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Barron's
April 22, 2002
By MICHAEL SANTOLI
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Percolating Over Perks
The efficient-market religionists believe that all of
investors' collective information, desires and priorities should be reflected in
stock prices -- a process that would effect a kind of direct financial democracy
rewarding the companies that please the greatest portion of the capital-wielding
public.
But judging by the increasingly ornery cast of money managers
who are pressing a campaign of moral suasion against unsatisfactory corporate
governors and unresponsive agents for shareholders, it appears the market alone
doesn't do it all.
Last week, Jack Bogle -- Vanguard founder and the industry's
Jiminy Cricket -- led an ad hoc committee of fund managers (including Legg
Mason's Bill Miller, the Davis Funds folks and others) to discuss ways to combat
perceived corporate abuses. Issues discussed included the move to charge
stock-option issuance as an expense and basing executive rewards on
relative-earnings performance, among others.
This activity partly reflects the current ethic in which
corporate excesses born in the fat years are prompting gall and inspiring
crusades to clean up Boardroom America. But there's another strain of investor
activism, targeting individual companies, that has always existed but is now
becoming more common, as the market writ broad fails to enrich fund managers
without their own exertion.
Last week, for example, saw Herbert Denton of Providence
Capital advance his assault on
Aetna -- although the stock is up around 20% this year and near a 52-week
high -- railing against the company's takeover-defense clause,
executive-compensation levels and purported general failure to maximize the
value of its shares.
Managers at Franklin Mutual have been at this game for years,
since the days when Michael Price routinely broke glass in executive suites. In
the firm's continuing attempts to get
ICN Pharmaceuticals to advance its long-delayed restructuring, Franklin and
Iridian Asset Management released the contents of a letter to ICN, rebutting a
company press release about their intentions in unusually sharp terms for this
outwardly decorous industry.
Late in the week, Franklin Mutual effected another turn of the
screw against a long-time object of its disdain, Farmer Brothers Coffee. First
discussed here about 18 months ago, when Farmer Brothers shares were around 190,
Franklin's complaints amount to a contention that the company is run like a
private family enterprise, where cash and securities are hoarded and all efforts
to realize a proper value for investors are neglected. Now, with the stock at
330, investors still say lots more value is being stifled by management.
Franklin, which owns nearly 10% of the company, late last week
filed documents with the SEC detailing its beef. The gist of the unhappy
shareholders' appeal is that the company is effectively comprised of $145 a
share in liquid securities, plus a decent commercial coffee-supply business with
$210 million in annual sales and $40 million in pre-tax profits. Capitalize
those earnings conservatively at a 20% discount to industry competitors, and
they suggest the business should fetch $275 a share. Together, the simply
calculated breakup value amounts to $420 a share, or 27% above the current
quote.
To nudge the company toward their way of thinking, some
investors are proposing a kind of forum with company executives to exchange
thoughts on value maximization.
All indications from history are that the eccentric
family-management setup at Farmer will be less than responsive to these
entreaties. But, so far, the stock has done rather well just by the combination
of a cheap valuation and vocally indignant fund managers mounting their soapbox.
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