Stephen’s Posterous

Warren Lichtenstein's Proposal Resisted by Jenny Strasburg and Joseph Checkler, WSJ.com

Investors owning more than half of the assets in Warren Lichtenstein's biggest hedge fund have asked to pull out their money, resisting a push to convert the fund into a publicly traded partnership.

In a letter sent to clients last week, the hedge-fund manager wrote that investors representing just 36% of the assets in Steel Partners II Master Fund had agreed to support the conversion plan, while the rest either didn't vote or asked to pull out of Mr. Lichtenstein's fund. A non-vote is equivalent to asking for money back, according a March letter that outlined the options facing investors.

Instead of selling holdings quickly and giving clients cash refunds, Mr. Lichtenstein proposed spinning Steel Partners II into WebFinancial, a public company controlled by his firm that that aims to be a holding company for entities such as small banks and insurers.

Despite the lukewarm support, Mr. Lichtenstein told clients that he is proceeding with the conversion anyway. "We would like to take this opportunity to inform you that the name of 'WebFinancial L.P.' has been changed to 'Steel Partners Holdings L.P.,"' he wrote in last week's letter.

Further details on the plan will come "in the near future," Mr. Lichtenstein added. Plowing ahead could inflame tensions between Mr. Lichtenstein and investors who already were skeptical of the conversion plan after the activist hedge-fund manager floated the idea in December.

An entity controlled by billionaire investor Carl Icahn and a separate group of Steel Partners clients has sued Mr. Lichtenstein and his firm over the transaction, claiming it would benefit the hedge-fund manager but not his investors.

Critics of the unorthodox conversion plan also contend that a publicly traded company with uncertain value is no substitute for the private hedge fund in which they invested. According to last week's letter, the 43-year-old Mr. Lichtenstein is in settlement talks with some investors. Details on the discussions weren't disclosed.

The situation reflects a broader tug of war between hedge-fund managers and investors over who should call the shots when a fund's bets go bad: hedge-fund executives who claim they know best how to rebound from recent losses, or clients who counter they are entitled to what's left of their money?

Before 2008, many hedge-fund managers raked in money by touting themselves as capable of making money no matter how the markets performed. Last year's turmoil undid many of those claims.

In the wake of steep losses, big hedge funds such as Harbinger Capital Partners and Citadel Investment Group limited investor withdrawals. Other funds that let clients pull out their money are now far smaller and trying to fight their way back to profitability.

Mr. Lichtenstein announced the conversion plan as his fund was facing requests by many clients who wanted to bail out. The fund's 2008 decline was double the average hedge-fund loss and worse than that of the Standard & Poor's 500-stock Index. It has about $1 billion in assets, down from $2 billion.

Last year's slide was a stark comedown for Mr. Lichtenstein, who started his firm in the early 1990s and had never suffered a money-losing year, typically outperforming most of his rivals over time. He often makes concentrated investments, pressuring companies in Japan and elsewhere to change their structures and management.

In the past, Mr. Lichtenstein has talked about wanting to be like Warren Buffett and run a conglomerate like Berkshire Hathaway Inc. WebFinancial was a prime opportunity that also would offer investors transparency and a stream of future profits, he told clients. Steel Partners investors were told they could vote on the proposal and that it required their approval.

According to last week's letter, 52% of the hedge fund's investors by headcount expressed support for the conversion, seeing the move as their best bet to recover losses. But those investors collectively hold less than 40% of the fund's assets. Many of the clients backing Mr. Lichtenstein are smaller investors.

"These results confirm that the Funds' investors have objectives ranging from a need for cash in the immediate future to maximizing value over the long term," Mr. Lichtenstein's letter said.

It's unclear how Mr. Lichtenstein will proceed if he doesn't reach a compromise with dissenters and still lacks sufficient support from clients in the hedge fund. A person close to Steel Partners said the plan is likely to move ahead, though there could be a liquidation of certain assets to allow some clients to exit. Meanwhile, another Steel Partners fund that makes concentrated bets on Japanese securities has been selling assets to pay out client redemptions.

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Activist investor Carl Icahn is looking at board seats at Lions Gate Entertainment, the studio behind this past weekend's No. 1 box-office attraction, "Madea Goes to Jail."

Mr. Icahn boosted his stake in the company to 14.3% from 9.2% on the heels of a disappointing third-quarter earnings report, according to Securities and Exchange Commission filings. On Monday, Mr. Icahn disclosed that he might seek representation on the company's board.

The move fueled speculation that the billionaire may push for an outright sale of the company, or possibly just Lions Gate's library of shows and movies. "I think he sees a company that's intrinsically undervalued by the market," said David Miller, the managing director of research provider Caris & Co. "He's interested in [Lions Gate's] content."

The Lions Gate library, which includes about 12,000 movies and shows, is the company's most attractive asset, Mr. Miller said. While the content library -- including the bloody "Saw" movie franchise and television's "Mad Men" -- is difficult to value, some analysts believe that by itself, it could fetch a price higher than Lions Gate's market value.

Mr. Miller said he wasn't surprised when Mr. Icahn disclosed he might seek board representation. "That's what Mr. Icahn does," he said, "but it's unclear what Mr. Icahn's endgame is."

Mr. Icahn might agitate for Lions Gate to put itself up for sale, as he recently did at Biogen Idec and Yahoo. But with Lions Gate domiciled in Canada, "changing the board is going to be tricky," Mr. Miller said. At least half of the company's board must remain in Canadian hands or else Lions Gate could lose tax advantages that keep its production costs low.

A fund controlled by Mark Rachesky, a onetime Icahn protégé, also recently boosted its stake in Lions Gate to 17.6%. Unlike Mr. Icahn, Mr. Rachesky disclosed his position as a passive investor, or one who doesn't seek influence over a company's operations.

Calls to Mr. Rachesky's MHR Fund Management LLC and Mr. Icahn weren't returned. A spokesman for Lions Gate declined to comment on Mr. Icahn's and MHR's latest activity.

Mr. Icahn's position in Lions Gate, which dates back four years, hasn't performed well so far. According to filings, Mr. Icahn paid $112.7 million for the stake, which is valued at about $75 million at Tuesday's price of $4.59 a share.

Source.

As shareholders left Lions Gate Entertainment in droves after miserable fiscal third-quarter results Monday, two funds took the opportunity to load up on shares of the film company. The most prominent buyer, Carl Icahn, is one of the few investors who can make tongues wag as easily as a Hollywood star.

On Tuesday, February 10, 2009. the day after Lions Gate's post-market-close earnings announcement, Icahn bought 1,036,136 shares for $4.7 million, or an average per-share price of $4.53. Mark Rachesky, who runs investment firm MHR Fund Management, also increased his stake after the earnings announcement, buying 1.7 million shares for $7 million from Tuesday through Thursday, upping his stake in the company to about 18%. Rachesky is a former advisor to Icahn. Unlike Icahn, however, Rachesky's filing indicated that his investment in Lions Gate is passive, meaning he is not agitating for changes at the company.

Beyond saying in his Securities and Exchange Commission filings that he thinks the shares are undervalued and has had discussions with the firm's management, Icahn has not tipped his hand on his intentions at Lions Gate. He didn't return a phone call on Friday. Neither Lions Gate nor MHR Fund Management returned phone calls seeking comment. Speculation about Icahn's intentions abounds.

Richard Dorfman, the chief executive officer of financial advisory and investment company Richard Alan, thinks Icahn will try to instigate a sale of the company, or perhaps form a partnership to distribute the company's film library online. Given Icahn's activist position in Yahoo (YHOO), Icahn could even be looking to bring the two companies together, Dorfman says in an interview with Barrons.com. Dorfman owns shares of Lions Gate.

Other observers have pondered whether Icahn will try to shake up management. Analysts tend to think Icahn is simply trying to increase his position in the stock while it's cheap. Changing management at the company would be difficult, says Wunderlich Securities analyst Matthew Harrigan, who downgraded the stock to Hold from Buy after the earnings report.

"He's been pretty supportive of management in the past," Harrigan says. "There's not a lot of good studio management out there. And you'll always have some bumps in changing studio management" as new managers try to change or cut projects mid-stream.

Lions Gate on Monday, February 9, 2009, posted a third-quarter loss of 81 cents per share versus analyst expectations for a loss of 27 cents. The company's problems raising money to finance films and reduced DVD sales have investors and analysts concerned. The stock fell 27% on Tuesday.

"The Lions Gate story is one that performs well during easy-money days," wrote Thomas Weisel Partners analyst Benjamin Mogil in downgrading the stock to Market Weight from Overweight. "We think the challenge now is that with those days now gone, the steady-state is at hand for Lions Gate; with a shrunken film slate and reduced DVD contribution the steady-state is not particularly exciting at this point in time."

Lions Gate's saving grace right now is its film library, which boasts titles such as The Blair Witch Project, Reservoir Dogs and Dirty Dancing, and accounts for more than 80% of its free cash flow, says StreetInsider.com vice president Jason Rasnick. Because the shares are so beaten down Raznick thinks Icahn "may be making a play at a value proposition."

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President Barack Obama's plan to limit executive pay to $500,000 a year -- plus restricted stock -- for institutions that get government funding is understandable. Still, salary caps are only a stopgap measure that fails to address the root of the problem.

The real problem is that many corporate managements operate with impunity -- with little oversight by, or accountability to, shareholders. Instead of operating as aggressive watchdogs over management and corporate assets, many boards act more like lapdogs.

Despite the fact that managements, albeit with some exceptions, have done an extremely poor job, they are often lavishly rewarded regardless of their performance.

We must change this dismal state of affairs if we are to rebuild our economy in a sustainable way that restores confidence. If we don't, these problems will keep recurring as investors pile into the next Wall Street innovation or asset bubble, enabled by the kinds of managements that nearly sank Wall Street.

The problem, as I have long maintained, is that boards and managements have been entrenched by years of state laws and court decisions that insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures.

What we need are fewer government rules at the state level that protect managements. We need to return capitalism -- our great national wealth machine -- to its roots, where owners call the shots to managements, not the other way around.

Currently, corporate law is largely the province of state governments, not federal. As a result, most corporations migrate to, and incorporate in, states that offer the most protection for managements.

Management-friendly states have a vested interest in attracting these companies because hosting them generates a substantial portion of state revenues. It's a symbiotic relationship: The state offers management protections and, in return, receives much-needed tax revenue.

However certain states, like North Dakota, offer many more rights and protections to shareholders. Because shareholders own companies, they should have the right to move a company to a state that gives shareholders more protections.

What is needed, therefore, is a federal law that allows shareholders to vote by simple majority to move their company's incorporation to another state. That power is currently vested with boards and management.

This move would not be a panacea for all our economic problems. But it would be a step forward, eliminating the stranglehold managements have on shareholder assets. Shouldn't the owners of companies have these rights?

Now some might ask: If this policy proposal is right, why haven't the big institutional shareholders that control the bulk of corporate stock and voting rights in this country risen up and demanded the changes already?

This is because many institutions have a vested interest in supporting their managements. It is the management that decides where to allocate their company's pension plans and 401(k) funds. And while there are institutions that do care about shareholder rights, unfortunately there are others that are loath to vote against the very managements that give them valuable mandates to manage billions of dollars.

This is an obvious and insidious conflict of interest that skews voting towards management. It is a problem that has existed for years and should be addressed with new legislation that benefits both stockholders and employees, the beneficiaries of retirement plans.

I am not arguing for a wholesale repudiation of corporate law in this country. But it is in our national interest to restore rights to equity holders who have seen their portfolios crushed at the hands of managements run amok. The suggestions above would do a great deal to change the dynamics of corporate governance in this country. Such a change will make us more productive as an economy, generating more wealth for everyone.

The Wall Street bailout and economic stimulus packages may be unfortunate and necessary steps to revive this flagging economy. But it is important to attack the real problem by demanding more management accountability.

I have initiated United Shareholders of America to empower shareholders to institute changes, and I encourage you to join our cause. A majority of the U.S. population owns shares. Their voices need to be heard -- now -- on Capitol Hill and in the boardrooms of corporate America.

Mr. Icahn is chairman of Icahn Enterprises, a publicly traded diversified holding company. Visit Mr. Icahn on the web at IcahnReport.com.

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By Carl Icahn

The epic financial crisis afflicting the banking industry over the past 18 months is largely the result of cratering loan and other asset values stuck on bank balance sheets. When the market for such loans stalled, banks couldn't sell them and had to take billions of dollars in writedowns.

Fearing the worst, the government pumped hundreds of billions of dollars into these institutions, with questionable long-term results. Though it is early in the rescue, the economy has shown few signs of improvement, and the bank losses continue. Why should taxpayers foot the bill when there are trillions of dollars in private money on the sidelines in the world financial markets? Private investment is a far more appropriate agent to revive these institutions, yet little is coming in.

One reason for this is that distressed assets on bank balance sheets have artificially low values because of misguided federal bankruptcy laws. With a few changes, the banking system could enjoy a revival backed by private investment, not public funds. The problem is that, in this bear market, the prospect of a bankruptcy puts a huge damper on investor appetite for debt securities in overleveraged companies. This includes hundreds of billions of dollars in bank and bond debt issued for leveraged buyouts.

This state of affairs could be improved by eliminating the bankruptcy rule known as the "exclusivity" period. This rule unfairly gives managements, with court approval, a monopoly in drawing up a reorganization plan for a minimum of 18 months. Generally that plan includes proposals to restructure debt, sell assets and void onerous contracts. During this period nontrade creditors, like bank debt and bond holders, languish in uncertainty as to what will happen to their investment. The exclusivity rule mainly benefits equity holders and managements, not creditors. But why should the same management that got the company into trouble havethe right to lock-up its assets for an extended period of time?

Without an exclusivity period, different classes of creditors and equity holders could immediately propose different restructuring solutions, including the sale of assets overseen by a bankruptcy court. The biggest impact of such a rule change would be that the assets of a company in Chapter 11 would be priced as though they could be sold -- in effect giving them a "mergers & acquisitions premium" -- rather than be shackled for years in a bankruptcy court.

This change would cause many distressed loan prices to rise -- bolstering the balance sheets of banks and other companies that hold these loans -- without public money. Furthermore, such a change would slash the need for expensive bankruptcy lawyers, restructuring firms, and other advisers, who can reap tens of millions of dollars in fees -- often at the expense of creditors and company treasuries.

It is one thing to apply the exclusivity rule to small businesses in the hopes that an individual who has spent his life building a business has a chance to keep it. But it is unfair that huge private-equity players can use this same rule to put into limbo billions of dollars of debt that banks lent to finance once-healthy companies.

If equity holders bet and lost, then debt holders should be able to come in quickly and salvage the company and their investment. In the long run, this would be good for companies, credit markets, employees and the communities in which companies are located.

Few are helped by the exclusivity rule, other than desperate equity holders and top managers clinging to the helm of companies that faltered on their watch. Eliminating exclusivity would not necessarily lead to more company liquidations, but it would take away the monopoly management has on formulating restructuring proposals. It would also force managements to redouble their efforts to stay out of Chapter 11 -- which would be a good thing. Chapter 11 is often a crutch for lackluster managements. Changing the rules would put pressure on them to keep their companies healthy.

I have long argued for increased shareholder rights and last year founded United Shareholders of America to advocate strengthening those rights. In this case I argue for increased creditor rights. But the thinking behind both is identical. In both cases it allows market forces to work better, both in pricing securities and in eliminating management monopolies in company affairs.

We must allow market forces to do their job, which includes promoting the ability of the rightful owners of assets -- not just managements -- to control their fate to the maximum extent practical. The idea is to efficiently maximize the value of the assets through operational changes, restructuring or sale to third parties. Today, troubled assets are stuck in a quagmire and will be for years unless bankruptcy laws are changed. The capitalist system is the most efficient wealth-producing machine in existence. We must strive to remove barriers that thwart this efficiency.

Mr. Icahn is chairman of Icahn Enterprises, a publicly traded diversified holding company.

Source.

Carl Icahn, Chairman, Icahn Associates, was interviewed by Lawrence C. Strauss for Barron's. The interview is in the December 1, 2008, issue. When asked about the current financial markets, Mr. Icahn said that this is the worst debt markets he has seen and he has never seen senior bonds as cheap as they are today. He sees senior debt and some stocks as a great opportunity for buys.

Mr. Icahn biggest complaint is that companies are not run by the right individuals. Companies are not run like a democracy, but more like Czarist Russia, where there is a monarchy. In speaking about Yahoo!, Mr. Icahn believes that the company should make a deal with Microsoft and sell its search capability and focus on content, which it does well. This would allow Microsoft to battle Google.

Mr. Icahn said that he hasn't used much leverage this year and has billion of cash in his hedge fund. He sees great opportunities as companies face challenging days ahead. Check out Carl Icahn's Blog, The Icahn Report. Source.

After Carl Icahn has lost about $1 billion on his investment in Yahoo, he bought an additional 69 million shares earlier in 2008. On the week of November 24, 2008, Mr. Icahn has bought another 6.7 million shares for about $65 million, bringing his total to 75.6 million shares, which amounts to a 5.4% stake. Yahoo closed at $10.58 on November 26, 2008. The 52-week low is $8.94 and the 52-week high is $30.25. Mr. Icahn's's stake is worth $800 million.

On November 19, 2008, hundreds of Microsoft shareholders converged on Bellevue’s Meydenbauer Center to hear the state of Microsoft and Steve Ballmer, the CEO, said “Let me be clear… We are done with all acquisition discussions with Yahoo. I’ve said that a bunch of times but somehow people have gotten confused nonetheless. We did our best. We thought we had something that made sense. It didn’t make sense to them. We’ve moved on.” Microsoft's $33-a-share bid for Yahoo was in May, 2008. Read Carl Icahn's Blog. Source.