bloggingbuyouts

When you look at the work of 13-D wielding activist investors, you usually find the following demands repeating themselves over and over:

• Try to sell the company to a private equity firm or strategic buyer.
• Buy back stock and/or pay a dividend.
• Get rid of the current management and/or board of directors.

The frequency of these requests has given many activists a reputation -- in my opinion largely undeserved -- as short-term oriented paper shufflers looking to pump up the stock price and move on.

Then there's Nelson Peltz, who focuses on that governance-oriented stuff too but is also unique in that he makes very specific comments about marketing: Wendy's isn't playing up its freshness in its advertising, Heinz's ketchup packets weren't good, Tiffany's was too focused on gifts, etc. This fascinating piece in Fortune looks at the investment methodology of this restaurant and branding expert.

Unfortunately, Mr. Peltz's publicly-traded company, Triarc (NYSE: TRY), has been a poor performer of late. But if you're sold on his ideas, it just might be a good time to take a look.

Recent data from FactSet's SharkWatch service demonstrates that activist investors are enjoying a remarkable level of success. Often the filing of a 13-D and a bit of saber rattling are enough to get companies to snap to attention: since 2006, activist shareholders have been awarded 218 board seats at public companies -- and only had to go through proxy fights for 28 of them. Most of the time, companies willingly offer seats as a truce.

The reasons behind this trend are interesting. It may be that, unlike the 1980s when there was great suspicion of "corporate raiders," most investors recognize that having outsiders with large paid-for-in-cash stakes on the boards is almost always a good thing; their interests are aligned perfectly with outside shareholders, and so big investors are willing to support them. Current executives know that and decide that it's better to concede than go through a proxy fight that will take up resources and, very possibly, lead to the ousting of the entire board.

In a column (subscription required) in The Wall Street Journal, Dennis K. Berman makes a bold prediction about where the future for activists might lead: "As power leaches away from the board room to the shareholder, much will travel along with it. That includes the relationships that form the basis of so much board room power. . . the incentives are changing for everyone, meaning that some investment banks will push ever closer to the best activist investors, dispatching whatever small stigma remains with such work. The same goes with the best executive talent, who may choose to align itself with a group of outside investors in the same way that private-equity firms develop a stable of top managers."

The irony here is that this is exactly the power structure that was developing in the 1980s when Michael Milken's junk bonds were fueling hostile takeovers. That era ended for all the wrong reasons when Milken was hauled off to jail on trumped up charges and a slew of bad deals collapsed amid excess, but it was the beginning of an important new world where the goal of increasing shareholder value is a reality instead of a myth. If top investment banks demonstrate a willingness to work closely with activists, shareholders and the economy as a whole will prosper.

Take it Private! is a series looking at one company each week that, in my opinion, has no reason for being public. To find these companies, I screen for the following:

• high insider ownership
• a history of solid profitability
• a paltry Price/Earnings and/or Price/Cash Flow multiple
• a stagnant stock price accompanied by low volume indicating a lack of interest in the stock.

My purpose in highlighting these companies? This screen can be a good way to find deep value stocks, especially companies that may be attractive to a strategic buyer, private equity firm or management-led buyout at a premium to the current share price. However these profiles should not be interpreted as a recommendation to buy a certain stock. Let's take a look at Rex Stores (NASDAQ: RSC), a stock that I've followed with interest since 2004. Rex Stores owns and operates 111 electronics retail stores in 34 states, a business that has struggled in the face of lower-priced competitors from Best Buy (NASDAQ: BBY) to Wal-Mart (NYSE: WMT)

MicrocapTrader made a compelling and difficult to refute argument about the stock's value in this post from April of 2007: "In any event, assigning a proper valuation to RSC's property brings its tangible book value up to ~ $15 per share without even considering its inventory, worth another $6 per share at its carrying value."

And then there's the ethanol.

In one of the least convincing editorials in recent memory -- no small accomplishment -- Service Employees International Union international president Andy Stern argues that "short-term capital infusions from private-equity funds will only make the banking crisis worse, by encouraging risky behavior and abusive banking practices."

He's so wrong. Risky behavior is encouraged by compensation systems that reward returns regardless of risk, supine directors lacking true independence, and an ownership structure so diffuse that there is no one to enforce accountability.

A private equity fund with a large equity stake and no ulterior motives -- they make money from increased shareholder value, not fees and bonuses -- which paid cash for their shares is the best thing for shareholders. The one valid point that Stern makes is this: "It's hard to imagine private-equity funds resisting the urge to double down on the tactics banks have used to drive profits in recent years – unfair lending practices, higher fees, and exorbitant interest rates on credit cards and other consumer products."

That's probably true -- private equity funds may push public companies to improve their profitability, but that's their job. Consumer protection is the domain of regulators, and publicly-traded banks have a responsibility to increase their profits as much as possible within the confines of the law.

We shouldn't blame private equity for lax regulation.

Leave it to private equity to try to bring back Michael Jackson.

The Wall Street Journal recently reported that "Colony Capital, which owns the Las Vegas Hilton and is a major shareholder in closely held Station Casinos, is in discussions with Mr. Jackson to get him back onstage and in the spotlight via a long-term stand in Las Vegas."

Colony Capital may just have the leverage to get something done with Mr. Jackson: he owes them $25 million after the firm acquired the debt from Fortress Investment Group.

The plan is to try to revive Jackson's career with a stint in Las Vegas and, eventually, build a Thriller-themed hotel-casino there. I'm not so sure. Las Vegas has resuscitated -- or at least prolonged -- the careers of a lot of entertainers, but it's hard to think of anyone who carries as much baggage as Michael Jackson.

Similarly, a private equity firm might be able to turn around a struggling brand but, to my knowledge, the industry has never attempted to work its magic on a brand that a large percentage of Americans believe has molested children (with the possible exception of Chrysler). And legal system be darned, that's what many people associate him with.

The struggles of the big boys in private equity have been well chronicled: Blackstone Group's (NYSE: BX) declining stock price, the Linens n' Things bankruptcy, and so on.

But NexCen Brands (NASDAQ: NEXC), a smaller, less diversified buyout shop, is also in trouble, according to The New York Times. The firm's portfolio companies include Bill Blass, Athlete's Foot and ice cream chain MaggieMoo's. With other brands including Pretzel Time and Great American Cookies, the fast-growing company had planned to make millions in the franchising business. But in recent months NexCen has fired its CFO, delayed the filing of its 10-Q, disclosed that there is "substantial doubt" about its ability to continue as a going concern, and announced that investors should no longer rely upon its 2007 financials.

Basically, NexCen is looking like yet another failed conglomerate, at least for now. Rather than buying, improving, and selling businesses like many private equity firms, NexCen had hoped to acquire various franchise brands and run them under a larger umbrella, taking advantage of synergies and opportunities for integration. Yes, that's the dreaded S-word. I wonder how many billions of dollars in shareholder value have been destroyed by promises of synergy.

With the company badly in need of cash, it's currently looking to sell some or all of its brands. But in this market, that might not be so easy. Athlete's Foot and Pretzel Time sure didn't create a lot of value for NexCen shareholders.

More bad news for Blackstone:

• Both GAAP and "economic net losses" in the latest financial results from Blackstone

• Lawsuits filed against Blackstone on behalf of shareholders

Shares of Starbucks (NASDAQ: SBUX) were up more than 6% on Friday after Nelson Peltz disclosed a stake of less than 1% in the company.

The Wall Street Journal reports that "John Glass, an analyst at Morgan Stanley, said Mr. Peltz could urge Starbucks to cut spending and use more licensing or franchising in opening locations. The money saved from that could go to buying back shares or a larger dividend for shareholders."

Perhaps. He very well could urge Starbucks to do that -- but take a quick look at the chart for the company that Mr. Peltz is chairman of -- Triarc (NYSE: TRY). The stock closed at $6.69 on Friday, after beginning 2007 at more than $20 per share. And how's the corporate governance over there? One company that engaged in a proxy fight with him blasted him with this:

Triarc received a corporate governance rating of 21.5, exceeding only 21.5% of all companies in the S&P SmallCap 600 and ranking it in the bottom quartile. Separately, Corporate Library gave Triarc an 'F' on overall board effectiveness -- the lowest possible rating.

Most likely Peltz's stake is a nonissue and will lead to no changes. I certainly don't buy that it's a good reason for the stock to add more than half a billion dollars to its market cap in a single day.

I and many others have been critical of Usana Health Sciences (NASDAQ: USNA) for a while now. Fraud fighter Barry Minkow has argued quite compellingly that the company's business model amounts to little more than a cleverly disguised pyramid scheme. How did he figure that out? He read the company's filings with the SEC.

Since Minkow's report, the stock has taken a beating: an auditor resigned, numerous credentials flaps were uncovered, the SEC opened (and closed, sadly) an investigation, and the company has repeatedly failed to meet the growth expectations of the Street.

Now founder Myron Wentz -- who owns half the stock through Gull Holdings -- is offering to take the company private at $26 per share. His reasoning? In the press release announcing the offer, Wentz explained, "Going private will provide significant cost savings and will allow USANA's talented management team, employees, and Associates to focus solely on providing industry-leading products and building USANA's strong Associate network without the pressures and distractions brought on by the public market."

Exactly! Going private will allow the company to operate its shady business model free from scrutiny. The selling of overpriced vitamins based on the promise of the potential to earn a six-figure income working from home has earned a lot of money for Usana. But having to disclose the business model in black and white has attracted the scorn of critics.

Now Usana can go back to what it does best: luring people in to a multi-level marketing business without having to disclose as much information about what a rip-off it is.

But before shareholders get too excited, they might want to take a look at Wentz's history of offering to buy the company. Back in 2002, Wentz made a similar offer (for a lot less money), but then Wentz later announced, "To allow our shareholders to benefit from any increased value, I have decided to terminate my current effort to acquire USANA's operating assets on the terms previously announced."

What a swell guy! This is starting to remind me of the whole Parlux (NASDAQ: PARL) buyout that never was fiasco.

I'm a big fan of shareholder activism on the part of small investors -- communicating with management and posting on message boards to let other investors know what you think. In an interview with TheDeal.com, I said that "I really believe that the internet is already starting to and will, much more so in the future, make it easier for very small shareholders to effect change through reasoned arguments on blogs and message boards. If you think about it, you really shouldn't need to be a 13-D filer to have your concerns heard. If your ideas make sense, they should be listened to."

Posting on a Yahoo! message board, an investor posting under the handle "daleysboy" describes the corporate governance outhouse that is Lenox Group (NYSE: LNX). The entire post is worth a read, but here are some samples:

That's 23 people acting in Executive positions, with a total 2007 average cost of $484,465 per Exec, and a total expenditure of $11,142,704 in 2007. Why did Lenox need 6 CMAG consultants supporting Marc Pfefferele, with them acting in Senior Management positions? Isn't that what the "real" Senior Managers were supposed to be doing, with Mr. Pfefferele directing their efforts? Lenox paid all of these Executives $11 Million plus, to lose over $15 Million on the bottom line in 2007 . . .

If anyone looks at the data released by Lenox, plus SEC filings, they will see it strewn with info on Lenox Executives, and CMAG, regarding wage compensation, consultant fees, buying and selling of stock, cash bonuses, long-term incentives, equity incentives, performance shares, success bonuses, retirement remuneration, perquisites, option exercises, pension benefits, golden parachutes upon termination, retention bonuses, and on and on and on. It appears that someone is preoccupied with placing a lot of emphasis and effort on Executive Compensation, as compared to current and future concerns for stakeholders, employees, and customers. Who are the ones financially protected if Lenox goes belly-up? . . .

The shareholders of Lenox need a true watchdog on the Board of Directors to scrutinize Lenox's, or CMAG's, plan for success. Proxy votes at the Annual Meetings just don't cut it.

I followed the Lenox Group train wreck for awhile back in March of 2007, and I took my own shots at the company's board of directors. Given the state of the company's balance sheet and the poor prospects for its business, it's probably too late for any activist to save Lenox.

But the fact is that former CEO Susan Engel walked away with millions after engineering the acquisition that destroyed the company. Since then, board members and turnaround executives have continued the looting, leaving shareholders out in the cold.

As an investor, I wouldn't want to get any closer to Blockbuster's (NYSE: BBI) patently stupid effort to buy Circuit City (NYSE: CC) than I have to.

But HBK Investments-- which owns 9% of Circuit City and 8 percent of the class A stock of Blockbuster and 5 percent of the company's class B stock -- has filed a 13-D on the matter, attaching a letter urging Circuit City to give Blockbuster access to the material it needs to perform due diligence. HBK added that If Blockbuster withdraws its offer because of a lack of cooperation by Circuit City's Board, we believe Circuit City shareholders will be immediately and substantially damaged."

The fund also added that it might be able to provide financing for the deal, and expressed its confidence in the prospects for a combined company: "We believe that over $300 million per year in increased EBITDA could be realized following an acquisition by maximizing cost savings between Circuit City and Blockbuster."

That's a pretty impressive suggestion, and one that flies in the face of what many analysts have said about the proposed deal. But HBK didn't grow to around $14 billion in assets with stupid decisions, so maybe they're onto something.

In a sign that the current leadership at Charming Shoppes (NASDAQ: CHRS) might be interested in a turnaround instead of just suing shareholders, the company has hired Banc of America Securities and Lehman Brothers to help explore strategic alternatives for its non-core catalog titles. Charming Shoppes' major brands include Lane Bryant and Fashion Bug, but it also owns catalog brands Old Pueblo Traders, Bedford Fair, Willow Ridge, Lew Magram, Brownstone Studio, Intimate Appeal, Monterey Bay Clothing Co., Coward Shoe and Figi's.

In a press release, chairman, president and CEO Dorrit J. Bern said that "We have received a number of inquiries from qualified third parties and are evaluating several alternatives for our non-core apparel catalog titles which would allow us to focus exclusively on and accelerate the growth of our core plus apparel businesses, with the goal of enhancing shareholder value ... Our ongoing review of our operations and strategic assets has determined that we are able to commit to further reduce our budgeted capital expenditures by an additional $20 million during the current fiscal year ... This reduction is in addition to our previously announced reduction of $43 million for fiscal year 2009. In total, this $63 million reduction in planned capital spending for the current year now represents a decrease of nearly 50% compared to our fiscal year 2008 capital expenditures."

Nelson Peltz isn't too happy with Wendy's (NYSE: WEN), which quickly rejected two of his bids for the company, including a plan to combine Wendy's with Arby's, a fast-food chain owned by Triarc (NYSE: TRY), a company chaired by Mr. Peltz.

Normally I'm pretty sympathetic to the campaigns of activist investors but Peltz has a pretty poor record on corporate governance. During his proxy fight with Heinz back in 2006, the company responded to his calls for change with this: "Triarc received a corporate governance rating of 21.5, exceeding only 21.5% of all companies in the S&P SmallCap 600 and ranking it in the bottom quartile. Separately, Corporate Library gave Triarc an "F" on overall board effectiveness – the lowest possible rating."

So it appears that Peltz may not be walking corporate governance talk. But then again, Wendy's has also been a prodigious destroyer of shareholder value of late, so this is kind of like trying to decide between leaving the kids with Britney or K-Fed.

Without even looking at the numbers or knowing anything about the deal, most people could probably tell you that Apollo Group's acquisition of Realogy, parent company of Century 21 and Coldwell Banker, at the height of the real estate boom is probably not doing too well.

And that's just the beginning of the private equity giant's woes. There's also the Linens n' Things deal on the brink of bankruptcy and Claire's Stores. The New York Times takes a look at the company and its top man, Leon Black, who continues to invest aggressively in spite of the troubled market. Apollo came close to buying billions in debt from Citigroup last week.

The Times piece has an interesting quote from Black: "You can get equity-type returns from debt instruments that may be a better play than pure equity right now, where you can't get leverage."

Apparently the lack of liquidity in debt has made that market a lucrative stomping ground for vultures. If Black and other are content to look for value buying back debt they issued a few years ago at 40 cents on the dollar, we could see the private equity slowdown continue for awhile -- that would be bad news for stock market investors who look to buyout shops to take companies private at substantial premiums.

Sometimes brilliant people armed with spreadsheets screw up badly. Sometimes, as in the case of Linens n' Things, they screw up really badly.

In February of 2006, Apollo Management agreed to take Linens n' Things private for $1.3 billion. Now, less than two years later, the company is poised to file for bankruptcy, according (subscription required) to the Wall Street Journal. The company employs 17,000 people, with 590 stores in 46 states. The company lost $242 million in 2007.

The Journal reports that "Linens also is working to avoid or delay filing for bankruptcy protection by meeting Monday with its lenders and largest vendors to work out an agreement, but a deal is unlikely."

Linens n' Things is a victim of two of the economic woes generating the most media attention: the housing downturn and the credit crunch. In addition, lower-cost suppliers of similar products like Wal-Mart (NYSE: WMT) are taking market-share. People who are having trouble paying their mortgages tend not to obsess over thread count.

On another note, housewares retailer Pier 1 Imports (NASDAQ: PIR) appears to be making strong progress on its turnaround, with its first comparable sales gain in 17 quarters and a return to profitability -- its first quarter in the black in 12 quarters.

But its huge debt load makes it tough for Linens n' Things to weather economic storms.

Dubbed the "Queen of the Corporate Jungle," Dutch-born Holocaust survivor Evelyn Y. Davis has developed a reputation as a corporate gadfly's gadfly. Every year, she travels around the country going to annual meetings and berates executives for pretty much everything: excess compensation, excessive perks, lack of accountability, lack of action, poor results and even their own personal weight gains, according to the USA Today.

Ms. Davis believes that companies are conspiring to hold their annual meetings on the same days to prevent shareholders from being able to attend. Speaking about mortgages, she said that everyone should get 20-year fixed mortgages with 30% down, and that every home buyer should have to take a mandatory class on financial literacy. I certainly agree with the last part of that.

Check out the interview, she's always entertaining, at the very least. Is she a grandstanding publicity hound? You bet. But the sorry state of corporate governance needs more attention, and bless her heart for talking about it long before anyone else was.

Keep going Ms. Davis!