`Activist' investor puts AAI in play

Controversial director may break up parent of Hunt Valley defense firm

April 21, 2002|By Robert Little | Robert Little,SUN STAFF

United Industrial Corp. has hired an investment bank, announced that it is "evaluating strategic alternatives" and pledged to "maximize shareholder value" - all the Wall Street code words for breaking a company apart and selling it off.

There's nothing wrong with United Industrial. No foundering business plan, no crippling shortage of cash.

Yet analysts say that a breakup or sale of the company has been all but inevitable for more than two years - ever since the day that United Industrial was introduced to Warren G. Lichtenstein.

Lichtenstein controls more than 10 percent of United Industrial, the parent of AAI Corp. in Hunt Valley. He has leveraged that position into a seat on the company's board of directors.

It's an old story for Lichtenstein. He controls large stakes in dozens of small public companies, serves on seven boards, and all of those companies are looking to "maximize shareholder value." Most are "evaluating strategic alternatives." Many have hired investment banks and are looking to sell.

"Whether the board at United Industrial had been thinking about those alternatives or not, Mr. Lichtenstein's involvement will certainly assure that some very visible attention is paid to them," said Gary Lutin, president of Lutin & Co. and an investment banker who advises institutional shareholders.

Lichtenstein, 36, is what's known on Wall Street as an "activist" investor. He doesn't just buy stock, he tries to influence company strategy. That usually means pressuring management, often fighting to get on the board, occasionally even installing himself as president and chief executive officer.

Representing a $160 million investment fund called Steel Partners, which he created, Lichtenstein has a 10-year history of proxy fights, forced mergers, spinoffs, buyouts and lawsuits - all in the name of maximizing shareholder value.

His investors pay $1 million or more to participate, and have earned an average annual return of 27 percent.

"We are not passive investors," Lichtenstein says in a prospectus on his fund's Web site.

"In the event the management of a company in which we have invested undertakes an action that we believe is against the best interests of its shareholders and ourselves, we take action as we deem necessary.

"We believe we are better served by becoming active shareholders and influencing a situation in which a good asset is coupled with bad management."

Lichtenstein declined to discuss his dealings with United Industrial, referring questions to company executives. They also declined to comment.

But interviews with analysts and former associates, and a review of documents filed with the Securities and Exchange Commission, reveal a man less experienced in running businesses than in determining their value and then extracting that value any way he can.

Not all of Lichtenstein's investments involve takeovers or liquidations, only his most spectacular ones. Aydin Corp. is an example. His fund seized control of the company's board in 1998, fired the management, divested three subsidiaries and sold what was left for 39 percent above market value. Tech-Sym Corp. was similar. Steel Partners acquired 10 percent in 1999, won two seats on the board, divested two businesses and sold the rest a year later.

"We invest on the basis of value, not popularity," Steel Partners wrote in a recent letter to investors. "We do not believe in passively sitting by and hoping that the gap between intrinsic value and market price will close on its own accord."

Many of Lichtenstein's efforts to sway management take place in public, through letters of admonishment that are ultimately filed with the SEC. And the tone, if not the intent, is quite often hostile.

One such letter begins: "We are pleased to hear that Christopher Pair is no longer with Herbalife International Inc."

Another begins: "We continue to be shocked by the continued display of arrogance by the board of directors of Liquid Audio Inc."

A letter to the chairman of Park-Ohio Industries says: "The illogic of your proposed transaction compels us to conclude that the acquisition is motivated by concerns other than maximizing shareholder value, namely the continued entrenchment of management."

Such a record has earned Lichtenstein a reputation as one of the small-cap market's most prominent corporate raiders - a title he disavowed in one letter to a disaffected CEO, saying that bad managers are the true raiders of corporate profits.

But among the companies that have endured Steel Partners' investor activism, critics are not hard to find.

Robert Muehlberg was CEO of a company called Medical Imaging Centers of America Inc. when Steel Partners began buying shares in 1995. Muehlberg spoke several times with Lichtenstein, and even offered him a seat on the board. He thought Lichtenstein was simply an interested investor, and that their relationship was amiable.

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