Thursday, November 6, 2008

Shifting SEC

The Securities and Exchange Commission will be a key regulator as Washington continues to restructure itself in response to the expanding financial crisis.

SEC Chairman Christopher Cox has called for a combination of the agency and the Commodities Futures Trading Commission, a key part of Paulson’s blueprint for regulatory reform.

Whether the agencies do combine, it won’t be under Cox’s watch. Arthur Levitt, SEC chairman during 1993 to 2001, is a potential pick for chairman. FINRA CEO Mary Schapiro is another potential choice because of her extensive experience working at both the CFTC and SEC. “To combine both these agencies you need someone with experience at both places,” said one securities attorney.

Another possible SEC chair pick is John Olson, a partner at Gibson Dunn LLP and former head of the American Bar Association’s business law section’s committee on Corporate Governance. Ex. SEC commissioners Harvey Goldschmid, Roel Campos and Annette Nazareth, are all possibilities. It would be easier for Obama to anoint an existing commissioner to the chair position. Elisse Walter, who is on the commission, could fit the bill. Lower level but still very important division chiefs at the SEC are on their way out too. John White, who heads the SEC’s corporate finance division, is expected to step down, leaving the hefty task of figuring out how to create a new derivatives disclosure regime to his successor. Stanley Keller, a partner at Edwards Angell Palmer & Dodge LLP could replace White. -- Ron Orol

Wednesday, November 5, 2008

Congressional Shifts on Capitol Hill

When Democrats lost seats in the 2002 midterm congressional election, then House Minority Leader Richard Gephardt quietly decided not to run for re-election for that position.

With Republicans losing House seats in both 2006 and 2008, expect GOP members to push for changes to their leadership. That could mean the ouster of House Minority Leader John Boehner, R-Ohio, or GOP Whip Roy Blunt, R-Mo. Possible replacement candidates include Reps. Paul Ryan, 38, R-Wisc. and Eric Cantor, 45, R-Va., both lawmakers that led a high profile ultimately unsuccessful effort to topple Treasury Secretary Henry Paulson’s $700 billion government purchase plan. According to Darryl Nirenberg, deputy chair in Patton Boggs public policy department, Cantor and Ryan may see the losses in their party as an opportunity to step up. The Republican study committee, a conservative caucus within the Republican party, now has a strengthened position for GOP lawmakers, Nirenberg contends. Previous members Tom Delay and Richard Cheney have gone on to strong positions within the Republican party. Opposition to Paulson’s package emerged from this committee.

One glimmer of positive news for Republicans was the re-election of Senate Minority Leader Mitch McConnell, R-Ky. McConnell understands the intricacies of the parliamentary rules on Capitol Hill and legislative observers expect that he is best positioned to protect GOP interests in the Senate. His ouster would likely have meant the installation of the less experienced Sen. Jon Kyl, R-Arizona, to the position.

On the Democratic side, look for Sen. Christopher Dodd, D-Conn., to remain chairman of the Senate Banking Committee, a panel that will be at the center of restructuring on Capitol Hill. Less likely is for Dodd to decide to be chair of the prestigious Senate Foreign Relations Committee, where vice president-elect Joe Biden is leaving a vacancy. Sen. Daniel Inouye, D-Hawaii, may take over the Senate Appropriations Committee (after the ouster of Sen. Robert Byrd, D-Va.) leaving the position of Senate Commerce Committee chairman to John Rockefeller, D- WV. All this may leave Sen. Chuck Schumer, D-NY., as chair of the prestigious and powerful Senate Rules Committee.

As far as Obama’s administration. Expect quick movement. According to the Washington Post, Rahm Emanuel is deciding whether he wants to be President-Elect Barack Obama’s chief of staff. Rahm may choose to stay on in Congress where he could one day replace House Speaker Nancy Pelosi.

Once Obama’s chief of staff is chosen, expect his White House staff and cabinet officials to be chosen quickly, in the next couple weeks.

Key cabinet official appointments should be made before Thanksgiving. The choice of Treasury Secretary, arguable the most important cabinet level job, should go to either New York Federal Reserve Bank President Timothy Geithner or New Jersey Gov. Jon Corzine, at least according to Stan Collender, managing director at Qorvis Communications in Washington. Larry Summers, a former Treasury Secretary during the Clinton Administration, is also in the running. -- Ron Orol

Thursday, September 11, 2008

Sun Times Under More Pressure

Already under pressure from activist investors K Capital Management LLC of Boston, Sun-Times Media Group Inc., which announced in February it was considering a sale of assets or a privatization, is now facing a second activist investor.

On Wednesday, Davidson Kempner Advisers Inc. announced an activist tack at the owner of the Chicago Sun-Times, the latest news company to be targeted by activist hedge funds. K Capital, the Sun-Times' largest shareholder with a 9.7% stake, has been a vocal advocate for a sale.

Davidson Kempner, a 5.9% Sun-Times holder, on Wednesday evening said in a Securities and Exchange Commission filing it has had and will continue to have discussions with "third parties and other shareholders and management regarding [Sun-Times], its prospects and potential means for enhancing shareholder value. In these discussions, [Davidson Kempner] may suggest or take a position with respect to future plans for the company, including, without limitation, potential changes in the business, strategy, operations, board composition, management or capital structure of the Issuer as a means of enhancing shareholder value."

The filing doesn't mention whether the two firms are working together, but Davidson Kempner's filing makes it clear that it certainly would be open to talking to a number of investors. - Ron Orol

Thursday, August 28, 2008

Steel Partners closer to Goal at Point Blank

Activist turned private equity investor Warren Lichtenstein is one step closer to his goal of buying body armor maker Point Blank Solutions Inc. or having it consider strategic options, including a sale.

The insurgent, who manages the New York-based activist fund Steel Partners, took five of seven board seats on the $153 million stock market capitalization company in a proxy contest on Tuesday. The Pompano Beach, Fla.-based company's market capitalization is roughly half its size compared to a year ago, and its former Chief Executive has been arrested on charges of fraud.

"We continue to believe that Point Blank should not remain a standalone company competing on uneven terms against much larger competitors in a weakening market," Lichtenstein said in a statement. "Steel Partners is committed to maximizing stockholder value by exploring all strategic alternatives, including possible sale of all or a portion of the Company on the most favorable terms available to Point Blank stockholders."

Steel Partners, which has a 9.6% Point Blank stake, offered last year to buy the company for $281 million. The company rejected the bid.

Steel Partners, traditionally known for pushing companies to auction themselves or find other means of improving shareholder value, is no stranger to bidding or buying companies. The activist fund, together with Newcastle Partners, another hybrid activist and buyout shop manager, acquired Fox & Hound Restaurant Group in 2006. The two funds later acquired Champps Entertainment Inc. In addition to restaurant chains, Steel Partners focuses a large chunk of its activist efforts on defense industry companies. In 2004, the fund unsuccessfully bid to buy aerospace engineering systems manufacturer GenCorp. Inc.

Thursday, August 14, 2008

Naked Short Selling Would Live On

One day after the Securities and Exchange Commission ended its pilot project to clamp down on naked short selling, at least one academic says any decision to extend the plan to the broader market would have some unintended consequences.

Columbia Law School professor John Coffee says he believes that if the SEC chooses to extend the temporary naked short-selling rule to the entire market, it would have the effect of driving short sellers to migrate their investments to single stock futures, the options market and cash settled equity securities, all strategies that could also drive a company stock down. The last option, also known as total return swaps, don't involve real shares but are agreements between investors and bank derivatives dealers where one party pays the other based on the performance of the underlying stock price.

"I'm not saying it's a complete substitution but people who want to avoid preborrowing stock might be able to achieve these things through these other means," Coffee says.

The agency in July set up emergency restrictions on short sales in the shares of 19 financial institutions including mortgage giants Fannie Mae and Freddie Mac through Tuesday. The emergency restrictions required short sellers in these institutions to either arrange formally to borrow shares, "preborrow." Previously, it was enough if the broker could determine that it had a reasonable basis to deliver the securities when an investor sought to borrow shares for a short sale.

It's not clear what the SEC will do after it collects all the data from this effort, but Coffee adds that he believes those investors seeking to engage in naked short selling, the practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed, will use these other mechanisms that fulfill the same functions. Coffee does add that even with short sellers finding these other means, he expects broad restrictions similar to those set forth in the emergency order to have some impact on discouraging the naked short- selling practice.

"It would succeed at putting some sand in the gears," Coffee said. - Ron Orol

Friday, August 8, 2008

What Happened to Fiduciary Duty?, asks TCI

ailroad company CSX Corp. still refuses to seat two of four dissident director nominees, partly because the company hopes an appeals court ruling will disqualify a block of shares voted by the activist dissident investor Children's Investment Fund Management (UK) LLP.

But now the independent inspector of elections has put out its report detailing that four of five TCI nominees won election to the board at the company's June 25 annual meeting.

If the appeals court upholds the District Court finding that TCI violated securities laws, it could disqualify many votes TCI cast in favor of the dissident slate by "sterilizing" or disqualify the portion of shares TCI owned while it was allegedly in violation of the disclosure rules. In total, that means 6.4% of TCI's stake could be ruled ineligible.

That would mean dissident directors Christopher Hohn, TCI founder, and Timothy T. O'Toole would have lost the election. According to the inspector of elections, Hohn received 130,506,157 votes, edging out incumbent director Frank Royal, who only got 129,715,745, a margin of about 0.3%. Hohn would definitely not have won had 6.4% of his TCI stake been removed. O'Toole also won with less than 6.4%.

The court isn't likely to rule until September, with oral Arguments scheduled for Aug. 25.

CSX is betting that if the court decides to sterilize those TCI shares it will be easier to keep Hohn and O'Toole off if they are never seated in the first place than if they have to remove them from their seats retroactively.

But until the court acts, what happens to fiduciary duty to shareholders? Hohn and O'Toole could end up losing up to 20% of their term as directors. Will the two dissidents receive an extra few months at the end of their 12 month term if the court doesn't decide to disqualify the votes? Also, what about the two directors Hohn and O'Toole are set to replace? Are Royal and William Richardson off the board yet? - Ron Orol

Tuesday, July 22, 2008

Activist Labor Fund Wants Citi Split

A five-year-old effort to press for changes at Citigroup Inc. by a major activist labor union just went into high gear.

In a letter sent to Citigroup's board late Friday, shareholder the American Federation of State County and Municipal Employees, or AFSCME, said it wants the bank to complete a strategic plan that includes splitting the company into two units in light of its financial problems stemming from the subprime mortgage credit crunch. AFSCME director Richard Ferlauto says he doesn't want to dictate specific terms, but thinks Citigroup should divide its commercial banking division from its investment banking unit.

"We want to see Citigroup spin off its Citi Smith Barney division," says Ferlauto.

AFSCME's letter follows an effort by the labor union fund to have shareholders vote to remove Citigroup directors at the megabank's April annual meeting. According to Ferlauto, between 25% to 30% of shareholders voted against the re-election of some Citigroup directors at the meeting.

"This is a strong indication of unhappiness of the company's direction," Ferlauto says.

Additionally, Citi, which has lost roughly $54 billion due to the credit crisis, has already raised more than $40 billion of new capital mostly from sovereign wealth funds. - Ron Orol

Tuesday, July 8, 2008

InBev's Anheuser Proxy Contest: No Annual Meeting Necessary

When beer titan Anheuser-Busch Cos. set up its bylaws to allow shareholders to act by "written consent," it probably did not expect the measure would be used by a rival in a campaign to take control of the brewer in an expedited manner. But, in fact, that is exactly what appears to be happening with InBev SA's plan released Monday to use the measure to replace 13 board members, according to a Securities and Exchange Commission filing.

Some corporations permit written consent provisions in their bylaws because they want procedures in place to give investors the ability to quickly endorse debt refinancing programs in cases when shareholder approval is required for those actions. But having such a provision in place also makes the company vulnerable to dissident shareholders seeking to bring in their own director candidates.

Unlike most corporations, Anheuser-Busch has a bylaw provision permitting "written consent solicitation."

To employ written consent solicitations, the activist distributes proxy documents to other shareholders asking them to sign a card saying they want to vote their shares to remove certain directors from the board and replace them with candidates nominated by the dissident. Typically, if investors with more than half of the total shares outstanding vote to remove the incumbent directors, the activist wins and his nominees are installed on the board. The campaign is different from a traditional proxy contest because it does not take place on the day of the company's annual meeting. As a matter of fact, no meeting must take place for the consents to be approved and for the directors to be removed and replaced.

It's likely Anheuser-Busch set up its bylaws to permit written consent solicitations thinking its double-digit billion dollar stock market capitalization would discourage hostile bidders and proxy contests.

But after removing its classified board, it looks increasingly like Budweiser should have killed the written consent solicitation bylaw a long time ago. The majority of other public corporations already recognize why that bylaw shouldn't be in place. - Ron Orol

Wednesday, July 2, 2008

Insurgent Investor Mark Schwarz Isn’t Taking No for an Answer

After specialty property and casualty insurance company Specialty Underwriters Alliance Inc. rejected his Hallmark Financial Services Inc.’s $6.50 a share, or $115 million, bid to buy the company, Schwarz on July 1, Tuesday, sent a letter to the company’s directors outlining benefits of such a deal.

“Hallmark senior management stands ready to meet with members of the board to answer questions regarding the proposal,” Schwarz wrote in a letter attached to a Securities and Exchange Commission filing.

The specialty property and casualty insurance company last week rejected Schwarz’s unsolicited takeover bid. Schwarz owns 9.9% of Specialty Underwriters.

In the filing, Schwarz points out that his offer represents a 31% premium on the $4.96 a share Specialty Underwriters Alliance was trading at on Friday June 20, the last business day before the company made Schwarz’s offer public, Monday, June 23. Schwarz also argues that SUAI’s business model will be improved by the addition of Hallmark’s strong financial position. This transaction will allow SUAI shareholders to enjoy a much higher return on their pro-rata share of invested capital in a combined company,” Schwarz added.

Schwarz’s investment vehicle, Newcastle Partners is the controlling shareholder of Hallmark Financial. -- Ron Orol

Wednesday, June 25, 2008

TCI: Four of our Five Nominees Are Elected to CSX's Board

When a federal appeals court on Monday dealt CSX Corp. a major setback by refusing to block activist investor The Children's Investment Fund from voting its stock at the company's annual meeting, it was easy to see that a pending proxy contest between the insurgent investor and railroad operator could become messy. The meeting and proxy contest took place Wednesday, and it looks like the messy prognosticators were right.

TCI and another hedge fund were permitted to vote the disputed 6.4% of their 8.7% stake for their five-member slate of dissident candidates for positions on the company's 12-person board. Wednesday afternoon, TCI has issued a statement explaining gleefully that based on preliminary voting results, shareholders have elected at least four of their slate. The two sides are battling over the future of the railroad company and its operational and investment priorities.

However, the news from the CSX camp was very different: "The outcome of the election of directors at CSX's 2008 annual meeting of shareholders is too close to call at this time. The annual meeting will reconvene at 10 am ET on Friday July 25."

It's unclear at this stage exactly how close the election was, but CSX is likely banking on the possibility that the appeals court, the U.S. Court of Appeals for the 2nd Circuit in New York, will ultimately decide to "sterilize" or disqualify TCI's shares at some point down the road.

The court did provide for a middle-of-the-road type expedited hearing, leading observers to speculate that a ruling could come by August or September.

It's less likely, but a decision could still be made by the appeals court before July 25. Should the court decide to disqualify TCI's shares, the company could conceivably, retroactively, reinstall management-backed director candidates if they lost in Wednesday's election by a margin of less than 6.4% of TCI's 8.7% stake. That would be unprecedented, and many observers aren't so sure a recount would be permitted.

There is still a long way to go before the appeals court rules. It is weighing whether TCI violated securities laws by using the swaps to get around Securities and Exchange Commission disclosure rules. A lower New York district court ruled June 11 that that was exactly the case. The court already rejected CSX's petition to have TCI's shares disqualified at the meeting pending its ruling. It also rejected CSX's petition to have the whole court case expedited so that a ruling would have taken place before the annual meeting.

What the 2nd Circuit does now and when it does it are key questions that need to be answered. - Ron Orol

Monday, June 23, 2008

TCI: Winning the battle but losing the War

It looks like The Children's Investment Fund may be winning its battle over the future of railroad operator CSX Corp. But is the hedge fund losing the war when it comes to the future of its activist strategy?

Sure, things look good for TCI and its proxy contest next Wednesday. Advisory services company RiskMetrics Group Inc. is recommending that investors vote for four of TCI's five-person slate at the meeting. That's a big boost. The 2nd Circuit Court of Appeals in New York has already rejected CSX's request to expedite the railroad company's appeal so that a ruling takes place before the meeting. The court late Friday also rejected CSX's petition to have TCI's shares "sterilized," pending the ruling, in otherwords blocked from voting, at the annual meeting. Both these measures should only help TCI gain the support they need to seat their insurgents and effect the operational changes they are seeking. All these measures should only help TCI gain the support they need to seat their insurgents and effect the operational changes they are seeking.

But let's take a step back. CSX's litigation battle has brought TCI's strategy of using a mixture of synthetic and equity shares to sneak up on target companies to the attention of the Securities and Exchange Commission. The agency had been mulling over whether it would require new synthetic share-related disclosures, but there was no urgency to the matter. Now, one person familiar with the SEC says the issue of synthetic swaps is becoming a top priority for the commission in light of the court battle.

While the agency is waiting for an appeals court ruling, which could take place in September, staffers there are very aware that a lower court's ruling on June 11 is already discouraging activist fund managers from employing swaps (and even passive investors that combine swaps and equity shares) as part of their insurgency strategy. There suddenly is an urgency for the agency to step in and provide some clarity.

The end result might just be that the SEC proposes new Schedule 13D rules requiring investors to consider synthetic swaps the equivalent of real shares for the purpose of disclosure. That means an activist with 3% equities and 2% synthetic shares would need to disclose their investment in a filing with the SEC. The agency may also propose a whole new disclosure regime for synthetic swap shares. In other words: no more sneaking up on companies.

TCI may win its battle with CSX. But it may be the last time the London-based investor can accumulate a large economic stake -- double-digit swaps plus equity below 5% of shares outstanding -- without disclosing that to the SEC. Companies soon may no longer be in the dark when it comes to activists with large hidden economic investments.

Of course, this does nothing to hurt the large number of activists that just buy equity stakes and use public pressure campaigns for their strategies.

But those activists using synthetic shares to stay in the shadows might have to become more transparent. That will give companies a better chance of responding to activists. Already a couple corporations have adjusted their poison pills to consider synthetic securities the equivalent of physical securities. This could be good news for corporations in their war against activist investors.

And while TCI may win its insurgency at CSX, its swap/equity activist strategy may be going the way of the dodo bird. - Ron Orol

Wednesday, June 18, 2008

SEC, Swaps and Schumer

A battle over whether some activist hedge fund managers will be able to continue to sneak up on certain target corporations is being waged in the courts, the Securities and Exchange Commission and now even on Capitol Hill

Sen. Charles Schumer, D-NY, sent a letter June 17 to SEC Chairman Christopher Cox expressing his concern that no penalties or injunctions were connected to a district judge’s ruling on June 11 that activist investor, The Children’s Investment Fund, violated securities laws by forming a group with another investor, 3G Capital Partners, and not disclosing that partnership when it was required by SEC rules. (Schedule 13D rules).

The court also ruled that TCI used so called “cash settled equity swaps,” to get around SEC disclosure rules. Railroad operator CSX Corp., TCI’s target, argues that the violations did not give executives sufficient time to prepare for the incoming TCI campaign.

CSX, frustrated with the court’s decision not to issue a substantive penalty, is appealing it to the 2nd Circuit Court of Appeals. The railroad operator is seeking to have TCI’s 8.7% equity stake “sterilized,” so these shares can’t be voted in the proxy contest.

The court argues that it was hamstrung from giving CSX the relief it sought, leaving the issue of penalties to the SEC, which may not provide that relief.

Seeing that the SEC may remain mum, Schumer has decided to prod the agency a bit, while also taking matters into his own hands. In a letter to SEC Chairman Christopher Cox, Schumer said that legislation might need to be considered to make sure penalties are included with these kinds of rulings.

“I am considering introducing legislation to correct this gap in the law, and would be very interested in discussing potential remedies, including the implications of granting CSX’s request for voting rights sterilization and increased civil penalties, with the SEC,” Schumer wrote. “The uncertainty created by this ruling will likely have a detrimental effect on the financial markets.”

And Schumer isn’t the only lawmaker prodding TCI in favor of CSX. Five lawmakers including Sen. Evan Bayh, D-Ind., is chairman of the Senate Banking Committee's Security and International Trade and Finance subcommittee, are pushing the Committee on Foreign Investment in the U.S., an interagency panel that examines U.S.-foreign deals for national security threats, to review the deal.

That would be an unusual review.

Representatives from both CSX and TCI testified before Congress earlier this year. Having lawmakers on Capitol Hill respond to TCI’s insurgency looks like it’s becoming an integral piece of CSX’s response strategy. TCI might need to hire some Washington lobbyists before this all swaps out. -- Ron Orol

Wednesday, June 11, 2008

Dems and Hedge Fund Taxes

Hedge fund managers can take a big sigh of relief, but watch out for 2009. Legislation that would have eliminated a tax provision allowing some hedge fund managers to defer taxes on billions of dollars of compensation came close to passing the Senate Tuesday, but in the end it was blocked.

Sen. John Kerry, D-Mass., attached a deferred tax provision to a broader energy bill, all of which was rejected by a filibuster from Republican senators. The measure would, in a nutshell, make hedge fund managers pay taxes immediately on income that is now tax-deferred.

"This vote is proof positive that Senate Republicans are more interested in helping hedge fund managers avoid taxes than helping working families," Kerry said on the Senate floor.

And while Kerry and other Democrat lawmakers remain frustrated by the outcome, hedge fund lobbying groups assert that the end of the deferment would have stifled investment and hurt the liquidity that hedge funds provide to the markets.

Of course, should Democrats obtain or get near to a filibuster proof majority of 60 senators following the upcoming election, a similar rejection might be more difficult or impossible to achieve. A Senate with 58 Democrats would have an easier time convincing (or strong-arming) a couple Republicans to break ranks and back a bill. And if not, Senate Majority Leader Harry Reid, D-Nev., could offer a few "incentives" like a bridge to nowhere. - Ron Orol

Tuesday, June 10, 2008

Is Activist Hedge Fund TCI A National Security Risk?

The Committee on Foreign Investment in the U.S., an interagency panel that examines U.S.-foreign deals for national security threats, may just review the activist Children's Investment Fund's large minority stake in railroad operator CSX Inc. But it would be an unusual review, if CFIUS decides to take it on.

TCI, which is based in the U.K., together with 3G Fund LP, another investment fund, own an 8.7% CSX stake. The combo also has financial exposure to an additional 12.3% stake through "cash settled swap agreements" with eight investment banks. The funds are pressing CSX to find a buyer or complete a leveraged buyout.

The intergovernmental agency CFIUS has been under pressure from lawmakers, the public and pundits to review deals involving foreign companies gaining a "controlling interest" in U.S. assets that are well below a 51% stake. CFIUS recently went to great lengths to explain to dealmakers that "controlling interest" could mean a large minority stake, but it would have to look at each transaction on a case-by-case basis to figure out which stakes warrant a review. In other words, there is no minimum threshold below which CFIUS attorneys could count on to avoid a review.

CFIUS practitioners argue that the TCI investment in CSX fits the bill for a CFIUS review. They say the railroad operator falls under the interagency's purview as critical infrastructure because it ships hundreds of carloads of nuclear waste and services military installations. TCI's activist efforts to replace five incumbent directors on the company's 12-member board at its June 25 annual meeting along with its large minority stake could be enough to trigger foreign control.

In practicality, though, this review would be unusual because neither CSX nor TCI have any plans to submit an application to CFIUS for review. Typically, when a foreign company buys a U.S. asset, both companies decide to voluntarily submit a joint application for approval. In this case, CFIUS might send out messages that it wants both companies to submit applications. Since CSX and TCI are opponents, both parties would likely provide separate documents explaining their opposition opinions.

In any case, there is no way a CFIUS review would be completed before CSX's annual meeting.

There are some high-profile lawmakers pushing for such an examination. Sen. Evan Bayh, D-Ind., is chairman of the Senate Banking Committee's Security and International Trade and Finance subcommittee. He and five other senators want Treasury Secretary Henry Paulson to launch a review.

There is reason to make one important distinction regarding this insurgency. Many in Washington are pushing CFIUS to review deals involving sovereign wealth funds, the investment arms of foreign governments, which buy large minority stakes in U.S. assets. TCI is not a sovereign wealth fund, but rather it is an activist hedge fund, very much like the investment vehicles operated by U.S. investors such as Carl Icahn or Jana Partners' Barry Rosenstein , only TCI is operated out of the U.K. The insurgent's pre-eminent goal is for CSX to be sold or taken private. In either case, TCI cashes out with a profit, but most likely the railroad operator remains a U.S. entity by being sold to a U.S. railroad operator. If TCI gets its way and the company remains a U.S. entity, then any CFIUS review may not be warranted. - Ron Orol

Thursday, June 5, 2008

Richard Breeden's Short Slates Usher In World of Activism

Former Securities and Exchange Commission Chairman Richard Breeden claims credit for the birth of the activist hedge fund movement. Breeden, who is chairman of the activist hedge fund Breeden Partners LP, may have a point.

Other regulators have done things to give activists leverage, but under Breeden's chairmanship, the agency did three things in 1992 that transformed the way activist fund managers operate today. (He was chairman during President George H.W. Bush's administration between 1989 and 1993.)

He approved rules freeing up communications among investors to talk about performance issues at companies of which they were stakeholders.
Under Breeden the commission also adopted executive compensation disclosure rules, which were the precursor to updated CEO pay regulations approved under SEC Chairman Christopher Cox.

Probably the most important change under Breeden involved the "short slate" regulation that allowed fund managers to nominate one or two candidates to a company's board rather than replace the whole slate of directors, or in cases of staggered boards, all the nominees up for election. "The only options before the short slate rule was the Wall Street walk or replace the whole board," Breeden told The Deal. "That is, leave, abandon your interests and give up in frustration or take control of the business. Shareholders had the atom bomb, but they didn't have anything as a lesser remedy to fix the situation."

Breeden added that frequently smaller changes to the board are necessary: "Too many boards have static membership. People burrow in, and maybe they were great directors in the first five years of their tenure, but in years 16, 17, they don't tend to be as involved as they might once have been," he said. - Ron Orol

Tuesday, June 3, 2008

Change Wants Broker Votes Out at WaMu

A large activist labor-backed institutional investor just isn't satisfied with Washington Mutual Inc.'s Kerry Killinger's decision to step down as board chairman at the country's largest savings and loan. CtW Investment Group, an organization that advises pensions for unions belonging to the Change to Win labor group, wants more.

Sure, CtW is excited that Killinger announced Monday that he will resign from his chairmanship position -- though he remains at WaMu as CEO. And it's also happy that WaMu director Mary Pugh, president of investment firm Pugh Capital Management, resigned from the WaMu board in April. But, it is still peeved that two directors on the WaMu board, James Stever and Charles M. Lillis, remain on the board. Both WaMu directors had been the target of a "just vote no" campaign orchestrated by the labor union fund.

At the WaMu annual meeting April 15, company tallies showed that 41% of shareholders opposed Stever's renomination, and 41% opposed Charles M. Lillis, a director who was targeted by another union-backed pension fund. But CtW, estimated that by counting only votes of actual shareholders, the tally for removing 50.9% for Stever and 51.2% for Lillis.

"The vote to name an independent chairman excluded uninstructed broker votes, but the disputed re-election of directors James H. Stever and Charles Lillis may have resulted from the inclusion of these phantom votes," said CtW Investment Group research director Richard Clayton in a statement. "The board needs to disclose whether Stever and Lillis received a majority of votes cast by shareholders and to request the resignation of any director who did not."

CtW asserts that Lillis and Stever were put over the top because of so-called broker nonvotes, also known as broker discretionary votes. For clients who never indicate how to vote their shares, stockbrokers are permitted to cast ballots for them in "routine matters," such as uncontested director elections, as the brokers see fit. Critics deride this practice as corporate ballot stuffing, because brokers typically back management initiatives. For CtW, the broker-nonvote issue is particularly relevant because WaMu has a majority vote policy in its corporate governance guidelines.

Monday, June 2, 2008

Paulson to the Soveriegn Rescue

Treasury Secretary Henry Paulson is taking his pro-investor message on the road to the Middle East.

On Monday he told participants in the U.S.-U.A.E. Business Council in Abu Dhabi that the U.S. is "open" to investments from sovereign wealth funds, the investment arms of governments mostly located in Asia or the Middle East.

"As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from sovereign wealth funds," Paulson said. "We reject measures that would isolate us from the world economy."

Paulson's remarks come as some lawmakers in Washington raise concerns about possible political motivations of sovereign fund investment in the U.S. A small group of lawmakers in Washington, including Rep. Frank Wolf, R-Va., question whether sovereign funds, which recently made major investments in U.S. investment banks, could use those stakes as leverage for political goals down the road.

One key sovereign fund is based in Abu Dhabi, where Paulson made his speech. The Abu Dhabi Investment Authority reported a $7.5 billion investment in Citigroup Inc. in November. According to Paulson, that fund has taken a "constructive role on this important issue."

Paulson did temper his pro-investment comments by referring to an effort underway by the International Monetary Fund to develop a set of best practices for these funds. The IMF plans to make these recommendations, which are expected to require increased transparency and disclosure of decision-making plans and investment positions, by this fall.

"We are trying to quell calls for restrictions by urging sovereign wealth funds to endorse best practices to create a dynamic rise to the top and help allay concerns about opacity and systemic risks," Paulson said.

That may not ally fears of some lawmakers, who argue that codes of conduct and transparency will not discourage sovereign funds from making politically motivated investment decisions.

Expect more details about Washington's point of view on sovereign funds when Reps. Jim Moran, D-Va., and Tom Davis, R-Va., speak about the "Implications of Sovereign Wealth Funds for American Interests and U.S. Policies," at a National Council on U.S.-Arab Relations event on June 5. The two lawmakers, who are members of a House task force on sovereign funds, have just returned from a visit to meet sovereign fund managers and government officials in Abu Dhabi, Cairo, Dubai and Saudi Arabia, as part of an internal investigation. - Ron Orol

Friday, May 30, 2008

Inferior Class Activist says "No" to Family Discount

Discovery Equity Partners LP is hoping institutional investors recognize that investors are being kept down by a dual-class structure at a Florida broadcaster, Spanish Broadcasting System Inc. Now the insurgent fund manager has some high-profile help.

The insurgent fund manager's "just vote no" campaign targeted at the board of the Coconut Grove, Fla.-based broadcaster received the support of the influential proxy adviser Institutional Shareholder Services Inc., according to regulatory filings late Thursday.

Discovery Equity Partners, which owns a 9.8% Spanish Broadcasting stake, launched its "vote no" campaign in April based on its argument that the company has a "family discount" because control of the board is placed in the hands of the company's CEO, Raul Alarcon, through a super-majority voting structure. This leaves institutional and individual investors, who hold a huge chunk of the broadcaster's economic value, out in the cold.

The insurgents recognize their "just vote no" campaign won't have any binding impact on the company's board, but it could just embarrass the CEO into effecting some change for shareholders prior to the business' June 3 annual meeting. The activists want Spanish Broadcasting to establish a special committee, hire an investment banker and consider a sale.

"Discovery recommended that the Board establish a Special Committee to hire an investment bank to pursue three specific options; going private, a sale of the company, and a revamping of the Company's corporate governance," the activists wrote. "Based on its meetings with several major media players, Discovery believes that industry consolidation has made Spanish Broadcasting a prized and highly strategic target for takeover."

Their efforts may be boosted by a study released in May 2008 by professors at Harvard, Yale and Stanford, which examines "the inferior class" and why companies set up dual-class voting structures. - Ron Orol

Thursday, May 29, 2008

SEC and CFTC merger? Ask Elisse Walter

Treasury Secretary Henry Paulson's plan to meld the Securities and Exchange Commission and the Commodities Futures Trading Commission is already experiencing major backlash from key lawmakers and regulators, but a new commissioner expected to join one of these agencies has the kind of experience that could help this process move forward.

Elisse Walter, who awaits Senate Banking Committee confirmation to become a Democrat commissioner at the SEC, spent several years at both agencies. She joined the SEC in 1977 and rose to become deputy director of the SEC’s Division of Corporate Finance. She also worked at the Commodity Futures Trading Commission as a general counsel.

Its unclear whether the two agencies will actually take steps to combine because there are many regulatory and legislative challenges to overcome. But Walter’s experience at both agencies could help trounce a communications breakdown between the CFTC’s "principles-based process for market oversight" and the SEC's more stringent rules and regulations. Don’t expect movement soon. Paulson has pegged the CFTC-SEC merger as a mid-term goal as part of his blueprint, meaning its not an immediate priority, but it also is not something he wants to see take place in the distant future. Of course, a lot depends on who succeeds Paulson in the next administration and how congressional committees on Capitol Hill will work out their own differences.-- Ron Orol

Thursday, May 22, 2008

Activists on the March

For those observers predicting activist hedge fund managers would quietly go home and wait out the current credit crunch and lackluster deal market (you know who you are), I present a recent report put out by FactSet SharkWatch.

The activist hedge fund manager research firm calculates that there were a record number of 152 new activist campaigns in the U.S. alone during the first quarter of the year. According to FactSet SharkWatch, that record beat out the previous quarterly record-- the last three months of 2007.

“These campaigns include formal proxy fights as well as other solicitations and activist campaigns typically calling for action to enhance value, but also include to a lesser extent those aimed at enhancing corporate governance practices,” the research firm explained in an April 2nd report.

The 152 campaigns included 50 new proxy contests, “the most announced in any quarter since we began tracking proxy fights in 2001,” FactSet reported. (The previous most active quarters for new proxy fights were the first quarter of 2007 and 2006 with 40 and 32, respectively)

Along with the new proxy contests, activists obtained a director positions at 32 companies. Activists that obtained board seats through proxy contests between January and March? FactSet lists: Breeden Capital Management LLC, Crescendo Partners LP, Harbinger Capital Partners, MCM Management LLC, Pershing Square Capital Management, Ramius Capital Group, LLC, Relational Investors, LLC, Steel Partners II, L.P., and Third Point LLC.

Why the huge expansion of activist investing? Blank Rome LLP partner Barry H. Genkin explains it this way: “What I think is going on is a lot of hedge funds are finding it difficult to produce the returns they have traditionally been able to generate, particularly as stock prices drop. They have had to figure out ways to improve returns and many have found the activist strategy a means to that end. Activists have been very successful to producing better than average returns.” -- Ron Orol

Monday, May 19, 2008

Carl Icahn Seeks a Bidding War

Although Carl Icahn's proxy contest at Yahoo! Inc. is his way of pushing for a bidding war between Microsoft Inc. and Google Inc. for the Web portal, search engine and news aggregator, analysts at Stifel, Nicolaus & Co. are wary of antitrust issues.

In a report released Monday entitled "Microgoohoo Tango: Gov't Would Scrutinize Deal But Microhoo Easier than Goohoo," research firm Stifel, Nicolaus & Co. argues that a Yahoo-Microsoft combination would be easier to achieve regulatory approval in Washington than a Google-Yahoo hookup, but both would have problems.

"While a Google deal could be structured to gain Department of Justice approval, we think generally that potential deal structures involving Microsoft would likely be easier for the government to swallow," according to the report.

The report adds: "Any deal between Yahoo and either Microsoft or Google would be subject to extensive government review and could be subject to a variety of headaches, stretching from delays to conditions to outright rejection."

The regulatory team at Stifel Nicolaus adds in their report that they believe the government would not permit Google to buy Yahoo. But they add that a Google-Yahoo alliance and outsourcing deal could be structured in a way that might be approved by regulators in Washington. "From an antitrust perspective, the key issue for a Google outsourcing deal, we believe, is whether the deal would be structured in such a way that Yahoo maintains the ability and incentive to continue to develop its own search/advertising product," the report adds.

Last week, Icahn launched a proxy contest to replace 10 directors on Yahoo!'s board. If Icahn achieves his goal, expect him to bring in executives that are more amenable to a major deal. Whether it involves Microsoft buying Yahoo! or Yahoo! forming a larger partnerhsip with Google, only time will tell. -- Ron Orol

Thursday, May 15, 2008

Trend of Activists Targeting Media Continues

Jana Partners LLC and Sandell Asset Management Corp. are the latest activist investors to win a campaign against a media company as target Cnet Networks Inc. agreed to a $1.8 billion offer from CBS Corp. With the latest victory, insurgent shareholders will certainly ratchet up their efforts against other media companies.

In fact Cnet is just one of a growing number of news media companies under fire by activist investors. As CBS and Cnet announced their deal, the father of activist investing, Carl Icahn, officially launched his latest campaign against a media company, Yahoo! Inc. Icahn issued a 10-man proxy contest against the search engine giant that also has a major news aggregation business. The goal of his proxy: He wants Yahoo! to return to the table to complete a sale to Microsoft Corp.

Icahn is no stranger to the media industry. He and other insurgents spent roughly three years nudging Time Warner Inc. into spinning off its cable division, which the old-media-meets-new-media company announced last month. The CNN parent also completed a major stock buyback to help keep institutional investors at bay in 2007 when Icahn contemplated and later chose not to launch a proxy contest.

Icahn aside, other activists are almost as prodigious in their efforts against media companies -- most notably Harbinger Capital Partners, which won two efforts in 2008.

Harbinger's biggest win in 2008 was against the New York Times Co., where Harbinger and Firebrand Partners LLC, alleging a flawed digital strategy, sought to nominate a minority slate of director candidates to the board. They ultimately settled for two seats and cancelled their proxy contest.

Then last month, Harbinger won its efforts against Media General Inc., whose shareholders elected three directors from Harbinger's slate. The new directors include former broadcasting executive J. Daniel Sullivan, investment manager F. Jack Liebau Jr. and turnaround consultant Eugene I. Davis.

Under pressure from activist investors K Capital Management LLC of Boston, Sun-Times Media Group Inc. announced in February it was considering a sale of assets. K Capital, the company's largest shareholder, with a 9.7% stake, has been a vocal advocate for a sale.

Small capitalization activists are targeting media companies lately too. Spanish Broadcasting System Inc., a Coconut Grove, Fla.-based operator of 21 radio stations and two television stations, is the target of activist fund Discovery Equity Partners LP and a "just vote no" campaign it launched in April against the media company's board and CEO Raul Alarcon.

In some sense the activists were emboldened not only by Icahn's efforts against Time Warner, but by the successful efforts Private Capital Management launched against Knight Ridder Inc. in 2005. In less than a year, Private Capital, a 18.9% Knight Ridder stakeholder and another investor, Southeastern Asset Management Inc., had pressed the news giant into auctioning itself to Sacramento, Calif.-based newspaper publisher McClatchy Co. for $4.5 billion.

Some common activist arguments associated with their campaigns: The newspapers have had a difficult time of late with revenue growth as advertising dollars migrate away from traditional newspapers to the Internet and other media (thank you, and Craigslist). Meanwhile with new media companies, the complaint is that they haven't captured the ad dollars quick enough. - Ron Orol

Wednesday, May 14, 2008

Three Reviews Likely for Italy's Biggest Arms Dealer

Italy's biggest arms maker Finmeccanica SpA's $5.2 billion acquisition of DRS Technologies Inc. will require at least three separate reviews by U.S. government agencies -- and it better not forget to file notice with all three.

In addition to a review by the interagency Committee on Foreign Investment in the U.S. and an examination by the Defense Department's Defense Security Service, Finmeccanica will also make sure it files a notice with the State Department's Directorate of Defense Trade Controls.

The DDTC is required to conduct a 60-day review of the transaction. DDTC has jurisdiction to review the transaction because DRS manufactures products that are on the U.S. export control list of munitions and technology.

But Finmeccanica got into a little hot water not too long ago with the DDTC as part of its 2005 acquisition of BAE System Avionics Ltd. Finmeccanica renamed the division Selex Sensors and Airborne Systems Ltd., which is based in Overland Park, Kan.

However, it seems someone didn't submit a form with the DDTC. According to a notice posted on the DDTC's Web site: "BAE understands that this authorization should have been obtained to address those Department of State licenses and agreements (active and expired) to which BAE Systems Avionics was a party." - Ron Orol

Friday, May 9, 2008

Paul Atkins Leaves Mixed Record for Activist Hedge Funds

With the departure of Paul Atkins hedge fund managers lose a Securities and Exchange Commission official that had a mixed record on their core issues.

On the one hand, Atkins, a Republican commissioner, was an ardent opponent of then-SEC chairman William Donaldson’s effort to have hedge fund managers register with the agency and open up their books to periodic inspections. Sure, many hedge fund managers already do that to draw in institutional investors who otherwise would allocate capital elsewhere. But others wished he was chairman so that they could avoid the costs of registering. Donaldson eventually joined with two Democrat commissioners to adopt hedge fund manager registration, but the whole rule was thrown out by an appeals court in D.C. thanks to activist fund manager Phil Goldstein and his Bulldog Investors.

On the other hand, those same activist fund managers probably weren’t so excited about Atkins opposition to Donaldson’s effort to allow investors to nominate director candidates on corporate ballots, the controversial “shareholder access” effort at the SEC. The measure is supposed to help activist institutions more than activist hedge funds, but most managers including Carl Icahn support the change, arguing it would give them more leverage at their target corporations.

Atkins also is a big backer of University of Texas Professor Henry Hu and his effort to reel in activist fund managers employing tactics involving “empty voting” or “hidden morphable voting” to advance their insurgency campaigns. Those insurgent fund managers employing cash settled equity swaps to pull some liquidity strings will likely be happy that Atkins is saying his goodbyes.

He’s not gone yet. Atkins promises to wait until his successor arrives. -- Ron Orol

Thursday, May 1, 2008

Sun Capital Wins Proxy Fight-- Next Up, a sale?

Activist Investor Sun Capital Securities Group LLC is reaping the reward of its support from proxy advisory services firm Institutional Shareholder Services. Next stop, sale?

The insurgent investor on Thursday reported successfully winning three seats on the board of Furniture Brands International Inc. According to a proxy solicitor, Sun Capital won its three seats, for Alan Schwartz, Ira Kaplan and T. Scott King, by “a substantial margin.”

Their successful proxy contest comes after ISS last month recommended to it institutional investor clients that they should support the three-person dissident slate.

With directors on board, the activists may also be one step closer to buying the business. In addition to its proxy contest, the activist fund had made an unsolicited bid for the furniture maker on Feb. 21.

Furniture Brands shunned Sun Capital’s advances, saying that the strategic plan it launched in the fall of 2007 is “on track, and earnings momentum is developing.” A key part of that plan is to switch to an operating company model designed to generate $40 million to $50 million in annual cost savings.

The St. Louis, Mo.-based furniture-making company also points out that should Sun Capital win its contest to put its nominees on its board, these directors would have a conflict of interest because they would be "less likely to fight for value" once another bid was put on the table.

Nevertheless, Sun Capital’s vice president, Jason Bernzweig, was, unsurprisingly, excited by the result:

“The election of Sun Capital’s nominees is a victory for all Furniture Brands shareholders. Today’s results demonstrate shareholders’ desire for constructive change at Furniture Brands, and we are gratified by their support for our nominees. Our nominees look forward to working with the other Furniture Brands Board members, management and the Company’s talented employees to enhance performance and create long-term value for the benefit of all shareholders,” he said, in a statement. -- Ron Orol

Wednesday, April 30, 2008

Icahn plus SWF = Time Warner cable division sale

A public activist effort that Carl Icahn began in 2005 and one that involved a sovereign wealth fund finally is coming to fruition.

That year Icahn began publicly pressing Time Warner Inc. chairman Richard Parsons to split up the media giant. On Wednesday, April 30, Time Warner Chief Executive Jeffrey L. Bewkes said the media giant would complete the spin off of Time Warner Cable, a divestiture Icahn had called for three years earlier.

In 2006, Icahn reluctantly backed down from his proposed proxy contest to press for a cable spin off and stock buyback. At the time he had the support of a number of activists including Jana Partners, SAC Capital Advisors LLC, and Franklin Mutual Advisers LLC. But they cumulatively had roughly a 3% stake in the company, not enough to move the institutional investors who backed Parsons.

A little known fact about Icahn’s efforts to break up Time Warner: He cooperated with a sovereign wealth fund in Dubai to press Time Warner to a sale.

According to a Feb 16, 2006 Schedule 13D filed by Istithmar PJSC, a Dubai based sovereign fund, its subsidiary, Istithmar Media Investments, which bought a 2.39% Time Warner stake, entered into a relationship with Icahn:

“In connection with [Istithmar Media Investments] acquisition of the Participation Notes and possible future investments in the Common Stock, [Istithmar] have retained Icahn Institutional Services LLC, an entity wholly owned by Mr. Carl Icahn, to serve as the investment advisor to [Istithmar Media Investments] with respect to [Istithmar Media Investments] economic exposure to shares of common stock through the participation notes and possible other investments in common stock.”

Istithmar PJSC is a Dubai-based firm that is owned by Dubai World, also the parent company of DP World, the Dubai owned company that sought unsuccessfully to acquire operations at six U.S. Ports. Lawmakers on Capitol Hill changed the law governing foreign acquisitions of U.S. assets after a U.S. government panel initially approved DP World's plans to acquire the six U.S. port operations. DP World backed down amid the resulting political uproar and agreed to sell its operations here to a U.S. entity.

Icahn’s Istithmar agreement was terminated shortly after it was formed, but it showed how in less politically charged days, a combination between an activist and a sovereign fund to press for changes at a U.S. company was not unthinkable. That kind of combination would raise the ire of lawmakers in Washington if it were to happen in today’s climate. -- Ron Orol

Friday, April 25, 2008

Activsts vs. Charming Shoppes: So Far, it looks like a Tie

A duo of activist investors seem to be having mixed luck with their efforts to press for changes at Charming Shoppes Inc., a Bensalem-based multi-brand retailer of women's plus-size apparel.

Hedge funds Crescendo Partners and Myca Partners have launched a proxy contest to install three director candidates on the company’s board at its May 8th scheduled annual meeting. But influential proxy advisory services company Glass Lewis & Co. only recommended one of the dissident duo’s slate, Michael Appel. The proxy advisory services company did not recommend institutional investors vote for Crescendo director Arnaud Ajdler and Myca official Robert Franfurt.

(A split recommendation is a favorite tool for the proxy advisory service firms in cases where they don’t want to appear too supportive of the dissidents or the management-backed incumbents)

Even so, Appel’s presence will likely help advance the share-value improvement goals of Crescendo and Myca. Appel’s experience as a retail-focused managing director at Quest Turnaround Advisors would likely bring a deal-oriented focus to Charming Shoppes. Though, company officials complain that his lack of experience as a director or in the apparel industry make him a bad candidate. Too bad for Charming Shoppes.

Also, largely in response to the activists, Charming Shoppes announced Friday it has retained Banc of America Securities and Lehman Brothers as financial advisors to assist the company in looking into “strategic alternatives” such as selling its “non-core misses apparel catalog titles in order to provide a greater focus on its core brands, Lane Bryant, Catherines and Fashion Bug, and to enhance shareholder value.”

That kind of restructuring is exactly the kind of thing activists are looking for. Even if Crescendo and Myca don’t get all three of their candidates on the company’s board, they can always come back next year with additional nominees. -- Ron Orol

Monday, April 21, 2008

Sun Capital's Furniture Brands Battle Heats Up

Activist investor Sun Capital Securities Group LLC may be one step closer its goal of putting three directors on the board of Furniture Brands International Inc. and, possibly, its goal of taking over the business.

The insurgent investor on Monday received the support of Institutional Shareholder Services, the influential investor proxy advisory firm, for all three of its candidates.

In addition to its proxy contest, the activist fund had made an unsolicited bid for the furniture-maker on Feb. 21.

Furniture Brands has shunned Sun Capital's advances, saying that the strategic plan it launched in the fall of 2007 is "on track, and earnings momentum is developing." A key part of that plan is to switch to an operating company model designed to generate $40 million to $50 million in annual cost savings.

The St. Louis, Mo.-based furniture-making company also points out that should Sun Capital win its contest to put its nominees on its board, these directors would have a conflict of interest because they would be "less likely to fight for value” once another bid was put on the table. -- Ron Orol

Thursday, April 17, 2008

New 13D Head at SEC

After five months without an official director, the Securities and Exchange Commission reportedly has a new head of mergers and acquisitions, Michele Anderson. And she's going to have her hands full.

The agency hasn't officially announced it yet, but Anderson was promoted to become the Corporate Finance division's new chief of the Office of M&A. Anderson replaces Brian Breheny, who in November moved up to become deputy director for Legal and Regulatory Policy at the agency.

High on Anderson's agenda will be figuring out what do about the agency's Schedule 13D rules when it comes to "cash-settled swap agreements" and other synthetic securities deals that activist hedge fund managers enter into with derivatives dealers. Do such swaps give activist hedge funds more control over a company's fate than they would like to let on? That's a question Anderson will try to figure out.

Recently, a railroad operator, CSX Corp., sued activist investor Children's Investment Fund Management LLP, charging that it violated federal securities laws by holding back information on how many shares it owned. Whether activist fund managers are forming illegal groups with derivatives dealers or just indirectly influencing the amount of shares being dumped on the market, Anderson's job will be a busy one.

In addition to 13Ds disclosure, Anderson will also be busy with cross-boarder business combination exemptions.

But Anderson comes prepared. Even though she worked recently as a legal branch chief in the Office of Telecommunications, she worked in the M&A office a few years earlier. - Ron Orol

Wednesday, April 16, 2008

Telos Wins Costa Brava Litigation

You win some and you lose some. Lately, hedge fund Costa Brava Partnerships III LP, has been on the losing end of their litigation activism approach.

Late Tuesday, April 15, the Circuit Court for Baltimore City dismissed a claim against information technology contractor Telos by the Boston-based hedge fund that the company was being managed for the benefit of insiders. The Costa Brava suit sought to have the court put Telos into receivership, wresting control away from existing management.

That loss piles up on a Jan. 7, Circuit Court of Baltimore City in Maryland order dismissing two claims against Telos by Costa Brava.

Costa Brava filed suit in 2005 claiming it was owed roughly $79 million in dividends.
Telos is privately owned, with 75% of its common stock owned by British investor, John Porter, while the rest is controlled by British investors, Telos management and employees. In 1989, the company issued publicly traded and redeemable preferred shares, some of which Costa Brava purchased, but the defense contractor didn’t pay dividends on the shares since their inception. In October 2005, shortly before a scheduled redemption date for the shares, a three-person committee of independent directors at Telos recommended that the company repurchase the entire package of preferred shares at what the panel considered a "substantial" discount.

One month later Costa Brava filed suit against the company and directors, arguing that it hadn't paid its obligations to preferred shareholders and that insiders were violating their fiduciary duty to investors. By August 2006 a special Telos litigation committee of six directors including two independent directors representing preferred holders, two Costa Brava representatives, set up by the company to investigate the matter, resigned.

Later, the company found other independent directors and set up a second special litigation committee that found that the counts against directors should be dismissed and that it was in the best interest of the company for the lawsuit to come to an end.

The Baltimore court in January concluded that the special litigation committee members "performed their duties in good faith" and "undertook a reasonable investigation" of Costa Brava's claims. The judge also dismissed claims against all directors, including Telos CEO John B. Wood. On April 15, the court also dismissed the activists other claims.

Costa Brava charged that when the ERPS was issued in 1989, Telos repeatedly stated in its Registration Statement to the SEC that the owners and prospective purchasers
of the ERPS should expect payment of [payment in kind] “PIK dividends in the first six years of the ERPS (1989-1995). But as part of the April 15 order: Judge Albert J. Matricciani, Jr. disagreed:

“…[I]n the judgment of the court neither the [Exchangeable Redeemable Preferred Stock] ERPS registration statement nor the company charter and Articles of Amendment and Restatement can be read to give rise to a contractual obligation with Telos to pay plaintiffs accrued [payment in kind] PIK dividends at the time of the first scheduled redemption date or anytime thereafter.”

The litigation activism approach wasn’t all bad news for Costa Brava. In a separate but related case, Costa Brava won a civil suit in Circuit Court of Fairfax County, Va., it launched in December 2005 against Telos' independent auditor, Goodman & Co (there were no damages awarded). The activist hedge fund alleged in the suit that Telos hire 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. Later, Goodman & Co. filed an appeal motion after the trial and on March 25, the Fairfax County judge reaffirmed the jury’s verdict.

Judge Bellows’ ruling of March 25: “As to sufficiency, the Court finds that there was sufficient evidence to support the jury’s verdict [that Goodman & Company aided and abetted a breach of fiduciary duty by Telos and its Directors].” Not introduced in the Fairfax case was a February letter from the SEC giving Telos a clean bill of health, accounting wise. -- Ron Orol

Saturday, April 12, 2008

Did blogger Jackson help Icahn?

Two months after Carl Icahn failed to have his nominee elected in a proxy contest at Motorola Inc. in 2007, YouTube video blogger Eric Jackson jumped into the fray. His activism strategy used a YouTube video he dubbed "Plan B for Motorola" and an Internet Wiki to attract support from other micro-investors like himself. Like Icahn, Jackson wanted Motorola CEO Ed Zander gone, much of the board replaced and a new head of Mobile Devices with a clear strategy.

When the company revealed major financial problems in its second quarter 2007 financials two days later, Jackson says his effort began receiving major support. He got the backing of roughly 150 investors with about $600,000 in shares, less than 1% but significant nonetheless.
"They didn't move quickly enough, so starting late last year, we started saying that the best course of action, given the extent of the problems in the company, was to break it up," Jackson says.

And while Icahn's two-year public prodding is certainly the major reason why Motorola decided Wednesday it will split into two independent, publicly traded companies, Jackson's novel approach to activism is lifting eyebrows. Anne Faulk, chief executive of Swingvote Inc. in Atlanta, says Jackson may be the vanguard of how shareholders and executives communicate with each other. Certainly, some of Jackson's goals -- having Motorola executive Ed Zander resign and seeing that the company divide into two units -- have been accomplished.
The same can be said of Jackson's efforts last year at his first YouTube activist campaign at Yahoo! Inc., which also has gone through serious changes since his insurgency began. Jackson sent out a "Yahoo! Plan B" YouTube video and later launched a "just vote no" campaign to persuade shareholders of the widely used Santa Clara, Calif.-based portal to expel its CEO, Terry Semel, from his chairmanship along with six others on the company's 10-person board. He also set up a blog, "Breakout Performance," a account and a LinkedIn Web site to spread dissent.

Semel later did resign, and now Microsoft Corp. has a $31 a share, or $44.6 billion offer on the table.

With the stock of Motorola still low at around $10 a share, don't expect Jackson to end his insurgency just yet. In February Jackson launched a $2 million activist fund, Ironfire Capital LLC. Even with few dollars behind him, corporations should beware of Jackson's YouTube "Plan B." - Ron Orol

Friday, April 11, 2008

Steel Partners Vs. EnPro, Point Blank, GenCorp, Rowan and Sapporo

Steel Parnters II LP seems to be on a bit of a tear of late.

The activist fund, managed by Warren Lichtenstein, on Friday settled a pending proxy contest with EnPro Industries Inc. Lichtenstein agreed to call off his pending proxy contest after Enpro agreed to expand its board size to nine members from eight and add Don DeFosset, the former chief executive of Walter Industries Inc., and one of Lichtenstein’s nominees (A number of activist investors, including Pirate Capital, sought to have Walter broken up in 2005. Steel held a large Walter stake at the time).

Separately, Point Blank Solutions Inc. announced April 8 that its board would look into strategic options such as a sale of the company after Steel Partners launched an agitation campaign at the body armor production company. Though, Steel Partners hasn’t wrapped up its efforts there. Point Blank later postponed its annual meeting by four months leading Lichtenstein to say this in an April 10th letter to the company’s CEO Larry Ellis: “The board, under your leadership, has gone astray during the past 48 hours by its unilateral postponement of the 2008 annual meeting.”

In addition to efforts at Point Blank and EnPro, Warren has garnered settlements at both GenCorp Inc. and Rowan Companies, in the past few months. Now watch out for his expected rash of campaigns in Japan. His campaign for change at Sapporo Holdings Ltd., for example, is ongoing. -- Ron Orol

Thursday, April 10, 2008

Soveriegn Fund Lobby Group Formed In Washington: Now They Just Need Some SWF Members

The head of the recently formed Washington lobby group for sovereign wealth funds, the investment arm of foreign governments, expects the U.S. government will take action regarding these investment vehicles in 2009-- and that decision will help other countries compete for these funds’ investments.

“We believe the US will take some actions regarding SWF in 2009 and we believe these steps will serve as a model for other nations,” said Thomas Karol, president of Sovereign Investment Council , a recently formed organization to represent sovereign funds in Washington, at a conference hosted by The European Institute. “Some will follow the US model and some nations will use that model to compete with the US for sovereign investments.”

Despite his reservations, Karol and the newly minted Sovereign Investment Council, have yet to gain any members from the asset class the organization represents. Typically lobbying shops are set up by a group of businesses who seek to have a voice in Washington, not the other way around. In any event, expect Karol to launch a major global wooing initiative to try and bring some real sovereign funds to the council’s table.

In his address, Karol argued that lawmakers and other legislators are contemplating a litany of responses to the phenomena of SWFs and these measures will likely discourage sovereign fund investment in the U.S.

One bill, that was being considered by the California state legislature, would have precluded state pension funds, the California Public Employees’ Retirement System, or CalPERS, and California State Teachers’ Retirement System, from engaging in any transaction with private equity companies that are affiliated with sovereign funds (Many U.S. buyout shops have sovereign funds as limited partners and the burgeoning Chinese sovereign fund, China Investment Corp. Ltd., or CIC, has a $3 billion investment in Blackstone Group LP). This could have a chilling action, Karol said, not just for sovereign funds but also U.S. buyout shops, while at the same time drive buyout shop investment to other countries such as the U.K.

Karol also expressed concern by an initiative launched by Senate Finance Committee chairman Max Baucus and ranking member Charles Grassley to have the non partisan joint committee on taxation to analyze the U.S. tax rules that apply to SWF, which are tax exempt entities. “Countries may yield to political pressure to use tax laws to make SWF act in a certain manner to retain that tax exemption,” Karol argued. “Or worse, change the entire government to government tax relationship.”

Finally, Karol raised concern about pressures put on sovereign funds by critics that argue the government investment vehicles should periodically, perhaps once annually as is the case with a sovereign fund in Norway, disclose their positions. “If people know what you’re going to do with your portfolio: everything you buy will be expensive and everything you sell will be cheap,” Karol said. “In certain countries in the middle east, sovereign funds may have investments they may not want to have disclosed to their neighbors. It may not be prudent to tell the people around you, who might be heavily armed, just how rich you are. You may not want to tell people that you are investing with someone who may not be friendly with the country around you.”

That may be true, but many in other countries may want to know about a sovereign wealth fund’s positions and links to the government in Sudan responsible for the Darfur humanitarian crisis, for example. -- Ron Orol

Tuesday, April 8, 2008

Sovereign Wealth Funds and Washington

The Committee on Foreign Investment in the United States, an interagency panel that examines U.S.-foreign deals for national security issues, will be getting some sought after clarity by the end of the month when the Treasury Department releases draft rules based on a law adopted last year revising the panel's review processes.
A key consideration will be whether sovereign wealth funds, the investment arms of foreign governments based mostly in Gulf and Asian countries, will fall under the new regulations when they buy large minority stakes in U.S companies. (SWF have bailed out a number of U.S. financial institutions struggling with subprime-related mortgage write-downs, including Citigroup Inc. and Morgan Stanley.)
The U.S. Treasury's draft rules are expected to clarify that even those foreign investments falling below the 10% threshold can be investigated on security grounds. For many CFIUS observers in Washington, that news simply means the status quo will continue.
CFIUS is a complex agency, and even with the new statute, foreign investments or acquisitions of U.S. assets can be investigated by the panel if there is a "controlling interest," which in many observers' minds can include allocations below 10% stake investments. But nevertheless, the question of what constitutes control is one that is being debated in Washington.
Patrick Mulloy, a member of the intergovernmental U.S.-China Economic and Security Review Commission, says CFIUS leaves "control" to be defined by agencies that make up the interagency panel. Golden shares and their super-voting rights aside, some observers argue that a sovereign fund could own a small passive stake of less than 10% but still have a controlling impact on a corporation.
But others have said ownership of less than 10% stakes can represent a noncontrolling minority investment, which wouldn't trigger a CFIUS review. John Douglas, partner at Paul, Hastings, Janofsky & Walker LLP in New York, says some sovereign funds have been taking stakes slightly below 10% because any allocation above that threshold in an institution that has a commercial bank would trigger a Federal Reserve Board review. That Fed review, they believe, could also trigger a CFIUS review.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., and a number of other lawmakers, argued in a Sept. 27 letter to Treasury Secretary Henry Paulson that in some cases, "passive foreign ownership interests in assets in the U.S., including through sovereign investment funds, may have national security implications."
Sometimes sovereign funds have taken much less passive roles in investments. Would one argue that the Qatar Investment Authority's decision to team up with activist investor Nelson Peltz last year to buy a 4.5% stake in Cadbury Schweppes plc and agitate for change to be a controlling stake? Qatar Investment Authority is an arm of the emirate's government.
Looks like minority sovereign investments, be they 5%, 10% or 15%, will still fall under the CFIUS purview.

Monday, April 7, 2008

Pershing Pursues Books at Borders

Activist investor Pershing Square Capital Management LP has agreed to buy Boarders Group Inc.’s international units, but that deal may be far from done.

The insurgent on Monday revised its financing agreement with Borders with a deal that is more favorable to the mega bookstore chain. In it, Pershing Square will pay $135 million for the bookstore’s international chain, up from $125 million. The revised deal also includes a lower interest rate of 9.8% on $42.5 million senior secured term loan offered by the activist fund.

But even with the transaction to sell the international division to Pershing Square, Borders has retained the right to continue looking for strategic buyers for these units. “As previously stated, Borders Group believes its international subsidiaries are worth substantially more than the amended backstop purchase offer price and the company has retained the right to continue its ongoing strategic alternatives process for these businesses,” Borders stated in its release Monday.

A sale of the international units to a strategic buyer, particularly if one pays a significant amount, is likely an outcome Pershing Square would prefer over its agreed to deal. In fact, activists are known to strike deals or make bids for companies or divisions simply to put them “in play” so that other strategic buyers come in and take them over. That may just be what Pershing Square is looking for here.

Pershing Square has an 18% Borders stake and one of the fund’s partners, Richard T. Mcguire III, was elected to the company’s board on Jan. 17.

Other activist-types have congregated at Borders as well Kenneth Shubin Stein of Spencer Capital Management LLC and Glenn Tongue, a value investor at T2 Partners Group LLC reported in February on a 13D SEC filing that they owned a 4.7% Borders stake.

Borders Group has hired J.P. Morgan Securities Inc. and Merrill Lynch & Co. to help explore strategic alternatives including a sale of all or parts of the company. - Ron Orol

Link to press release by Borders:

Friday, April 4, 2008

George Soros on Credit Default Swaps

International financier George Soros thinks the financial tension in the markets is going to ease out but there are still a number of landmines left to navigate around.

Case in Point: Credit Default Swaps, or CDOs, a synthetic financial instrument that acts as an insurance policy against debt defaults.

“This is a totally unregulated market hanging like a Damocles sword over the financial system,” Soros told reporters on a conference call hosted by the New America Foundation Friday. “You don’t know whether your counterparty is good for its payment or not.”

This is a concern that others in the financial markets have expressed. Jonathan Sablone, partner at Nixon Peabody LLP in Boston, discusses it in my “An open book?” news story in The Deal magazine.

Soros suggested that there is an active and unregulated $45 trillion CDS market that has become unhinged from actual hedging against defaults. Regulators and industry players need to create a clearinghouse or exchange where these swaps can be settled according to well established rules is critical to avoid an implosion, Soros adds. “Until that happens the market is nervous and creates this counterparty risk,” he said. “People who have these contracts need to know whether or not the counterparties are good or not and you will only know that when you know who the counterparties are.”

He contends that the amount invested in the CDS market is roughly equal to 1/2 the entire U.S. household wealth or five times the U.S. national debt.

The biggest player, Soros ponits out, is J.P. Morgan Chase Inc., which has roughly $16 trillion to $18 trillion in CDS’s while Bear Stearns Cos. has $2.5 trillion CDSs. But Soros notes that a large chunk of these financial instruments are held by individual hedge funds. Hedge funds holding CDS obligations both as parties and counterparties and observers are concerned that the inability of highly leveraged counterparties to meet their obligations on such instruments could lead to a "cascade" failure through the system.

Soros says he takes a middle of the road approach to market regulation. “I have found myself to be a critic of both market fundamentalism in the west and a critic of state regulation in the former Soviet Union,” Soros said. “We have to stop swinging from one extreme to the other.” -- Ron Orol

Thursday, April 3, 2008

Another Media Company is Target of Activists

Another media company has become the target of an activist hedge fund manager.

Spanish Broadcasting System Inc., a Coconut Grove, Fla.-based operator of 21 radio stations and 2 television stations, is the target of activist fund Discovery Equity Partners LP and a “just vote no” campaign it launched Wednesday against the media company’s board and CEO Raul Alarcon.

“We are being regularly contacted by shareholders wishing to share their concern over the management of the company and, in many cases, to express their skepticism with respect to the board’s willingness to confront Mr. Alarcon with our recommendations,” the activists wrote in its letter which was attached to a Securities and Exchange Commission filing on Thursday.

Discovery Equity’s foray at Spanish Broadcasting, a company with a $121 million stock market capitalization, is just the latest in a string of recent activist campaigns against media companies. Other more high profile targets include: New York Times, Knight Ridder, The Chicago Sun-Times, Media General Inc. and Reuters

The activist investors, which own a 9.8% Spanish Broadcasting stake, want to see the company’s board set up a special committee, strike a contract with an investment bank and consider either a going-private transaction or a sale to a strategic buyer. Discovery Equity Partners wants Spanish Broadcasting to give it a list of shareholders so other investors can be contacted for their just vote no campaign. “The purpose of the inspection demand set forth above is to enable Discovery to contact other record and/or beneficial owners of SBS’s shares for the purpose of communicating with those owners regarding the withholding of their votes in the election of directors at SBS’s 2008 annual meeting of Stockholders and other matters pertinent to that meeting,” the activists wrote. . -- Ron Orol

Wednesday, April 2, 2008

Dillard's and Barington Agree on Candidates

A settlement reached late Tuesday over the future of Dillard’s Inc. is a mixed bag for both the activist investors seeking change and the management of the department store chain.

Insurgent investor Jim Mitarotonda of Barington Capital Group LP and another fund, Clinton Group Inc., nominated a slate of four directors for the company’s 12-person board. But he agreed to call of his campaign after Dillard’s agreed to one of his candidates and three other mutually agreed upon individuals.

Nick White, a former Wal-Mart executive, was on Mitarotonda’s initial slate of nominees and he was included on the board. Three other individuals, James A. Haslam III, chief executive officer of Pilot Travel Centers LLC, R. Brad Martin, former chairman and CEO of Saks Inc. and Frank R. Mori, co-CEO and president of Takihyo Inc. and former president and CEO of Anne Klein Inc., were also put on the board. These three were not part of the Barington-Clinton slate.

“Both the board and management welcome the perspectives and insights of our proposed new directors,” Dillard’s Chairman William Dillard II said in a statement.

And even though Mitarotonda did not get most of his chosen candidates on the board -- one of the candidates he put up for election was himself -- he did get a slate that is likely to be more independent of management than the incumbents it replaces. (Eight of the 12 directors are controlled by the Dillard’s family through their ownership of Class B shares).

Also, with this partial victory, Mitarotonda was able to have the company agree to re-examine its real estate and capital obligations. It also agreed to close department stores that were underperforming and subject new locations to return on capital requirements. The activists had hoped Dillard’s would complete a sale-lease back of owned properties, a typical tactic considered by insurgents seeking to have corporations raise capital for other purposes such as stock buybacks or special dividends. Even though that didn’t happen, the company’s steps to put a razor eye on real estate is a step in the activists' direction.
And there is always next year. -- Ron Orol

Friday, March 28, 2008

Motorola Takes Steps to Appease Icahn

When it comes to activist campaigns at super-sized technology companies like Motorola Inc., patience is the name of the game, especially when you're Carl Icahn. The megatechnology company said Wednesday it will split into two independent, publicly traded companies, thus separating its struggling mobile-phone business from its broadband and mobility-solutions operations.
This, of course, is a large part of what Icahn wanted. But even with victory, Icahn continues to agitate for change at Motorola, whose stock is still in the doldrums at around $10 a share. Icahn wrote a letter to Motorola that despite its agreement to split the company up he still wants management to install a candidate, Keith Meister, he had put up for election to the board in a proxy contest. Meister directs funds controlled by Icahn. Icahn also raised questions about Motorola's decision to wait until 2009 to complete its breakup plans.
And this contest was not the first time Icahn pressed for changes at Motorola. Icahn started his public efforts in 2007 by launching a proxy contest to nominate a director candidate for the board of Motorola, which had a stock market capitalization at the time of $42 billion. Icahn lost his campaign, but it was close -- he received 717 million votes while the incumbent director attained 931 million.
This was considered a major loss for Icahn, but was it really? Motorola agreed to cut 7,500 jobs, saving it roughly $600 million, in what can be argued was a partial response to Icahn. The restructuring continued when Motorola's CEO Ed Zander resigned.
Icahn himself hiked his stake to 6.3% and took his campaign into high gear. He launched a new proxy contest at the Schaumburg, Ill., company in an attempt to secure records relating to the hiring of senior executives and corporate strategy, especially regarding its mobile-devices business. The raider-turned-activist spoke to institutional investors at a Riskmetrics event in New York on Feb. 6 about activism in general -- but his real goal was to gain support for his insurgency at Motorola. His effort to gain their support appears to have worked -- its impossible to win an activist campaign at a large capitalization company without the support of institutions.
Icahn's success prompted other activist type investors to back his endeavors, and more institutions privately backed his campaign. One of the more interesting supporters is YouTube activist Eric Jackson, who launched his own effort.
Jackson last year used a YouTube video he dubbed "Plan B for Motorola" to attract support from other micro-investors. Like Icahn, Jackson wanted Zander gone, much of the board replaced and a new head of Mobile Devices with a clear strategy. He got the backing of roughly 150 investors with about $600,000 in shares, less than 1% but significant nonetheless. "They didn't move quickly enough, so starting late last year, we started saying that the best course of action, given the extent of the problems in the company, was to break it up," Jackson said.
And now Icahn is still pressing for changes. He still must be patient. - Ron Orol

Monday, March 24, 2008

Glass Lewis on CtW's activist effort at Morgan Stanley

Proxy advisory firm Glass Lewis & Co.’s recommendation Monday on Morgan Stanley is a mixed bag for an activist labor union backed fund.
CtW Investment Group, an organization that advises pensions for unions belonging to the Change to Win labor group, on March 12 had launched a “just vote no’ campaign, calling on investors to vote against Morgan Stanley chief executive John Mack from his role as chairman of the brokerage firm. They also wanted to see investors vote against two other directors, Robert Kidder and Howard Davies at the company’s scheduled April 8 annual meeting.

Glass Lewis gave the investors a split decision, recommending against the re-nomination of Kidder and Davies, but opting to support the company’s decision to keep Mack in the position of board chairman. The advisory firm said Mack’s removal would be too much for the company: “We believe shareholders should support Mr. Mack’s continued tenure,” Glass Lewis reported. “Simply put, we believe that additional turnover at the CEO position would not serve their best interest at this time.”

Ctw have a different perspective. This is what they had to say March 12: “We believe the circumstances surrounding these risk management failures demonstrate the need for stronger independent leadership at Morgan Stanley. Consistent with best governance practice, we believe John Mack should not serve simultaneously as Chairman and CEO, and are urging shareholders to vote “Against” Mr. Mack to convey that message to the Board.”

This is what they had to say about Davies and Kidder: “We believe that directors Davies and Kidder failed to maintain the integrity of Morgan Stanley’s risk management, and thus bear central responsibility for the firm’s $9.4 billion in subprime-related write-downs in 2007.”

Wednesday, March 19, 2008

Barington Dillard's Campaign Steps Up

Activist investor Barington Capital Group LP has taken its insurgency at Dillard’s Inc. up a notch Wednesday by nominating a minority slate of four director candidates to the department store chain’s 12 person board.

One of the candidates is Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, and a known governance expert.

The likelihood that Barington would launch a proxy contest at the Little Rock, Ark.-based company was high after the hedge fund on March 4 asked Dillard’s to provide a list of shareholders. Having a list of shareholders enables Barington to reach out to other investors and gain support for their proxy contest.

The activist group was founded by director James Mitarotonda, who early in his career was a Bloomingdale's employee. Barington and its partner, the Clinton Group, together own a 5.2%.

Other activist investors and shareholders interested in backing either Barington or the incumbent board still have an opportunity to buy shares. The annual meeting is scheduled for May 17 and shareholders that have a stake as of March 31 are eligible to vote shares at the meeting.

In addition to Elson, the Barington nominees include Mitarotonda, Nick White and
Eric S. Salus, who both have retail backgrounds.

The activists are recommending operational and strategic improvements, such as eliminating its dual-class stock structure, which gives the founding family control over the chain; evaluating its senior management team, which is overseen by the founding family; and shuffling the company's real estate portfolio by closing underperforming properties. The activist funds also would like to see the company complete a sale-lease back of owned properties, a typical tactic considered by activist investors seeking to have corporations raise capital for other purposes such as stock buybacks or special dividends. -- Ron Orol

Monday, March 10, 2008

Activsts Target Corporations That Provide The News

Under pressure from activist investors K Capital Management LLC of Boston, newspaper group Sun-Times Media Group Inc. announced last month it was considering a sale of assets. K Capital, the company's largest shareholder, with a 9.7% stake, has been one of the most vocal advocates for a sale. Last month, the hedge fund demanded a "radical restructuring" of the board and repeated its demands for a sale. A sale may soon be forthcoming, but don't expect this to be the last news organization to be targeted by activists.

K Capital Management is one of a growing number of activist hedge fund managers targeting newspapers, wire services and other news media corporations over the past couple years. Since 2005, Knight Ridder Inc., Time Warner Inc., CNet Networks Inc., Reuters Group plc and The New York Times, all corporations that provide news, have all become the focus of activist hedge fund managers.

Some common activist arguments associated with their campaigns: the newspaper industry has had a difficult time of late with revenue growth as advertising dollars migrate away from traditional newspapers to the Internet and other media. Meanwhile with new media companies, the complaint is that they haven't captured the ad dollars quick enough.

The most high profile activist hedge fund success in recent years is Private Capital Management's campaign to press Knight Ridder Inc. to auction itself to the highest bidder. By November 2005, Private Capital held an 18.9% Knight Ridder stake. Shortly after that Southeastern Asset Management Inc. converted its passive stake into an active 13D. By June 2006, the activists got what they really wanted when Knight Ridder completed an auction and closed a deal to sell itself to Sacramento, Calif.-based newspaper publisher McClatchy Company for $4.5 billion.

Another recent high profile activist campaign is taking place at the New York Times Co., where Harbinger Capital Partners and Firebrand Partners LLC, alleging a flawed digital strategy, have been seeking to nominate a minority slate of director candidates to the board. Separately, activist investor Jana Partners has been agitating for change at CNET Networks Inc., a San Francisco-based media and technology news company.

Jana Partners has also taken on Time Warner Inc., following in Carl Icahn's footsteps. Icahn launched an effort to have the media giant split up, but only succeeded at having the New York based company expand its stock buyback program, repurchase $20 billion in shares by the end of 2007 and cut $1 billion in costs. Icahn told CBS's 60 Minutes in a program that aired Sunday that despite the fact he didn't succeed in having the company split up, he still faired ok. "It's a little bit of he who laughs last. I mean, well you know, maybe I made a mistake but I made $300 million on it. So is that too bad? Okay. I mean you know, so I guess I was wrong," he told 60 Minutes.

Meanwhile in 2007, Children's Investment Fund turned its attention to news and data information provider Reuters Group plc, a financial data provider and newswire service, which later agreed to merge with Thomson Corp. for $17.2 billion. The deal was approved by federal regulators in February, and is expected to close soon.

Recent insurgencies at Yahoo! Inc. show that even with new technology media organizations, this trend of activist funds taking on news organizations is here to stay. - Ron Orol

Thursday, March 6, 2008

Shareholder List Key to Barington's Dillard's Campaign

After launching a public activist campaign to press for changes at department store chain Dillard’s Inc. last month, Barington Capital Group LP has taken their insurgency up a notch.

The activist group, founded by director James Mitarotonda, on Tuesday afternoon asked Dillard’s to provide it with a list of shareholders, according to a filing with the Securities and Exchange Commission.

The request indicates to many observers that Barington and its partner, the Clinton Group, who together own a 5.2% stake, are on the verge of launching a proxy contest to install director candidates to the Little Rock, Ark.-based company’s board. (Having a list of shareholders enables Barington to identify reach out to other investors and gain support for their endeavors).

The company has a duel-class stock structure which gives the founding family control over the chain and eight of its 12 board seats. But Barington and Clinton may seek to put a minority slate of directors on the company’s board.

Analysts at Credit Suisse seem to think so as well.

“We estimate that as of 12/31/07, 12% of Dillard’s shares outstanding were held by institutions that could be classified as potential activists. With Dillard’s proxy statement to be filed in late April and annual shareholders meeting usually scheduled for mid-May, we believe there is likely to be an attempt from activist holders to acquire at least one independent directors’ seat. While company insiders control 2/3 of the voting stake, the reminder that there exists a vocal minority could attract some attention to these shares,” a March 4 Credit Suisse report wrote. -- Ron Orol

GenCorp Activist Effort Drags On

A five year old activist campaign by activist investor Steel Partners at GenCorp. Inc. shows that insurgencies are not all short-term affairs.

One month after Steel Partners resurrected an activist push at the Rancho Cordova, Calif.-based aerospace conglomerate with a proxy contest to install six directors, Steel Partners and GenCorp. late March 5 settled up- the latest step in a campaign that has lasted since 2002. Steel Partners agreed to drop its proxy contest and in return GenCorp agreed to install three Steel Partners nominees including the activist fund’s manager, Warren Lichtenstein. They replace three incumbent directors that management nominated for the company’s March 26 annual meeting.

Lichtenstein argues in a Securities and Exchange Commission filing that he had been seeking to reach some sort of settlement with the company which makes rocket propulsion systems and components, but was unsuccessful. The proxy contest was a "last resort," the filing added.

The activist investor offered $700 million in 2004 to buy GenCorp, after attacking the conglomerate for its subpar financial performance and questioning the company's dealmaking record. After GenCorp rejected the offer, Lichtenstein launched his first proxy contest. In consultation with Steel Partners, GenCorp agreed to add a corporate governance expert to its board, in return for which Lichtenstein dropped his proxy contest. As part of the deal, Lichtenstein was permitted to send a nonvoting representative to GenCorp's board meetings.

Steel Partners isn't the only activist battling GenCorp management. Sandell Asset Management Corp., which owns a 6.9% GenCorp stake, launched its public insurgency at the company in March 2005. That year Sandell requested that GenCorp make more changes to improve governance and also sell a chemicals unit. Sandell Asset portfolio manager Thomas Sandell said in letter addressed to GenCorp's board (and included in a recent government filing) that he wants the company to remove a raft of anti-takeover defenses, among them a poison pill and staggered board elections, which make it difficult to mount change-of-control proxy contests. He wants annual elections for the whole board. Sandell also wants GenCorp to allow large stakeholders to call special shareholder meetings.-- Ron Orol