinton Group campaign follows up on another activist insurgency that was initiated by James Mitarotonda and his Barington Capital Group LP in New York. Barington launched a public campaign to “maximize value of shareholders” in 2004, but has since cashed out.

S.A.C. may seek another bidder for EDO

Activist investor S.A.C. Capital Management LLC has decided to try to stir things up at EDO Corp., a supplier of defense electronic systems that agreed in September to be purchased by ITT Corp. for $1.5 billion.
According to a Securities and Exchange Commission filing on Thursday evening, activist fund manager S.A.C. Capital Management, which has a 6.1% EDO stake, reported that it believes the price being offered for the defense systems company may not be enough. Apparently, a slowing deal market coupled with the credit crunch hasn’t led S.A.C. to quietly accept the EDO-ITT deal: “While [S.A.C.] are continuing to review [EDO’s] preliminary proxy statement and are considering the proposed merger transaction in light of the information contained in the [company’s] preliminary proxy statement, [S.A.C.] believe that the merger consideration might be inadequate,” S.A.C. wrote in the filing.
EDO has a $1.2 billion stock market capitalization. According to S.A.C.’s filing, the activist fund’s managers will continue evaluating their investment and they may, “engage in discussions with certain persons, including, without limitation, management or representatives, [EDO’s] board of directors, other shareholders … and other relevant parties, concerning matters with respect to [S.A.C.’s] investment in the common stock, including, without limitation, the terms of the proposed transaction."
According to the filing, S.A.C. also says it may write and respond to letters from EDO’s board or management. In other words, this is just the beginning of the activist’s disruptive efforts.
Despite S.A.C.’s endeavors, EDO and ITT reported that they expect the deal to close sometime early next year. — Ron Orol

Hedge Fund Manager Shapiro Takes On Mace Security

Activist hedge fund manager Andrew Shapiro on Friday took his insurgency campaign at Mace Security International Inc. up a notch by launching a proxy contest to elect four nominees to the electronic surveillance security devices maker’s five-member board.
Shapiro, who manages Lawndale Capital Management LLC, a Mill Valley, Calif.-based activist fund, owns a 9.6% stake in Mace. His proxy contest is the latest stage in a public campaign he launched last year intended to prod the Mt. Laurel, N.J.-based company into improving its governance by bringing on more independent directors and installing stringent ties between executive performance and compensation.
"Lawndale believes that adding new, independent directors who have no ties to the current management of the company and have not been selected by the management of the company will improve the functioning of the board," Shapiro wrote to Mace Security secretary Robert Kramer.
Lawndale’s proxy contest follows up on a compromise measure offered by Shapiro to Mace officials on Sept. 10 that was rebuffed. In it, Shapiro wrote Mace officials asking them to replace director Matthew Paolino, the brother of Mace's CEO, with an expanded board that included three of Shapiro's four nominees. Shapiro said he would consider modifying his proposal if the company only wants to have a five-person board, but it would need to be significantly restructured.
One day after Shapiro made that offer, Mace’s second largest holder, Ancora Capital Inc., reported owning an 8.6% stake, and according to a Securities and Exchange Commission filing, portfolio managers there have come out in support of Lawndale. Mace Security has a $36 million stock market capitalization. — Ron Orol
Ron Orol is a reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.
Tags: deals, m&a, mergers, hedge funds

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