Now It's Hedge Fund vs. Hedge Fund

The second-largest shareholder in Acxiom plans to fight a proposed buyout by another hedge fund

It's no longer surprising when hedge funds do battle with a company's management, agitating for everything from a board seat to the outright sale of the business. Shareholder activism is a staple investment strategy for a growing list of hedge funds.

It's not every day, though, that an activist hedge takes on one of its peers. Yet that's what's about to happen in the proposed $3 billion buyout of Acxiom (ACXM), a Little Rock business data processing company.

BusinessWeek has learned that Acxiom's second-biggest shareholder, Millbrook Capital Management, is going to oppose a proposed buyout of the company by the activist hedge fund ValueAct Capital and private equity firm Silver Lake Partners, arguing the $27.10-a-share purchase price is too low. The company's management agreed to the buyout on May 16, and as part of the deal, Charles Morgan, Acxiom's chief executive, will continue on in his post.

In an interview on May 18, Clay B. Lifflander, Millbrook's president, said the $700 million hedge fund, which has an 8% equity stake in Acxiom, will soon voice its objections to the deal in a regulatory filing and a letter to management. Lifflander says if Acxiom's financial projections are accurate, the stock should be trading north of $35 a share a year from now. "We're solid in our view," says Lifflander.

Sweetening the Pot

So far there has been little comment in response to Millbrook's threat. An Acxiom spokesman says the company can't respond because it hasn't seen anything official from the company. A Silver Lake spokeswoman declined to comment. A spokesman for ValueAct, which has a 13% equity stake in Acxiom, didn't return a phone call.

But Millbrook may already have found at least one ally in Kalmar Investments, which has a 1% equity stake in the company. Dana Walker, a portfolio manager with Kalmar, says: "We're being short-changed over an 18-to-24-month time horizon [if everything management has said about the company's future growth prospects is true]." With shares of Acxiom trading Friday around $27.70, or 2% above the proposed purchase price, it appears other investors may be betting that ValueAct and Silver Lake will have to sweeten the pot, or that a rival bidder will enter the fray.

Lately shareholders are starting to bristle at the wave of private equity-backed buyouts sweeping the market. There's a perception that private equity buyers, who rely on big sums of borrowed money to finance their transactions, are getting companies on the cheap, doing some minor restructuring, and then unloading their prey for a handsome profit. Most notably, a shareholder revolt at Clear Channel Communications (CCU) forced private equity buyers Thomas H. Lee Partners and Bain Capital to raise their $28 billion bid for the radio broadcasting giant.

Battle of the Activists

Even though most private equity buyout deals include a so-called "go shop" provision, requiring a company to go out and solicit other bids, it's rare for rival offers to materialize. Indeed, Acxiom's board, while accepting the offer from ValueAct and Silver Lake, says it will solicit other bids over the next 60 days. Analysts who follow the company are divided on whether any other bids will be forthcoming.

What's most unusual about the brewing battle over Acxiom is that it pits two hedge funds with a history of shareholder activism against each other. Two years ago, ValueAct, a $5 billion San Francisco fund led by Jeffrey Ubben, was a thorn in the side of Acxiom's management. The company's board twice rejected takeover offers from Ubben's fund in 2005, which back then was proposing to buy the company for $25 a share.

Ubben then launched a proxy battle to elect three directors to the company's board. But last summer the activist manager and Acxiom's management made peace. In a deal announced last August, Ubben got a seat on the board and ended his proxy challenge.

At the time, Ubben said he planned to "deliver significant long-term value to all Acxiom shareholders." Lifflander takes a cynical view, saying that Ubben and Acxiom's management have gotten too close. "They've gone from fighting to hugging to actual marriage," he says.

Better Days Ahead

Yet there's a lot of optimism to Lifflander's view about Acxiom shares being undervalued. The $3 billion buyout offer for Acxiom, which includes the assumption of $756 million in debt, represents a 14% premium to the price at which the stock closed on May 16. Shares of Acxiom, which traded as high as $43 in late 2000, have been stuck in a narrow trading range for much of the past five years.

On the same day it announced the buyout, Acxiom reported a modest 4.7% rise in sales for its just completed fiscal year, which ended Mar. 31. Full-year earnings rose 10.3%, to $70.7 million, or 84 cents a share. Investment firm UBS (UBS) is advising the buyers in the deal and is expected to provide some of the financing, sources say.

Still, the company is projecting much better days ahead. It's looking for a 21% gain in earnings per share, to $1.08 in the current fiscal year. Indeed, that rapid earnings growth is fueling Lifflander's opposition to the deal.

Using the company's own projections, Millbrook calculates that the buyers are getting Acxiom at a price that's 7.1 times its EBITDA, or earnings before interest taxes, depreciation, and amortization—a popular way of measuring a company's profitability.

That's much lower than the EBITDA multiple being paid this year by private equity buyers for other information services companies, according to Thomson Financial. Millbrook's opposition to another hedge fund is unusual, but he may gain some traction.

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