Not so long ago, the formula for activist investing was simple: Buy a 5% stake and file a 13-D, blasting the company's management for its poor performance and excess compensation. Raise hell until they put the company up for sale and a private equity firm takes advantage of the company's low stock price. Then cash out, having made yourself and your fellow shareholders rich. What if the company headed into the toilet after it was taken private? Not your problem.

Those days are long gone. With the private equity business the quietest it's been in a long time, there are no third parties ready to scoop up bargain-priced stocks after activist shareholders push them to the auction block. Increasingly, activist shareholders are having to stick around for the long-term, pushing for improved corporate governance and better management as a way to increase returns.

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.

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'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.

It's increasingly clear that Motorola Inc.'s (NYSE: MOT) plan to split into two companies to separate its ailing cell phone business from its other telecommunications equipment operations is not appeasing shareholders. The latest sign came Monday evening at the company's shareholder meeting, where investors did more than just make a lot of noise. They passed a resolution loosening management's control over executive pay by making it subject to an annual shareholder vote.

FT.com, which covered the meeting, quotes shareholders as saying they were "embarrassed and outraged" by the company's decline,and calling the plan to split into two a "cop out" that does nothing to revive the company's cell phone business.

In the days leading up to the shareholder meeting, activist investor Eric Jackson, who heads a group called Motorola Plan B representing 135 investors holding 600,000 Motorola shares, had urged shareholders to vote against three longstanding Motorola board members, who he said had failed to learn the lessons of two boom-and-bust cycles (the StarTac and the Razr) -- namely, that phones are fashion, and fashion gets old very fast.

Continue reading at TechConfidential.com

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.

Wendy's International Inc. (NYSE: WEN) looks like it is about to have activists coming right up under its floors. Trian, Triarc Companies (NYSE: TRY), Nelson Peltz, Peter May, and others have all sent a letter according to an SEC Filing.

The activist group saw two separate proposals rejected within 24-hours, and it looks like the group is going to go after shareholders directly to garner up support. Wendy's is set to report earnings on April 25, and the activists have essentially said "don't do anything before that date."

What is interesting about this activist situation is that the valuations in the past were ugly and no one would have been able to "make shinola out of you know what" with where the stock was trading. It almost had a phantom premium associated with it merely because of activists and merely because it was "troubled" and in need of being fixed. But a serious pullback in a stock changes things.

So far, the board has been able to rebuff all outside efforts. There are many provisions the company has to defend itself, but things might be heating up quite a bit here.

Continue reading more detailed analysis at 247WallSt.com.

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!

Electronic retailing outhouse Circuit City (NYSE: CC) has lost more than 80% of its value over the last few years, and now lead director Mikael Salovaara has decided (subscription required) that he will condescend to meet with the head of Wattles Capital Management LLC, which owns 6.5% of the company's stock.

What a nice guy! This company's board of directors has presided over a pretty amazing destruction of shareholder value while rivals like Best Buy (NASDAQ: BBY) have prospered, and he's willing to take time out of his busily destructive day to meet with a major shareholder.

Mr. Salovaara said in a letter filed with the SEC that the company's nominating committee would not meet with Wattles' nominees for the board of directors, given that Wattles had conditioned the meeting on the company's agreement to support his nominees. That seems like an unreasonable request -- why should there be special conditions for a conversation? -- and Mr. Salovaara wrote that "I trust that we can resolve this point in a personal conversation."

This matter appears destined for a proxy fight, and you have to like Wattles' chances. Given the company's performance in recent years, most shareholders would probably support change of any kind.

A recent panel at Tulane's Corporate Law Institute discussed the rise of activist investors, with participants including a corporate public relations man, representatives from proxy solicitation firms, a representative of a firm that helps companies fight activists, and a lawyer who has represented William Ackman, one of the most prominent activist investors going.

The New York Times' DealBook reports that "Dan Burch of the proxy solicitor firm Mackenzie Partners lamented how some defenses aimed at thwarting activist proxy fights, like staggered boards that only put a small number of directors up for election in a given year, are failing. Many activists are now nominating full slates of director candidates, and companies are giving in by ceding some seats in any election."

What exactly is wrong with that? To be sure, there are cases where activist investors are wrong and the goals that they achieve do not maximize shareholder value. But I would posit that this is the exception, not the rule.

Activist investors -- who profit only from a rise in the company's share price -- are the only people who truly have their interests aligned with shareholders. Executives and directors may be motivated by salaries, perks, ego, etc.

In addition, activists generally move in on companies where the current management team's strategy has failed to generate value. Most companies that are targets of activist hedge funds have long track records of destroying shareholder value. A company that's been creating value at a good clip for shareholders has a compelling response to activists: "Our strategy has worked and we think it will continue to work. Leave us alone!"

Activist investors aren't a problem. They are the solution to the problem of a lack of accountability at the highest levels of public companies.

Clear Channel Communications Inc. (NYSE: CCU) is going on the offensive. Affiliates of Bain Capital and Thomas H. Lee are filing breach of contract suit against the banks in the buyout deal, and Clear Channel itself joined in the complaint.

The firms are filing suit against against Citigroup, Morgan Stanley, Credit Suisse, The Royal Bank of Scotland, Deutsche Bank and Wachovia.

Some of the allegations are that banks inserted poison provisions, pretext and misdirection, and even a re-cut of the deal as they faced $2.65 billion in losses (that figure according to WSJ).

This one may be a done deal for sure now. When buyers and sellers have to start suing lenders, it is not all that frequent that those providing the leverage get forced into it.

But on the flip side, those banks should have to pay severe business penalties via a break-up fee for backing away.

Motorola Inc. (NYSE: MOT) 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.

The move comes amid a long-standing battle with activist investor Carl Icahn, who has been urging the company to shed the handset unit.

Icahn, who owns just over 6% of Motorola, has been actively seeking representation on the company's board. On Monday, he sued the Schaumburg, Ill-based company in an attempt to secure records relating to the hiring of senior executives and corporate strategy, especially as it relates to its mobile devices business.

Continue reading at TechConfidential.com.