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Investor activists target high tech

Shareholders demanding a shakeup of Digital Equipment's board exemplify a breed of investor that technology companies face in ever-greater numbers.

Three members of Digital Equipment's board of directors are over 70 years old. If Digital shareholders had their way, they would be fired.

And it looks like those board members better start planning their retirement.

Digital investors plan revolt
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Electing new, younger individuals to the company's board of directors is just one of the items on the to-do list for a group of Digital (DEC) shareholders who have decided that Digital execs just can't get it right on their own. This group wants to get involved in the operations of the company, including picking new board members and perhaps even going shopping for a merger partner. The group is now preparing to present its list of demands to Digital executives.

The Digital investors are an example of a particular breed of shareholder: the activist investor. Concerned about everything from rising competition to dropping share prices, these investors are increasingly resorting to a wide range of tactics to effect changes--their own changes--within companies. And while shareholder activism is not new in most market sectors, it is becoming more visible in the computer industry as more and more technology companies breach the ranks of the Fortune 500.

"Shareholders have to be involved for the same reason that citizens have to be involved in a democracy. You can't expect a system to work for you unless you are actively involved in making it work," said Bob Monks, a money manager at Lens Incorporated and a Digital investor.

This allusion to democratic ideals doesn't mean the companies themselves are comfortable with the idea.

"Companies are not happy to see us arrive?They ignore us and hope we go away," said Herbert Denton, president of Providence Capital, and the shareholder activist that organized the recent Digital meeting.

Digital is far from the only high-tech company confronted with shareholders who are not only angry but have an agenda.

The nation's largest public pension fund, California Public Employees' Retirement System (CalPERS), is scheduled to meet with the board of Apple Computer (AAPL) on July 8 to discuss what CEO Gil Amelio should be doing.

CalPERS already has voted against Apple's board of directors at the shareholders' meeting earlier this year. The pension fund giant also has been known to take companies to task by filing shareholder proposals that let investors vote on a course of action.

"It is difficult to turn a battleship quickly. We don't pull out when a company is doing badly...What we do is employ corporate governance as a strategy," said CalPERS spokesman Brad Pacheco.

If there is one issue in particular that has drawn the attention of Apple investors--and investors in general--it is executive compensation. Apple shareholders, for example, objected quite loudly when Apple executives received bonuses last year during quarters when the company was bleeding streams of red ink. The result: Apple changed the bonus policy to require that Apple make a profit before execs collect their perks.

Apple execs aren't the only ones with questionable compensation packages.

"Most big Fortune 500 companies have gotten the message and have adjusted their boards, but medium and small companies run by founders have executive compensation structures that our members would not agree with," said Anne Hansen, deputy director for the Council of Institutional Investors.

Hansen's organization is made up of 100 or so pension funds and has assets exceeding a trillion dollars. Nothing makes the Council angier than the thought of those pension funds being drained by an overpaid CEO. "Excessive executive compensation makes us get involved. A CEO who gets gigantic stock options is symptomatic of a poorly run organization," Hansen said.

Apple and Digital investors have so far been relatively civil, holding meetings, taking votes, and asking pointed questions at shareholder meetings. The most popular technique of individual investors is to corral the support of larger, institutional investors who wield enormous clout within companies by virtue of the size of their holdings.

CalPERS, which manages $108 billion for 1500 to 1600 companies in its portfolio, is an example of such an investor. It will place underperforming companies on a hot list if they fail to measure up to the performance of the S&P 500 index, a distinction most companies would rather avoid. Apple, Novell (NOVL), and Sybase (SYBS) have all made the CalPERS list.

But such open hinting is sometimes only the first step in a process that can become downright confrontational, leading to shareholder lawsuits and proxy fights--a kind of shareholder election to take control of the company. Successful proxy fights usually result in the sacking of a company's board of directors and executives.

In one recent example, Michael Price, fund manager of Franklin Mutual Advisers, earlier this year filed proxy documents with the Securities and Exchange Commission to try and realign the board at telecommunications company Telephone & Data Systems. His fund's nominee, Martin Solomon, was elected to the board by shareholders at the company's May annual meeting.

Executive compensation is not the only issue that can rally activist investors to such efforts. Often shareholders want to get involved simply because they think the company is mismanaged and losing out on profits that could be lining investors' pockets.

Digital shareholders are agitated because the company's shares have fallen 17.8 percent over the past year while the Nasdaq High Technology Index has consistently grown. Investors buying a $100 stake in Digital in 1991 would have found that investment fall to about $75 five years later, according to the company's proxy statement. That same $100 investment placed in an S&P 500 Computer System Index would be worth slightly more than $135 for the same period.

Sometimes one spectacularly bad quarter is enough to get investors involved. Shareholders punished Informix (IFMX) with a series of lawsuits after an overambitious product strategy cost the database company several big sales last quarter and pushed it into the red. The suits charged the company with misrepresenting its revenues, prospects for profitable growth, and other financial results. Some shareholders publicly called for CEO Phil White's resignation. White held onto his post but was pressured into promising a profit by the end of the year.

As with Informix, most shareholders don't get involved until they feel that they have been misled about the state of a company's financial health. Some shareholder activists, however, don't wait for the big mistakes but take action from day one of taking a stake in a company.

Activist money manager Lens, for example, targets underperformers as part of its investment strategy. Lens will take a stake in an undervalued company and become a shareholder activist to prod management into changes and, hopefully, thereby bring up the stock price.

Lens has previously focused on Eastman Kodak (EK) and American Express (AXP). But it is now voicing its concerns as a holder of $10 million in Digital stock. "Why hasn't the board taken action on what is a terrible loss of value over the past five years?" asked Lens principal Monks.

More and more investors such as Monks may start asking similar questions as the computer industry matures and the explosive growth of the early years is checked by saturated markets and increased competition. Companies unaccustomed to such scrutiny aren't likely to welcome such inquiries. But Monks thinks the smart companies will at least listen and perhaps learn.

"It is a measure of the health of the company to hear the things that they don't want to hear," Monks said.