In Nook and AOL Wins, a Kinder, Gentler Activist Emerges (Update 1)

(AOL, Nook activist investor story, updated for analyst comment)

NEW YORK (TheStreet) -- Carl Icahn and the old guard of corporate raiders may still prefer the second hand of a watch to the calendar as the primary mechanism for plotting investments, but it's a more deliberate type of activist fund that is walking away with big profits in targeting of stock market laggards.

Roughly ten years into a gradual decline of their respective dial-up internet and bookselling businesses, AOL (AOL) and Barnes & Noble (BKS) are surging in 2012. Microsoft (MSFT) has played a major role in both cases, buying AOL's patent portfolio -- which may give AOL the cash it needs to shift course, and creating a joint venture with Barnes & Noble's to spin off the Nook E-reader -- which may provide Barnes & Noble with the partner it needs to survive in the intensely competitive E-reader and tablet war.

A kinder, gentler activist helps turns Barnes & Noble into a page-turner in 2012.

And at first glance, the 35%-plus share gains of AOL and Barnes & Noble in 2012 show that companies can be pushed to accelerate strategy changes by monetizing assets in coordination with a deep-pocketed partner.

However, it is the emergence of large activist investors Starboard Value and Jana Partners behind the scenes of these stock market turnaround stories -- companies that had seemingly lost Web-battles to more adept technology giants like Google (GOOG), Apple (AMZN) and Amazon (AMZN) -- that offers a larger lesson in how investors identify and plan stakes in low-priced companies requiring radical change.

Starboard Value owns more than 5% of AOL shares, while Jana Partners bought a near-12% in Barnes & Noble shortly before the Nook spinoff was announced. The funds are known for an activist bent. Recent successes include planned divestitures at McGraw-Hill (MHP) and Progress Software (PRGS), and the full sale of El Paso (EP) and TNT Express. Yet in targeting turnarounds at AOL and Barnes & Noble, both funds said they planned for multiple outcomes and only bought shares after they made sense on traditional value investment criteria. The prospect of monetizations was only one aspect of the bets.

Indeed, there's an important lesson for investors in these stories: put the speculative headlines to the side and first zero in on a straightforward value analysis, looking for a disconnect between embedded value and market sentiment.

"I'd like to take all of the credit for the patent portfolio... to be fair we didn't know what it was worth when we made the initial investment," said Starboard Value CEO Jeff Smith at this week's IMN Active-Passive Investor Summit.

Starboard made its AOL bet, the firm's single largest investment according to Bloomberg data, without expecting much out of the company's patent portfolio. When unveiling its 4.5% stake in AOL in December, Starboard said that the company's investment in its money losing display business had diminished the value of its shares, in a letter directed to AOL chief executive Tim Armstrong.

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