Tuesday, September 11, 2012

An Activist's Sweet Gains

An Activist's Sweet Gains


SPYING A BARGAIN and unlocking its value take two very different talents. It's quite clear, for instance, that a cold can of soda costs a lot less in a supermarket than it does on a hot beach. Not everyone, however, has the inclination to take advantage of that price discrepancy. Timothy Edward Brog, as a kid, was one of the exceptions.
"We used go to the IGA and buy its soda for 10 cents and put it on ice and sell it on the beach for 50 cents or a $1," says Brog, now 42 and president of Pembridge Capital Management, a two-year old hedge-fund firm based in New York.
, the fabled maker of Bazooka gum, Ring Pop candy and collectible trading cards. He has also shaken up the likes of Vestcom International, a maker of labels, and Register.com, a provider of Internet domain names.
As big, activist investors like Carl Icahn and Kirk Kerkorian take aim at such giants as Time Warner and General Motors, Brog and a number of other young hedge-fund pros are doing exactly the same with smaller quarry.
Brog, for one, has been racking up big-league returns sometimes tripling his money in little more than a year. And he clearly is thriving on the pressure.
"The odds are so stacked in favor of the company," he says of his adversaries. "They have an unlimited purse that comes out of the shareholders' pocket. There is an incumbent bias, so in order to win you have to have a compelling case."
The tall, lanky Brog, who earned his spurs as a mergers-and-acquisitions lawyer at Skadden, Arps, Slate, Meagher & Flom, now operates from a tiny closet of an office in midtown Manhattan.
He spends his days seeking out companies with overpaid, underperforming managements and trying to make them do right by investors. He usually takes his case directly to shareholders via proxy fights for board seats.
A study by Institutional Shareholder Services, a corporate-governance research outfit serving big investors, found that the number of proxy proposals focusing on executive compensation was up 4.8% this year through August, compared with the year-earlier period.
At Brog's level of the action, it's less a reprise of the barbarians that stormed the gates in the 'Eighties than what might be called the Children's Brigade. "We are young, we are aggressive and we don't like the status quo," says Arnaud Ajdler of Crescendo Partners, a 30-year-old Belgian engineer with a degree from the Massachusetts Institute of Technology and an MBA from Harvard who has teamed up with Brog in the fight for Topps.

Ajdler calls Brog a throwback to the days when shareholders had the ear of management. "Fifty or 75 years ago people like J.P. Morgan dominated the stock market and they behaved like managers and were very active in the company they owned," he says.
Brog's fund, with relatively modest assets of less than $50 million, is able to maximize its impact by sticking to small-capitalization stocks. He avoids companies that have two classes of voting stock or where the chairman owns a blocking stake in the company; he figures his odds in those situations would be too slim. He also prefers companies with clearly frustrated shareholders and easy-to-understand businesses. "If I can't explain it to my mother, I don't feel comfortable I have the expertise to deal with it," he says.
Topps fit the bill nicely. Although Bazooka Joe has been a friend to generations of bubble blowers, the New York City-based company has been struggling as the confectionery market has evolved. Topps' annual revenues dropped 33% over the past five years and profit margins have dwindled.
Brog's Pembridge Value Opportunity Fund began taking a position in the stock when it was at $8.47 in April of 2005. Although he took less than 1% of the shares outstanding, he wasted no time agitating for change. His claim: The company had been run like an old family candy shop, with CEO Arthur T. Shorin not only drawing a sweet $1.5 billion in annual compensation but employing his son-in-law, Scott Silverstein, as president.
Pembridge soon launched a proxy contest with lawyer John Jones, another Skadden Arps alumnus, and Ajdler, who became interested in the company because his daughter is partial to Ring Pops finger rings with big rocks of candy.
Last month, all three investors won positions on Topps' 10-member board. They are pushing Topps, with a market value of $353 million, to sell itself in pieces. The parts, Brog argued in the proxy contest, are worth far more than the whole. Topps' management, which wouldn't comment for this story, has said only that Brog & Co. aren't qualified to be on the board.
As yet, the stock has climbed only 6.5% since Brog bought in, to about $9 last week. Brog, however, is a tenacious fellow, and he says his work has only begun. Ultimately, says Jim Barrett of research firm C.L. King & Associates, Topps could be worth 11 a share in a breakup.
Struggles like that are getting be standard procedure for Brog.
"Our goal is to do a whole host of things to maximize shareholder value, and that can include selling off pieces, issuing a special dividend, slicing off part of the business and discontinuing it," he says.
Sometimes, as with Vestcom International, Brog tries to force a company to go private. The West Caldwell, N.J., company makes the labels and tags for stores like Kroger, Walgreens and Target. Brog liked its product, but its stock was selling at a low multiple to cash flow when he bought a 2.7% stake in 2001 through an investment fund he formed for the purpose. He launched a proxy battle that led to Vestcom's sale to a New York private-equity firm, Cornerstone Equity Investment. He had bought the shares for an average of $1.86 and sold most of them at an average of $5.85 all in just 16 months.
"Vestcom should not have been a public company," Brog says. "It was too small."
As for Register.com, it was the hordes of cash that attracted him. He accumulated its stocks between $2.90 and $3.31 a share in the fall of 2002, and began indirectly pressuring the board. He sold out for an average price of $5.79 a share eight months later, after Register was sold to private-equity firm Vector Capital.
Brog, who declines to provide overall results for his Pembridge fund, has been fighting the capitalist fight since his boyhood in Manhattan. Although he grew up on Manhattan's posh Upper East Side, his mom, Sheila, made sure he kept his distance from silver spoons. "I remember when I was about six years old, I told my mom I wanted to buy something, and she said 'Well, get a job,' " he recalls.
He took the advice to heart. After getting a B.A. from Tufts University in 1986, he worked as an M&A analyst at Kidder Peabody while simultaneously earning a law degree from Fordham University. He spent six years at Skadden Arps as an associate in corporate finance and M&A, before leaving to become managing director of the Edward Andrews Group, a middle-market boutique investment bank.
These days, when not throwing himself into investor activism, he joins with his wife, Jennifer, in another famously high-pressure activity: getting kids (two daughters) into the private nursery schools of Greenwich, Conn., where the family lives.
"Luckily, we have been successful in working our way through the system," Brog reports. Chances are, he will be just as successful in his next boardroom skirmish.

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