Back in the 1980s, corporate raiders -- T. Boone Pickens, Ron Perleman, Carl Icahn -- launched hostile takeovers against companies. They claimed they were performing an essential function of capitalism -- that is, paying shareholders a premium, as well as getting rid of poor management teams.
The corporate raiders called themselves "shareholder activists," not greedy greenmailers. Although, they certainly did get rich in the process.
Last week, we got another glimpse of shareholder activism. The target: Cenveo (NYSE:CVO). The company sells products like custom/stock envelopes, labels, and offset/digital printing services -- often used for annual reports and brochures.
Activity in the company's stock has been heavy. In the past week, the stock soared from $5.64 to as high as $10. Volume yesterday was 2.3 million shares. Keep in mind that the average daily volume is 312,500.
Cenveo is the subject of a hostile bid from Robert G. Burton, who manages Burton Capital Management. He was smart enough to join forces with Goodwood Inc., a hedge fund. In all, the group was able to purchase 9.6 million shares of Cenveo.
Last week, Burton wrote a lengthy letter to the senior management of Cenveo. First of all, he claimed that Cenveo has been under-managed. For example, the company reported a fourth-quarter loss of $3.6 million, compared to a $2.5 million profit in 2003. The company also guided lower for 2005 and the CEO resigned.
The printing industry has been hit hard since 2001. With lower demand and intense competition, there has been a need for restructuring (to realign companies in a relatively asset-intensive business). The current arrangement bodes well for Burton and Cenveo; taking a company private allows the sort of managerial intervention wherein companies see the forest through the trees -- making difficult short-term decisions for some long-term benefits (the sort which are sometimes not advantageous to short-term, per-share valuations). Somewhat conveniently, Burton knows how to structure investments from private equity firms and institute turnarounds.
Next, Burton indicated he wants to be the CEO of Cenveo and bring in his own management team. No doubt, he has an impressive resume. Much of his career has been in the printing business, with his last stint at Moore Corporation. During his tenure, the stock increased from $2.38 in 2000 to $10.16 in 2002. Also, from 1991 to 1999, he led World Color Press, which was owned by the private equity firm of KKR. He took the company public at $19 in 1996 and sold it for $38 in 1999.
Yes, Burton has a knack for making money. Last year, he launched a proxy fight against Creo Inc., a printing company, when the stock was at $8 per share. Then Eastman Kodak (NYSE:EK) bought the company for $16.50.
So, does this mean Cenveo is a buy? Well, according to his letter, Burton thinks the company "remains significantly undervalued" and can support a value of $10 to $12 per share assuming the company's cost structure is "brought in line with those of its publicly traded peers."
But, chasing buyouts can be a dangerous sport for investors. Even the professionals can take a bath. Wolves (some might call them speculators) rush in when deals of this magnitude become probable, introducing a high degree of volatility and less than certain returns.
Fool contributor Tom Taulli does not own shares mentioned in this article.
