Updated from 8:07 a.m. EST
Another activist hedge fund is wreaking havoc on a boardroom in the name of shareholders.
, a laggard in the office-supply retailing business, said Wednesday that its board voted to remove some defenses against a shareholder revolt. The decision comes as the company remains under fire in a proxy battle waged by K Capital Partners, a Boston-based hedge fund.
Amid lingering controversies on Wall Street over corporate governance issues like executive compensation and director independence, K Capital's influence on Wednesday's vote at OfficeMax serves as further evidence that hedge funds are an increasingly potent force for change in the market.
"This is a response to all the haranguing that K Capital has caused with its proxy fight," says Morningstar analyst Anthony Chukumba. "It's been bashing management for not increasing shareholder value, but it's also complained about these takeover defenses. So, this is a proactive step to show that management is being responsive to one of its largest shareholders."
OfficeMax's board voted to not seek an extension to its shareholder rights plan that expires in 2008. The so-called poison pill plan limits the number of shares that can be owned by an investor and minimizes the threat of a hostile takeover by an outside investor.
OfficeMax also voted to include a proposal in its 2006 proxy statement that would declassify its board and provide for the annual election of directors, if approved by shareholders. Currently, elections for OfficeMax's directors are staggered in groups of four over three years, limiting the voting power of shareholders to force change on the board by dragging it out over a long period of time.
"At first blush, these moves don't appear all that revolutionary, since they're pretty common occurrences in boardrooms across the country these days," says Beverly Behan, a partner in the corporate governance practice of Mercer Delta Consulting, LLC and co-author of
Building Better Boards: A Blueprint for Effective Governance. "But within the context of all the upheaval that is going on at OfficeMax, these steps take on greater significance."
Despite Wednesday's pop in its share price -- up 55 cents, or 2.1%, to $26.74 -- OfficeMax's stock price has shed over 13% since the company sold Boise Cascade's timberlands and mills to a private equity buyer and took the name of its office supply unit in November 2004. Back then, management had great expectations for the company's office supply business, none of which have come to fruition. Instead, scandal and underperformance have whittled away at its share price, leading some investors to call for a sale of the company.
For starters, OfficeMax faces stiff competition from the likes of
, a well-entrenched leader in office supply, and
, a company that has embarked on a turnaround of its own under the leadership of Steve Odland, the former chief executive at
"At the end of the day, it is the third horse in a three-horse race," Chukumba says. "Staples is way out of reach and Office Depot is actually increasing the performance gap between themselves and OfficeMax. So at some point, if it doesn't have a coherent strategy to turn things around, or it's not in a position to execute a strategy, then you have to wonder whether it would be better to add shareholder value to sell the company."
K Capital, which owns a 6.4% stake in the retailer, launched its proxy battle against OfficeMax in February amid an investigation into the company's accounting practices that forced its former president and chief executive, Christopher Milliken, to resign. The company retained a buyout maven, Blackstone Group, as a financial adviser in exploring a possible sale of the company.
In April, K Capital nominated an independent director to the board, a move that was rejected by OfficeMax but later resulted in the addition of another independent director to the board. The company hired retail veteran Sam K. Duncan to replace Milliken.
Things heated up again in October, when OfficeMax extended Duncan's term on the board to 2007. Some investors protested because Duncan had been appointed to the board rather than elected. In November, K Capital filed a letter calling for management to submit a detailed turnaround plan to shareholders immediately, create an independent board committee to assess the strategic value of the company and hold annual elections for all the directors on the board.
In December, Ward Woods, the lead director on the board and the chairman of the committee of outside directors, resigned.
Last week, OfficeMax revealed a plan to close 115 stores and a factory in Washington state. The closings represent about 12% of the company's 950 U.S. stores and will reduce pretax profit by $187 million. The company has also offered to buy back $800 million in stock, but K Capital remains unimpressed.
"We are confident that a sale will create more value for shareholders than any alternative strategy," K Capital's Abner Kurtin said in letter to the OfficeMax board on Jan. 10. "Why should a company's shareholders have to run a proxy contest to convince its board to do the right thing?"
Kurtin cited a recent Goldman Sachs research report that said "a sale of the company would deliver superior value to shareholders" and estimated a potential transaction could be valued at $39 to $44 a share.
Goldman Sachs disclosed an ownership stake in OfficeMax greater than 5%, and it also has an investment banking relationship with the firm.
"We can only hope that the Goldman Sachs investment bankers who are advising the board are providing you with the same advice," Kurtin said.
An OfficeMax representative couldn't be reached for comment Thursday on the company's poison pill and director moves. K Capital declined to comment.
Other hedge funds have recently shown an ability to force the hands of company directors. Bill Ackman's Pershing Square Capital is currently pressuring
to revamp its capital structure. Previously, he scored a win at
, forcing the fast food chain to sell part of its Tim Hortons doughnut chain and authorize a $1 billion share buyback. The stock shot up 12% after the announcement to an all-time high.
Elsewhere, Carl Icahn is lobbying for change at
and Kirk Kerkorian is putting the screws to
"Directors are really not used to getting this kind of direct, aggressive pressure and criticism that they're getting these days from hedge funds, so there's probably an instinct to ignore it," Behan says. "On the other hand, directors are charged with looking out for the best interests of long-term shareholders. Some investor activists often take a more short-term view."
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