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Get Four
|  | FEBRUARY 17, 2005
By Emily Thornton The New Raiders [Page 2 of 2] DEALS GALORE. Another top raider prefers a more swashbuckling image. Surrounded by buccaneer memorabilia in Pirate Capital's office in Norwalk, Conn., Hudson and his crew fire off lawsuits and testy letters to companies that they consider poorly run. They helped to oust the chairman and CEO of educational services provider Cornell Cos. (CRN ) and to attract offers for John Q. Hammons Hotels (JQH ). James A. Mitarotonda, a co-founder and principal of Barington Capital Group, has created waves, too. From his office opposite Carnegie Hall in New York City, he spurred changes that led to the Feb. 7 resignation of the CEO of Register.com (RCOM ). At the other end of the spectrum, most deals pursued by Midas men aren't hostile. But these alchemists who spin distressed companies into gold increasingly find themselves facing off against private equity and corporate buyers for bargains. Stephen A. Feinberg, founder of Cerberus, which manages more than $14 billion, backed out of a deal last year for Clayton Homes that was also pursued by Warren Buffett. But Feinberg has outmaneuvered other buyers to pick up old-line companies such as Anchor Glass Container (AGCC ) and MeadWestvaco'S (MWV ) paper unit along with its 900,000 acres of forest land. In December he took public BlueLinx Holdings (BXC ), a building-products distributor bought from Georgia-Pacific (GP ) last May. PLAYING FOR KEEPS. Iconic companies aren't out of the hedge funds' reach. D.E. Shaw & Co., with $12 billion in capital and populated by PhDs, bought toy emporium FAO Schwarz out of bankruptcy last year. Founder David E. Shaw, himself a PhD in computer science, personally promised Frederick August Otto (F.A.O.) Schwarz, Jr., the founder's great-grandson, to make the retailer the world's greatest toy store. "Our feeling was that the brand was strong and the things FAO used to do were important and worth something," says Shaw, whose mother viewed toys as works of art. "If we brought [FAO] back to its original mission, [the company] should be profitable." If Shaw pulls off the revival, it will indicate that hedge funds can be better managers than critics give them credit for. There are positive signs. People beg to be let in to FAO Schwarz's flagship New York store on Fifth Avenue before its doors open at 10 a.m. Once it's time, three salespeople, dressed as toy soldiers, roll out a red carpet and blast a trumpet to greet shoppers. Shaw says the catalog and online businesses have "exceeded expectations." The company says it is profitable. Hedge funds are adept at finding new wrinkles in traditional dealmaking. Like many financiers, Edward Lampert's ESL Investments started buying shares of his target, Sears (S ), before making a bid for the company. But there was a twist: He already owned and ran the company's rival, Kmart (KMRT ), and it was Kmart that actually made the bid. NEW ERA. Consider, too, Richard Perry's battle with Carl Icahn, the legendary financier. Icahn -- who is trying to raise about $3 billion to start his own hedge fund -- is suing Perry Capital for $1 billion for allegedly meddling in a proposed acquisition of generic-drug producer King Pharmaceuticals (KG ) by a larger rival, Mylan Laboratories (MYL ). Icahn charges that Perry used complex hedging techniques to obtain shareholder voting rights without holding an economic interest in the shares. Perry declines to comment. The reinvention of hedge funds marks a new era for the industry -- and for Wall Street. During the 1990s fund managers took their cue from George Soros, morphing into multistrategy types and taking advantage of inefficiencies between the world's stock, bond, and currency markets. In a similar metamorphosis, hedge funds now are buying whole companies. Some of the new raiders simply want to make changes, rake in the rewards, and move on. Others plan to hold on to companies and rebuild them over the long haul. Either way, they're not long on tolerance. If CEOs slip up, these guys will take their companies from them. Consider yourself warned.
 Thornton is Finance & Banking editor for BusinessWeek in New York with Susan Zegel in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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