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BEHIND THE NEWS: Founders' voting clout riles Finish Line investor

December 25, 2006

You can understand the thinking. An entrepreneur takes his company public, gaining access to the capital markets. But he wants to keep control of the business. So he gives his own shares greater voting power. In short, he has the best of both worlds.

That's all great-except, critics say, it's just not fair.

Earlier this year, professional investors assailed Emmis Communications Corp. CEO Jeff Smulyan for his turbocharged shares. Those shares give him the clout to swat down any takeover offer, even though his ownership stake is just 14 percent.

Now, it's Finish Line Inc. in investors' sights. In a regulatory filing this month, New York-based hedge fund manager Clinton Group implored Finish Line to abandon a structure that gives the three company founders 56 percent of the voting power despite holding just 11 percent of the shares. Clinton, holder of 4.4 percent of the stock, says that, because of the arrangement, Finish Line shares trade at a discount to their true value.

"The incongruity of that is obvious to anyone," Conrad Bringsjord, Clinton's portfolio manager for event-driven and activist investments, told IBJ. "Having been an M&A banker for 20 years, I think the structure couldn't be less democratic."

Finish Line officials declined to comment, citing a quiet period surrounding their Dec. 20 third-quarter earnings release.

While a handful of companies in recent years have ditched the dual-class stock structure, Finish Line and Emmis are far from alone. More than 300 public companies in the United States give extra voting power to certain insiders' shares, according to "Extreme Governance," a study released this year by professors at Harvard, Stanford and the University of Pennsylvania.

Corporate-governance watchdogs universally pan the practice. It's a big reason the Maryland-based watchdog Institutional Shareholder Services concluded this year that Finish Line's governance practices were better than those of just 1 percent of the companies in the S&P 600. Compared with other retailers, Finish Line fared somewhat better, with ISS finding the company's practices better than 22 percent of peers'.

Of course, people like Bringsjord aren't raising the issue because they like to climb on their high horses. They see money to be made if Finish Line slides into play.

Clinton Group said as much in a September regulatory filing. At that time, it said that if Finish Line's stock price doesn't climb, the company should hire an adviser to explore taking it private or selling it outright.

This has been a tough year for Finish Line, whose sales have slumped amid a fashion shift away from athletic apparel and shoes. But that kind of disclosure in a public filing has a way of getting investors' hopes up. Before the filing, Finish Line's shares were off 39 percent in 2006. They've since spiked and now trade for $14.10, shrinking the decline for the year to 19 percent.

Bringsjord overall gives company management high marks. "I think it is a well-run business," he said. "It is going through a transition. I'm sure they will come through it with flying colors."

Yet he doesn't think Finish Line is doing everything possible to spark the stock.

If executives think it will rebound to $25, he said, the company should be buying back shares by the boatload, taking advantage of today's bargain prices. Such a move reduces the number of shares outstanding, leaving remaining shareholders with bigger slices of the pie.

Unlike many retailers, Bringsjord noted, Finish Line has no debt and thus has plenty of leeway to fund a big buyback program through borrowing.

On the other hand, he said, if the company's prospects aren't so certain, it should take advantage of the booming buyout market. Private equity firms would pay a hefty premium to where the stock now trades. Why not capitalize?

"There are several trillion dollars of potential buyout value in the private equity players' pockets," he said. "You can't help notice there's a deal announced on a daily basis."

CEO Alan Cohen and the other founders have the good fortune not to have to take the advice of Bringsjord or other rank-and-file stockholders, thanks to the founders' special shares. You can't blame them for liking the arrangement. But they do run a public company. Is it fair?

Hungry for Steak n Shake

Dell Computer founder Michael Dell's private investment firm, New York-based MSD Capital, has quietly upped its stake in The Stake n Shake Co.

The Indianapolis-based restaurant operator's recently filed proxy statement shows MSD now owns 2.8 million Steak n Shake shares, or 9.8 percent of the company. The stake's worth $49 million.

Regulatory filings show MSD, Steak n Shake's biggest shareholder, has added to its holdings each of the past two years. As of September 2004, it owned 2.1 million shares, or a 7.4-percent stake.

An MSD official declined to comment. The investment firm began scooping up Steak n Shake's shares in early 2003.

Since then, the company's shares have appreciated 86 percent. That compares with a 69-percent advance for the S&P 500.
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