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ValueAct's "Tough Love" Letter

As the name implies, ValueAct Capital Partners looks for compelling values. When investors dumped the stock of Martha Stewart Living Omnimedia (NYSE: MSO  ) , the fund bought shares and made a tidy profit.

So ValueAct is certainly not a passive investor, and part of its strategy is to agitate for change, in much the same way that Carl Icahn does.

Yesterday, ValueAct flexed its corporate muscle in a letter to Acxiom (Nasdaq: ACXM  ) . Basically, the fund is prepared to offer $23 per share, in cash, to buy the company.

Founded in 1969, Acxiom builds technology solutions that help companies market to customers. Benefits include improved customer acquisition, retention, cross-selling, up-selling, and channel management. In the past year, Acxiom's revenues increased 21% to $1.2 billion, and earnings per share increased 16% to $0.74 per share.

However, ValueAct is disappointed in Acxiom's management decisions. The fund's letter to Acxiom says there are "obvious management deficiencies and missteps."

Why? ValueAct says that Acxiom has been focusing on the low-margin consulting business. Instead, the fund wants the firm to target data products, which have much higher margins. ValueAct believes that this strategy will achieve a return on investment of 14% to 15% per year. Of course, it's easy to be a Monday morning quarterback and fiddle with spreadsheets to generate nice projections. In that respect, the letter is quite vague; it primarily assumes that Acxiom will have a more profitable business if it shifts toward data products.

Accordingly, I'm compelled to ask where the clearest and strongest opportunities lie within the consulting realm. Competition is most certainly rife in the data-processing realm as well, and companies are most likely to achieve the highest returns in areas where they possess expertise, since they're able to charge a premium for services. There's not really an area of consulting that isn't rife with competitors, so it comes down to finding niche areas where consulting companies can maximize the value-added component they offer (to customers), while generating some degree of pricing power. Will Acxiom be able to do so, per ValueAct's suggestion?

Additionally, ValueAct has criticized Acxiom's deal-making abilities. In the acquisitions of Claritas and Consodata, the fund thinks the "analysis, forecasting, and capital allocation processes were flawed."

While Acxiom's stock price increased on the announcement -- to $21.25 per share -- it is still priced at a sizable discount to ValueAct's $23 offer. But if you read the letter carefully, you see that it really isn't an official offer. It merely indicates that the fund is prepared to make an offer.

Thus, speculating in this possible takeover certainly is risky. After all, ValueAct made a similar move against MSC Software. Early this year, the fund dropped its bid and accepted two board seats instead.

Fool contributor Tom Taulli does not own shares mentioned in this article.

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