The Activist Investor: N.Y. Times Catches Activists' Softer Pitch

Wasn't it only five months ago that Morgan Stanley MS fund manager Hassan Elmasry threw in the towel on his 7.2% stake in the New York Times NYT? After months of protracted activism, confrontation and negotiation, one of the Times' staunchest critics decided that his battle to improve the performance of the newspaper was futile.

So, how is it that only a few weeks later two hedge funds not only acquired a sizable stake in the Times but also ran a successful campaign to get elected to the board, with the newspaper announcing plans to add two new seats for representatives from the two funds?

Why did one activist approach aimed at the New York Times meet such failure while the other proved successful?

The answer, in part: how and when you conduct an activist campaign can be critical determinants of your success.

The Hard Tack

Easily more than 80% of the people I meet who hear I run an activist fund assume that an activist, by definition, is confrontational, negative and bullying. Carl Icahn certainly has an aggressive style of engaging management, and it's worked for him over his career.

Most activists take this hard-line approach and so did Morgan Stanley's Elmasry with the Times. Through a series of letters and meetings lasting over a year, Elmasry criticized the newspaper for its new headquarters, poor acquisitions, poor choice of executive editor, and -- most offensive to him -- the Times' sacrosanct two-tier share class structure.

He withheld votes for the Times' board in protest in 2006 and then again in 2007. Forty-two percent of his fellow shareholders joined him in last year's vote. But, nothing really changed.

At the end of the day, the Sulzberger and Ochs families retained control of the board, the share structure and the company. Elmasry retreated. Activism had failed.

Yet, it was a pyrrhic victory for the Times' owners. From the stock's peak in June 2002 until mid-January of this year, the families' value in the newspaper -- along with other shareholders -- dropped more than 70%.

Some Elmasry critics would say he was wrong to target improving the newspaper industry. After all, Bruce Sherman of Private Capital Management had recently tried activism at Knight-Ridder. But, because of rapidly declining revenue, the company had little success and was forced to sell out to competing media outlet McClatchey.

Many activists choose to steer clear entirely from companies with a majority-owner or dual-class structures like the Times. After all, so this thinking goes, you can have the best plans for change, but you will never have any leverage over that majority owner.

Yet, on March 17, the New York Times announced that Harbinger Capital Partners and Firebrand Partners would get two director seats on the board -- less than two months after the hedge funds first disclosed their stakes and started calling for change. How could capitulation come so quickly for so difficult a target?

The overly simplistic answer is that Harbinger and Firebrand were nice whereas Morgan Stanley was too aggressive.