HEADLINE: WALL STREET JOURNAL SEES RISE IN INSTITUTIONAL INVESTOR

WALL STREET JOURNAL SEES RISE IN INSTITUTIONAL

INVESTOR ACTIVISM

Money Managers Raise Activism Among Investor

By ROBIN SIDEL

Staff Reporter of THE WALL STREET JOURNAL

April 13, 2001

Move over, gadflies and pension funds. The money manager is on your turf.

With the springtime annual shareholder-meeting rite in full swing, dissatisfied shareholders are aggressively pushing companies to find new ways to unlock shareholder value. But this year, it isn't just the traditional agitators making themselves heard at these gatherings. Among the growing ranks of activists are mutual-fund managers and even hedge-fund managers, who historically have been relatively passive. And corporate boards are actually paying attention.

A big reason for the stepped-up activism: 2001 marks the first year of significant stock declines since more money managers started doubling as activist shareholders. This has given credence to their demands for board seats, auctions and revisions to executive-compensation packages.

Proxy experts, in fact, attribute much of the year's activity to the sickly stock market, noting that the resurgence of conservative value investing has heightened shareholder attention on companies that were ignored in the technology boom.

"Because there is more turbulence and volatility in the market, professional money managers want to take a more active role in the investments they make. In turbulent times, the value is not just in the stock picking, it's in helping move the direction of the company," says Bruce Goldfarb, senior managing director at proxy firm Georgeson & Co.

Adds Michael Useem, professor of management at the University of Pennsylvania's Wharton business school: "Investment companies would often quietly throw their support behind a proxy challenge, but [now] the idea of investor activism has been legitimized. In a down-market period, investors are going to be anxious to use whatever tactic they can to extract returns on their investment."

Certainly, the annual meeting season so far has featured the usual raft of hostile takeover bids, this time by Weyerhaeuser Co. and Royal Dutch/Shell Group 's Shell Oil Co. for Willamette Industries Inc. and Barrett Resources Corp., respectively. And there also have been moves by well-known aggressive investors like Carl Icahn, who is seeking to gain control at Visx Inc., and Samuel Heyman, who wants board seats at Hercules Inc.

But proxy advisory firm Institutional Shareholder Services is tracking some 50 situations where proxy fights could develop -- double the number seen at this time last year. Companies that are targets of this shareholder ire include Equity Oil Co., Longs Drug Store Corp. and Hungry Minds Inc., publisher of CliffsNotes and the popular "For Dummies" series.

Companies also are under attack from lesser-known names, including Edward Lampert of ESL Investments, Robert Chapman of Chap-Cap Partners, Alan Snyder of Snyder Capital Management and Warren Lichtenstein of Steel Partners.

"We get actively involved to protect our investment if we have to," says Mr. Lichtenstein, who was nominated this year to fill a vacant spot on the board of United Industrial Corp., in which Steel Partners holds a 10.5% stake. The nomination follows an unsuccessful attempt the year before to get onto the board of the producer of defense, energy and transportation systems.

Mr. Lichtenstein has repeatedly said the company's stock is undervalued and has suggested the company may need to put itself up for sale. Shares of United Industrial have risen to nearly $14 from about $8 in 1999, when Mr. Lichtenstein bought a 6.3% stake, a return far outpacing that of the broader market.

Mr. Lichtenstein also has urged Mayor's Jewelers , in which he has a 10% stake, to put itself up for sale. "When you go into a situation and you own 10% to 20% of a company, you can't just go away," the money manager says.

"We believe Mr. Lichtenstein's experience will be beneficial as we work together to continue and accelerate UIC's momentum in building shareholder value," a United Industrial official says.

Many other such companies are listening to their activist shareholders. In fact, people who track potential proxy situations say companies these days are increasingly willing to negotiate with their money-manager critics.

"We're seeing a much greater willingness to deal. When the market was going gangbusters, they were much less willing," says Patrick McGurn, director of corporate programs at ISS.

As for investors, "there is willingness on our clients' part to have us take the initiative to walk the walk and talk the talk. In the past, I may have gotten painted as the bad apple. Now, it's more mainstream," says Mario Gabelli, chief investment officer at money-management firm Gabelli Asset Management in Rye, N.Y., who recently targeted Navistar International Corp.

Shareholders of the truck and engine maker in February approved a Gabelli-led resolution calling for the company to repeal its poison pill antitakeover mechanism. The board of Navistar, which also has been targeted by activist shareholder Herbert Denton of Providence Capital, is expected to consider the nonbinding resolution this month.

For Nashua Corp., meanwhile, a decision to nominate activist shareholder Mark Schwarz of Newcastle Partners to the board evolved from a series of discussions he held with board members and the company's new chief executive. Shareholders will vote on the board nominees next month.

"He showed a real interest, and he was very concerned about shareholder value. He was a person we could talk to and have a positive relationship with," says Andrew Albert, Nashua's chairman and CEO, who was impressed by Mr. Schwarz's request to tour the company's facilities.

Mr. McGurn of ISS expects the pace of shareholder activism to continue through the year. The bylaws of some companies permit shareholders to call special meetings to consider certain issues. "The number of situations is mind-boggling compared to prior years. Activity clearly increased in 2000, and I expect 2001 to be substantially higher than 2000," he says.