Sun's largest shareholder often wears a velvet glove

Although Southeastern Asset Management has become an active investor, its recent history with other companies indicates that a fight is unlikely to get bloody.

The investment firm gobbling up shares of Sun Microsystems might look tough, but it usually avoids playing hardball with executives.

Sun got a wake-up call last week from its largest single investor, Southeastern Asset Management, which added the hardware maker to its list of companies for which it has switched from being a passive investor to an active one, with regard to corporate governance, operations management, and increasing shareholder value. But while the road ahead may be bumpy with this activist shareholder, which had $34 billion in assets under management as of the end of September, it will likely be far from bruising, if history is a guide.

While Southeastern, a self-described value investor seeking to make investments in companies whose stock price is trading less than the company's intrinsic value, hasn't been shy in turning up the heat on its portfolio companies, it has yet to go public with caustic letters to management or launch a hostile proxy fight, according to data from FactSet SharkWatch.

"Southeastern's tactics have been less severe than other shareholder activists'," said John Laide, a product manager at FactSet. "The most aggressive action they've taken in the last four years is a withhold vote."

Although withholding a vote generally does not prevent a director from being re-elected, it is meant to nonetheless send a clear message to a company about the level of investors' dissatisfaction.

In its U.S. Securities and Exchange Commission filing over its change in status as a Sun investor, the investment firm had noted that it intends to talk to Sun's management and third parties:

As the result of investment analysis or the occurrence of events, Southeastern may desire to participate in discussions with the particular portfolio company's management or with third parties about significant matters in which Southeastern may suggest possible courses of action to assist in building corporate intrinsic value per share or to cause the company's true economic value to be recognized...In this situation, Southeastern has talked to (Sun's) management and will have additional conversations with management and/or third parties, regarding opportunities to maximize the value of the company for all shareholders.

It remains to be seen whether Southeastern will ramp up its activist activities with Sun. The Silicon Valley mainstay declined to comment on Southeastern, following the activist shareholder's SEC disclosure, other than to note that it has spoken with Southeastern in the past, as it does with all shareholders. Southeastern also declined to comment, after its SEC filing, noting that it does not discuss its portfolio companies.

In the past four years, Southeastern has gone from passive to active on six companies, four in which (including Sun) it saw an opportunity to maximize shareholder value.

For Telephone and Data Systems, Southeastern expressed concern about the way its board of directors were governing the telecommunications company by withholding a vote to re-elect four of its independent directors, according to FactSet SharkWatch.

A majority of activist investors tend to follow a similar model to Southeastern's, not escalating their actions beyond engaging with a company's management, FactSet's Laide noted, in contrast to the high-profile manner in which Carl Icahn has waged battle , from his proxy fight against Yahoo to his successful role in pushing BEA Systems to accept an unsolicited bid from Oracle .

According to Southeastern's SEC filing regarding TDS, it believed that the company had withheld information about an all-cash, "full and fair" bid for the telecommunications company.

In the filing, Southeastern noted:

After learning of the bid's rejection without public disclosure, Southeastern wrote to the full board, demanding an explanation.

The board wrote back and refused to comment on the bid but stated that it would "serve no valid business purpose for a board of directors to attempt to take action that cannot succeed due to the controlling shareholder's lack of support."...Southeastern does not believe that the independent directors have been proactive enough in seeking to persuade the Carlsons of the merits of the proposed transaction.

The Carlson family holds a 51.8 percent stake in the company. And despite its stated views in the SEC filing, Southeastern never launched a publicity campaign around the issue.

TDS, meanwhile, has found its relationship with Southeastern, one of its largest single shareholders, a workable relationship.

"They're not at you every day. In fact, sometimes, I feel the need to call them to make sure they got our latest (quarterly) numbers," said Mark Steinkrauss, vice president of corporate relations. He added that Southeastern makes its views known and said some of its suggestions, such as a stock buyback plan, will be pursued.

And if TDS does not act on Southeastern's recommendations?

Said Steinkrauss: "They've always acted courteous and professional."

 

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