Tuesday, October 2, 2007

Mutual funds growing a pair

I prefer my headline, but the Journal's works too, in a story about mutual funds working for their shareholders' interests (free WSJ Digg link). The short of it is a T. Rowe Price mutual fund owned shares in a company that was being taken private. The Price fund manager thought the buyout price being offered for the company was too low, and then he waged a battle against the buyout offer. In the end he lost, but it's significant that he tried.

Early this year, mutual-fund manager Brian Berghuis learned that a company in his portfolio was targeted for takeover. Normally this would be good news. But when the T. Rowe Price manager examined the offer, he came to a different conclusion: The price for Laureate Education Inc. was so low it was "laughable," he says.


Better known for retirement accounts than rabble-rousing, T. Rowe Price is among a handful of mutual-fund firms that have loudly complained that some of the many recent management buyouts -- in which a public company's managers team up with private investors to buy out shareholders -- haven't been fair. In a traditional takeover by an outside buyer, they say, management's goal is usually to win the highest price for their company. But when managers buy their own operation, there can be an incentive to pay as little as possible.


Early this year, Fidelity Investments took a stand against a private-equity buyout of radio-broadcaster Clear Channel Communications Inc., and helped win improved terms that shareholders approved last week. After Lord Abbett Inc. and other shareholders opposed a proposed private-equity buyout of OSI Restaurant Partners Inc., which operates the Outback Steakhouse chain, the offer was sweetened; the enhanced pact won shareholder approval in June. In July, New York fund manager Pzena Investment Management helped thwart financier Carl Icahn's takeover of auto-parts supplier Lear Corp., rejecting the argument of Mr. Icahn and Lear's management that the price was fair in light of the challenges facing the big U.S. auto makers and their suppliers.

"Eventually, you just say you're not going to take it anymore," says Richard Pzena, the firm's founder.

Why don't mutual funds fight more often?

Critics say mutual-fund companies have dodged these fights in part to avoid offending companies that could be potential customers for investment services. Mutual funds deny that charge.

Fund companies say they've skirted confrontation for other reasons. There are regulatory hurdles. To monitor possible collusion, the SEC requires investors who own more than 5% of a company to register as either "passive" or "active." A passive investor isn't permitted to lobby other investors on matters that affect how a company operates or on votes in corporate elections. An active investor can seek to influence other investors, but those registering as activists are restricted from trading a company's stock for 10 days after filing.

Mutual funds are there for the benefit of their shareholders. Funds should always be fighting for better takeover terms. Stories lie these should be the rule and not the exception.

A money manager becomes an activist

What was behind Berghuis's decision to fight?

For 48-year-old Mr. Berghuis, who joined T. Rowe Price in 1985, the path to activism began in January 2006. That is when one of his holdings, Fairmont Hotels & Resorts Inc., announced a buyout involving a private equity group. The group offered to buy back shares at $45 apiece, a level that valued the company at $3.9 billion.

Mr. Berghuis felt Fairmont's valuable real-estate holdings, which included the 651-room Scottsdale Princess resort in Arizona, would make it worth $65 or more per share. T. Rowe Price went by its traditional playbook: It complained privately to the company, then voted its shares against the deal. The buyout was approved a few months later.

In July 2006, Fairmont's new owners sold the Scottsdale property for $345 million, while continuing to operate the resort. A few months later it sold seven other properties, roughly one-quarter of its portfolio, for $1.5 billion. Mr. Berghuis took the sales to mean his $65-a-share estimate had actually been low. "This was a heist!" he says.

I'm a realist. I don't expect all fund manager's to get religion and oppose sweetheart takeover deals. But it's heartening to see that there are principled ones out there fighting for their funds and the little guy.