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Activists flexing muscles at city's marquee firms:

October 8, 2007

Suddenly, activist investors are swarming around struggling Indianapolis public companies-from The Steak n Shake Co. and Conseco Inc. to Emmis Communications Corp.

Here's an unsettling reality: Activists are all about making handsome returns on their investments-often achieved by selling businesses, taking them private or selling them piecemeal. It's not farfetched to think that a year from now, none of the three high-profile firms still will be a local public company.

To be sure, the executives who run the three firms have a measure of control over their fates. That's especially so at Emmis, where CEO Jeff Smulyan holds a special class of stock that gives him voting control, even though he owns less than 20 percent of the shares.

Even so, at least one analyst already has crunched the numbers on what Emmis could fetch for its Monument Circle headquarters if it were to cast off its radio stations and magazines to multiple buyers. That makes for unsettling reading for Smulyan, to say the least.

And it gets worse from there. The era of the imperial CEO unquestioned by his board or shareholders is long gone. In its place are activists who think nothing of engaging in what amounts to corporate trash talk.

In a recent regulatory filing, for instance, Elkhart-based Martin Capital Management said Smulyan is "ostensibly accountable to no one but himself" and runs Emmis "according to his own whims and fancies."

Steak n Shake's board and management team fare no better. An investment group led by San Antonio-based hedge fund manager Sardar Biglari recently set up a Web site, enhancesteaknshake.com, in an effort to rally support for a board overhaul.

"We are disturbed by the present direction ... as exemplified by its failed vision, failed strategy, failed execution, and failed board," a letter posted on the site says.

Another Steak n Shake investor group, this one based in Dallas, also is stirring the pot. It said in a Securities and Exchange Commission filing this summer that it wanted to open talks on strategy, such as an acquisition or other "potential transactions to maximize shareholder value."

Less communicative so far is Conseco Inc. investor Warren Lichtenstein, whose hedge fund recently said it wanted to start discussions with Conseco managers and directors "concerning the business, operations and future plans."

Sounds mundane, but Lichtenstein isn't the stay-on-the-sidelines sort. Two years ago, Business Week included him in a profile of "the new raiders." More recently, he's focused on Asia, where he's trying to impose Western-style reforms on the patriarchal form of corporate governance prevalent on the continent-and win big profits along the way.

Lichtenstein did not return calls. Conseco spokesman Jim Rosensteele said: "We've talked with him and other major shareholders about the ongoing progress of the company."

None of the activists hold more than a 10-percent stake in the Indianapolis companies they're targeting. In the old days, entrenched boards might have dismissed such investors as small potatoes out for short-term gain.

But the world has changed, in part because Sarbanes-Oxley regulations imposed in the wake of recent corporate scandals hold boards more accountable for company performance. Thus, directors are more willing to listen to dissidents. It also helps that such investors have established a record of success, demonstrating that many long-slumbering firms can markedly boost shareholder returns.

The result: Investors are far less forgiving of a stumble than they were just a few years ago. Take Finish Line Inc., which now is entangled in litigation with Genesco Inc. over whether it should have to complete its $1.5 billion purchase of the Tennessee company.

If Finish Line wins the right to walk away, its problems won't be over. Activist shareholders likely would be swiftly afoot, howling for new strategies to boost Finish Line's shares. The stock has fallen 80 percent since early 2005.

Last fall, New York-based hedge fund investor Clinton Group said in an SEC filing that if the company's stock price didn't climb, the company should hire an adviser to explore taking it private or selling it outright.

Clinton Group later sold Finish Line shares and looked elsewhere for investment opportunities. But other investors surely would revive the cause. Over the past year, the stock has tumbled another 60 percent.

Brightpoint shares surge

Wireless phone wholesaler Brightpoint Inc., which is in the process of assimilating two major acquisitions, is receiving an enthusiastic reception from investors these days. The stock this month hit a 52-week high of $15.49, up 53 percent since March.

The surge has helped CEO Bob Laikin pocket a tidy profit on stock options. According to a Securities and Exchange Commission filing, Laikin recently exercised options for 90,000 shares of stock under a prearranged trading plan. The exercise price was $6.51 apiece. He then turned around and sold the shares for $15 each, yielding a pretax profit of $764,000.
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