Shareholders press Smulyan for more
Noonday Asset Management is not the only investment firm pressuring Jeff Smulyan to raise his buyout bid for Emmis Communications (5/16/06 RBR #96). Martin Capital Management's managing partner, Frank Martin sent Smulyan a letter spelling out objections to the proposed buyout and filed a copy with the SEC to make sure it was made public. In short, the letter accuses Smulyan of putting his own interests ahead of his fellow shareholders, the people he is supposed to represent as CEO. "It is within your power to do what is fair and just," Martin says, but implies that the offer as it stands, for 15.25 per share, is neither. Thus, he says the firm will vote against the proposal to take Emmis private.
RBR observation:
What looked good on paper has a way of always finding a red magic marker attached to it. Smulyan has made a bold move going private and this is just a hurdle to over come. Many eyes are on Emmis to see the end result and how much red is on the floor when the transaction is complete. Some in the public sector have said - "Ah, I will watch and see how Jeff makes out."
Read the letter.
May 17, 2006
Mr. Jeffrey H. Smulyan
Chief Executive Officer
Emmis Communications Corporation
One Emmis Plaza
40 Monument Circle, Suite 700
Indianapolis, IN 46204
Dear Jeff:
This is an open letter from a long-term shareholder of Emmis Communications Corporation ("Emmis"). Martin Capital Management clients, partners, and employees own approximately 7.2% of the total shares outstanding. We ask that you share this correspondence with the Emmis Board of Directors.
You have proposed a "going private" transaction. In making that offer, you have advised the Board of Directors that:
Mr. Smulyan will not agree to any other transaction involving Emmis or his shares of Emmis. Under the terms of Emmis' charter, on any such other transaction (other than the "going private" transaction described above) that requires the approval of Emmis' shareholders, the Class A Common Stock and Class B Common Stock will vote together as a single class, with each share of Class A Common Stock entitled to one vote per share and each share of Class B Common Stock entitled to 10 votes per share. Mr. Smulyan would in such circumstances have approximately 66.7% of the combined voting power entitled to vote on any such other transaction (calculated to include shares issuable under all options exercisable currently or within 60 days).
As a practical matter, it would appear that your proposal would give you the unilateral power to prevent Emmis from engaging in any other transaction. However, if 50% of the shareholders of Emmis were to vote against the proposed "going private" transactions, your proposal could not be implemented.
One of the unfortunate developments in corporate America is the all-too-frequent breakdown in the age-old "principal/agent" relationship. The principal/agent relationship is invoked when a principal (the shareholders acting through their elected representatives, the Board of Directors) engages an agent (the CEO and other ranking officers of the corporation). The 17th-century Scottish political economist and moral philosopher, Adam Smith, wrote of the possible hazards that may render the principal/agent relationship ineffective.
A century later, Abraham Lincoln invoked moral and ethical considerations in a civil case when two minors refused to pay a debt. On advice of their attorney, the lads argued that they could not be held liable by virtue of being underage. Lincoln conceded the literal meaning of the law, but argued that the boys should not be allowed to enter adult life with their names besmirched by not making good on what they owed. Pointing a long bony finger at the opposing attorney, Lincoln admonished lawyers who denigrated the practice of law with such advice.
Various mechanisms may be used to try to align the interests of the agent with those of the principal, so long as the principal is in a position of ultimate authority. We note that the principal/agent relationship at Emmis has been damaged because you have taken steps over time, the result of which is to expand the voting power of your current(1) 17% economic interest in Emmis by a factor of almost 4 to a potential 66.7% voting interest through the creation of a second class of stock, Class B shares--which only you have been permitted to own--that have 10 times the votes per share of the Class A shares owned by all other Emmis shareholders. As a result, you have effectively negated the safeguards inherent in a system that depends on checks and balances. (2)
Fresh from attending the Berkshire Hathaway annual shareholders' meeting in Omaha with 24,000 others who trekked from countries around the world to the Woodstock of capitalism (in part to be reassured that integrity is alive and well in the executive suite of one of America's finest corporations), I'm happy to report that all is indeed well with the man who is known to have said "a principle wouldn't be a principle if it were subject to change." On page 15 of Warren Buffett's Chairman's letter (see BerkshireHathaway.com to download the 2005 annual report), the icon of corporate-governance probity wrote an essay about executive compensation that may strike close to home (plate). He concluded as follows: "Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood hero of mine. Hank's son, Steve, at one time was a player's agent. Representing an outfielder in negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he should ask for. Hank, a true pay-for-performance guy, got straight to the point, `What did he hit last year?' When Steve answered `.246,' Hank's comeback was immediate: `Ask for a uniform.'"
Like Hank Greenberg, Warren Buffett wouldn't have paid that .246 hitter a signing bonus either. Carrying through with the analogy, the bonus that could accrue to certain shareholders--if the "going private" offer is successful--would make Ted Williams' salary the year after he hit .406 pale, of course, by comparison.
Moreover, we're concerned by the explanation of the "going private" transaction found in the SEC filings:
"We believe that our offer is fair to and in the best interest of Emmis and its various constituencies, including its public shareholders. This offer represents a 13.6% premium over the closing price of Emmis' Class A shares on May 5, 2006."
We find this a peculiar statement because, first, Emmis is not an entity unto itself but a company owned by all its shareholders. Second, the statement that the offer is fair because it "represents a 13.6% premium over the closing price of Emmis' Class A shares on May 5, 2006" disregards the various alternative methods of achieving the highest value of the company for the benefit of all its shareholders. Rather, your statement that you would oppose any such alternative effectively prevents the consideration or realization of any such alternative.
Accordingly, we wish to inform you that (1) it is our present intention to vote against the proposed "going private" transaciton because we believe that it is unfair to the shareholders of Emmis and (2) we intend to make this letter public through our 13D offering.
Jeff, we implore you to be magnanimous. There are many aspects of your performance as CEO of Emmis that we admire greatly. It is within your power to do what is fair and just. May you understand the virtue of making those decisions now that will cause your contemporaries to refer to you with admiration and respect for years to come. We believe that you are too good a man to do anything less.
Sincerely,
/s/ Frank K. Martin, CFA
Frank K. Martin, CFA
Managing Partner
Martin Capital Management
Good Morning - Gain a personal edge on today's business day. Are you reading this from a forwarded email?
