Corporate America just doesn’t understand Jim Mitarotonda.
wallstreetreporter.com
The 48-year-old executive best known for liquidating cash-rich Internet music groups MusicMaker.com and Liquid Audio is simply a concerned shareholder with a few helpful suggestions for befuddled managers. To hear him tell it, liquidation is a last resort reserved for companies with failing business models and spendthrift executives. He’s really a grower of companies.
He touts his management credentials – before forming Barington Capital Group in 1991, Mitarotonda was a co-founder of investment boutique Commonwealth Associates – and the collected wisdom of trusted advisors such as Joseph Wright, Jr., Chief Executive Officer of PanAmSat and Sy Stewart, Chairman of Style Valet.
“Our objective is to be long-term investors and value added—to managers of these companies,” explains Mitarotonda.
But critics, and even some of Mitarotonda’s staunchest supporters, aren’t impressed with his credentials for managing growing businesses. When asked to evaluate his instincts for picking winning emerging technology firms, several former colleagues who have high regard for Mitarotonda concede that Barington’s record of restructuring former highfliers is mixed, at best.
A manager who received one of Mitarotonda’s recent “suggestions” was more blunt. “He says he wants to be a builder of companies,” this executive said. “Where’s the evidence he’s built companies? We looked at his background and didn’t find any.”
But detractors and supporters agree on one thing: Mitarotonda has all the makings of the next prolific corporate raider. While some fund managers are content to wait for a catalyst to unlock hidden value, Mitarotonda doggedly pushes companies to exit dead end businesses and cut extravagant corporate spending. This hardnosed determination is offset by a subtle sense for picking public confrontations he can win.
His private equity fund, Barington Companies Equity Partners, has produced an 86% cumulative return since founding it in 1999. Total assets under management have swelled to $30 million, $11 million from Barington’s fund and about $29 million managed on behalf of Ramius Securities and Seymour Holtzman’s Jewelcor Management.
And while he doesn’t invite comparisons with notorious corporate raiders of the past, Mitarotonda isn’t afraid to learn from them. There are three books on a table next to his desk: The Deal by Bruce Wasserstein, Mora Johnson’s Takeover and a book on vulture investing. Takeover is his favorite – the book is packed with details on a handful of 1980s leveraged buyouts. Vulture investing peaks his interest but Mitarotonda concedes he doesn’t have the expertise for that niche.
Although most of Mitarotonda’s portfolio companies are profitable old economy stalwarts in need of restructuring, it’s Barington’s successful proxy fights for control of Liquid Audio and Musicmaker that have defined his public persona.
Mitarotonda’s argument to shareholders of Liquid Audio and Musicmaker was simple: Executives were wasting money on pointless efforts to prop up a failed business model. He promised to shutter the businesses and distribute all remaining cash if elected to the board. Shareholders liked what they heard. His nominees won control of Musicmaker by a comfortable margin and received 80% of votes cast by shareholders of Liquid Audio.
The battle for Internet music distributor Musicmaker was short and profitable. Barington acquired a block of stock late in 2000 at an average price of $2.50 per share. Following a short proxy contest, Barington closed Musicmaker on Jan. 3, 2001. A month later he distributed $3.00 per share to shareholders.
The corporate shell was renamed MM Companies and became a vehicle for launching his next deal. Music encryption software developer Liquid Audio had accumulated losses of $103 million during its six years of operations, revenues were declining and the company was burning through $5 million per quarter. Mitarotonda believed the company would never turn a profit and should be shutdown before wasting management squandered its remaining cash.
Between August 14, 2001 and March 5, 2002 MM Companies purchased nearly 1.6 million shares of Liquid Audio at an average price of $2.21 per share, according to documents filed with the Securities and Exchange Commission.
With a sizable stake in the company, Barington had two options for unseating management. The firm could either acquire Liquid Audio or commit to a long proxy fight. But before Mitarotonda could choose a strategy, a rival bidder put the company in play. On Oct. 22, 2001, rival buyout shop Steel Partners floated an offer to purchase Liquid Audio for $3.00 per share in cash. Four days later Barington sent a letter to chief executive Gerald Kearby outlining Barington’s interest in topping Steel Partners’ bid. Mitarotonda claims management never responded to the letter.
In early November Liquid Audio issued a press release rejecting proposals from both buyout firms.
On Dec. 18, Mitarotonda launched a proxy battle to unseat management’s slate of directors, proclaiming his nominees would “act to eliminate the burdens that the Company's charter documents and current board have imposed on the exercise of corporate democracy.”
His principles of good corporate governance included eliminating stockholder rights plans, banning staggered boards, eliminating a prohibition on stockholder action by written consent and instituting a policy of simple majority rather than a two-thirds vote of stockholders to modify by-laws.
On June 13, 2002, Redwood City, CA. based Liquid Audio, unveiled a plan to merge with Alliance Entertainment. The deal called for Liquid Audio shareholders to tender 10 million of the company’s 22.75 million shares at $3.00 per share. The remaining shareholders would control 26% of the combined company. In conjunction with the merger, Liquid Audio postponed an annual meeting scheduled for July 1.
Barington and Steel Partners lobbied against the deal, arguing Liquid Audio should simply make a cash distribution of $3.00 to all shareholders. On August 22, the company expanded the board from five members to seven in an effort to dilute the influence of directors elected at the upcoming meeting.
Despite the legal maneuvering - or perhaps because of it - more than 80% of Liquid Audio shareholders backed Mitarotonda’s slate of directors at the Sept. 26 annual meeting. Shareholders also vetoed the proposed merger with Alliance.
Liquid Audio declared a cash distribution of $2.50 per share to shareholders of record on December 20 and reimbursed Barington for $930,000 in expenses incurred during the proxy fight. The stock recently traded around 34 cents per share, giving Barington a return of about 29% on the deal.
Adding insult to injury for Liquid Audio executives, on Jan. 7 the Delaware Supreme Court ruled Liquid Audio’s last minute expansion of the board was illegal.
“The defendants compromised the essential role of corporate democracy in maintaining the proper allocation of power between the shareholders and the Board, because that action was taken in the context of a contested election for successor directors,” the court wrote.
The decision was important victory for Barington and its legal team of Peter Smith at Kramer Levin and Michael J. Maimone of Delaware law firm Gordon, Fornaris and Mammarella.
But Mitarotonda doesn’t want to be pigeonholed as a champion of shareholder rights and becomes visibly agitated by reports referring to him as an activist investor. “We own the company, but boards don’t want us to say anything,” Mitarotonda fumes. “Could you imagine what it would be like if George Bush was allowed to appoint his own Senators? But that’s what we have in corporate America.”
Marc Cooper, Managing Director at Peter J. Solomon and former Vice Chairman of Barington, provides one explanation for Mitarotonda’s visceral distain for failing managers. “Jim is not interested in shareholder rights,” explains Cooper. “But he does get indignant when he sees management failing to deliver value for shareholders while protecting their own position.”
As he sits in his corner office overlooking Central Park, Mitarotonda projects the deliberate gaze and controlled speech of man unfazed by the chorus of naysayers or his growing celebrity. On the floor of his office, directly below two trophies from a corporate basketball tournament Barington won a few years ago – the diminutive Mitarotonda didn’t play – is an enlarged copy of a cartoon. The character is walking into the sunset with a shadow stretching out behind him. The caption reads “The wise man credits the sun, not himself, for the growth of his shadow.”
Mitarotonda’s family emigrated to Woodside, a working class community adjacent to the Long Island Railroad depot, when he was nine. He received an MBA from New York University in 1979 began his Wall Street career as broker at D.H. Blair & Co.
He still shops at Vincci, an apparel store in Forest Hills run by younger brothers Mario and Mike. Domrose Sons Partnership, a partnership formed to funnel the brothers’ money into Barington’s bid for Liquid Audio, was named after his parents, Dominick and Rose.
It was through youngest brother Mario that he was introduced to one of his first business partners, Michael Falk. Mario Mitarotonda and Falk were classmates at Queens College. “Mario said he had an ambitious brother who was managing a branch office for Citibank at the time,” recalls Falk. “He recommended I talk to Jim.”
Mitarotonda hired Falk for the summer. Several years later, in May 1988, Falk, Mitarotonda and Jim Giordiano formed Commonwealth Associates. The securities firm had three arms: investment banking, brokerage and trading, and a small research operation. Giordiano ran the brokerage business. Falk split his time between research and investment banking. Mitarotonda ran the business and worked in corporate finance.
It was at Commonwealth that Mitarotonda tested his strategy for investing in undervalued companies. Commonwealth created a partnership that accumulated a 7% stake in cruise ship operator Regency Cruises. The group joined with Hong Kong-based real estate and entertainment conglomerate New World to make an offer for the company. The bid was rejected, but management eventually sold the company to a Greek shipping company, pocketing Commonwealth a nice profit.
“Jimmy always had what we would now call a merchant banking mentality,” observed Thomas Constance, co-Chairman of the law firm Kramer Levin Naftalis & Frankel LLP and a member of Barington’s advisory board. “He would go out and find these undervalued companies with an older CEO who was looking to exit the business or [he would find] a former highflier and push for change.”
But Mitarotonda’s first entrepreneurial foray ended after only three and half years. In November 1991, he sold his one-third stake in Commonwealth and launched his own firm. While none of the former partners were willing to discuss details of the split, Mitarotonda and Falk acknowledge egos contributed to decision. “I think Jim always wanted to run his own firm,” Falk said. After Giordiano left the business, Falk successfully repositioned Commonwealth as a merchant bank serving the healthcare and technology sectors. Giordiano could not be located for comment.
One of Mitarotonda’s first tasks after leaving Commonwealth was to create a catchy name for his new firm. He eventually settled on the name Barington, a derivative of his birthplace, Bari, Italy. “An attorney who was a co-founder of Barington and Donna Ziccaro, the daughter of Geraldine Ferraro, came up with the name,” according to Mitarotonda. “I thought it was kind of corny, but I asked around the office and other people thought it sounded great.”
The firm was organized as a full service investment bank targeting smaller businesses overlooked by Montgomery, Robertson Stephens, H&Q and boutique banks such as Volpe, Welty and Co. and Needham & Co.
Barington launched its first activist investment in 1995. The company had underwritten the initial public offering of RGB Computer and Video Inc., a video editing company, in 1992. But RGB was slow to recognize the growth of digital technology and lost market share to Avid Technology. Mitarotonda recommended management sell the business. When they refused, he acquired 250,000 shares and brought legal action against RGB. The company eventually closed the editing operations and entered a series of new businesses, netting Barington a sizable profit.
While Mitarotonda continued to dabble in private equity-type investments, managing Barington was his passion. At its peak, the company employed nearly 150 employees. But with the explosion of venture capital in the mid 1990s, larger investment banks began targeting private firms that had been Barington’s bread and butter.
The Internet bubble of the late 1990s was the final straw. When tech companies with little more than a business plan and a few software engineers were valued at $500 million or more, there was little need for the $5 million to $50 million deals Barington pioneered.
In 1999, the brokerage operation was sold and the investment-banking group decamped to Peter J. Solomon Co., leaving Mitarotonda with a nascent private equity business.
The rapid rise and fall of Barington’s investment banking operation once again highlighted Mitarotonda’s skill for identifying a profitable niche but raises questions about his vision for recognizing the evolving needs of clients and a shifting competitive landscape.
Of course, Barington wasn’t the only small investment bank to be forced out of business by the Internet bubble. Nearly all of Barington’s competitors either merged with a larger firm or curtailed operations. But many of Barington’s problems were self-inflicted. The company had a deep Rolodex of technology clients but simply misjudged investor demand for Internet IPOs. All totaled, Barington only underwrote one Internet company, Hollywood.com.
With his private equity fund, Mitarotonda has once again unearthed a profitable niche, but he also faces risks from a changing corporate landscape.
Mitarotonda needs to look no further than the books on the table next to his desk to find cautionary tails from corporate raiders who were stymied by elaborate takeover defenses. In 1980, attorneys from Skadden, Arps helped thwart Carl Icahn’s bid for Hammermill Paper, handing the future buyout king his first significant setback and tying up his capital for nearly a year.
Shortly after Barington launched a bid for Register.com, a New York based domain name registry, Register hired poison pill specialist Wachtell Lipton Rosen & Katz to craft its defense. Asked if he would walk away from Register if Barington fails to win a seat on the board, Mitarotonda reiterates his commitment to sticking with an investment for the long-term.
Icahn tweaked his strategies following the Hammermill Paper standoff, preferring leveraged buyout to long proxy fights.
Although Mitarotonda appears unlikely to change his approach despite stiffening corporate resistance, Mitarotonda and his advisers aren’t concerned. They believe institutional shareholders will take a more active role in future proxy fights, neutralizing the impact of poison pills and other legal impediments.
And while Barington’s dogged pursuit of Liquid Audio may have raised the ire of corporate America, Mitarotonda’s backers argue the transaction boosted his credibility with the investment community. They argue future takeover battles will focus more on winning the hearts and minds of shareholders and downplay the role of larger than life personalities. If it comes down to an issue of who to trust, you have to like Mitarotonda’s chances. |
