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Firms keep blocking activist investor's goal

Richard Breeden knows that yet again it's unlikely he will get through a year without a proxy battle.

January 22, 2008|Dane Hamilton | Reuters

Richard Breeden, founder of activist investment fund Breeden Capital Management, has one goal this year: no proxy battles.

But he acknowledges achieving this is unlikely, given his record. Since founding his $1-billion-plus firm 18 months ago, he has launched two major proxy battles that have won him seats on the boards of H&R Block Inc. and Applebee's International Inc. And last Friday, jewelry chain Zale Corp. gave up without a fight, giving Breeden two seats on its board.

"I'm an optimist," said Breeden, 58, a Harvard-trained lawyer who was chairman of the Securities and Exchange Commission from 1989 to 1993. "I always hope boards will do their best to improve poorly performing companies. My goal every year is zero proxy battles."

But Breeden, like many investors who try to pressure companies to change strategies or management, is also a realist who expects some companies to resist.

If they do, they could face a barrage of negative publicity that rivals a nasty political campaign, as did Applebee's before it was sold last year to IHOP Corp., giving Breeden's fund a 30% gain.

"There's never a shortage of badly run companies," said Breeden, whose fund invests only in companies that fall behind their peers. "If you don't want me in your shareholder base, do a good job of running your company."

Breeden's entry into the sometimes raucous world of shareholder agitation comes at an opportune time, some say. As the economy turns south and financing dries up, more companies are hitting rough patches and attracting the kind of shareholder ire that can build support for dissidents.

"In today's environment, there are a great number of companies that can use activism," said Carl Icahn, the 71-year-old billionaire investor who has a long history of initiating hostile actions against companies. "I think we're going to be very active this year."

Breeden's strategy is similar to other multibillion-dollar activist fund managers, such as Jana Partners and Pershing Square Capital Management, which regularly take large stakes in public companies and press for changes.

But Breeden's background as a former SEC chairman seems to give his campaigns more clout, possibly worrying corporate executives who fear regulatory wrath, said Herb Denton, the longtime corporate agitator who follows Breeden's moves.

"He carries a big invisible stick as former chairman of the SEC," said Denton, who heads hedge fund Providence Capital Inc. and has undertaken 32 proxy battles over nearly 20 years.

Like Icahn, Denton sees a banner year ahead for shareholder activism, with the economy hamstrung by higher energy costs and a credit crisis.

"It's going to be spectacular with all the nonsense that has built up [in companies] since the last bull market," Denton said.

But Denton points out that the very factor that wins influence on company boards -- a large stake -- also hampers activists such as Breeden who win seats because they are insiders and subject to stock-sale restrictions.

Breeden, for instance, holds 18% of Zale.

"The only way out of these things is to make something happen," Denton said.

Breeden says he is unfazed by the restrictions, maintaining he is not a short-term speculator, an accusation opponents often level at activists.

And Breeden says having large stockholders on corporate boards is beneficial because they can have vastly more resources to analyze corporate strategies than a part-time board member without an investment firm's staff.

"I can put eight MBAs on studying a company's problems," Breeden said.

The former SEC chairman has harsh words for companies that try to fend off activists with legions of lawyers and public relations firms to attack their motives and strategies.

He says the SEC is partly responsible for failing to require corporate America to be more shareholder friendly, a rare public rebuke of the agency by a former official.

"I would like to see them do more to advance the interests of shareholders in corporate governance," Breeden said of the SEC. "They have fallen short."

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