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

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

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

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

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, Monster.com and Craigslist). Meanwhile with new media companies, the complaint is that they haven't captured the ad dollars quick enough. - Ron Orol

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

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

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