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Portfolio > Mutual Funds > Equity Funds

Highfields Cautions But Stilwell Proceeds, Becomes

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KANSAS CITY, Mo. (–Stilwell Financial Inc. completed its transformation into Janus Capital Group Inc., effective Jan. 2, despite the advice of hedge fund manager Highfields Capital Management LLC, Boston. Highfields is Janus’ second-largest investor, with 8% of its equity.

The name change is part of a broader reorganization plan in which Janus has merged its two mutual funds, the Janus and Berger Funds. Janus also plans soon to sell its 33% interest in a fund data processor, DST Systems Inc., and to take a 30% ownership stake in a securities broker-dealer, Perkins, Wolf, McDonnell and Co., Chicago.

A Janus spokeswoman, Jane Ingalls, said that the company has had no contact with Highfields on this subject for the last two weeks. “Other than what you see in the public filings, that’s the most up-to-date contacts,” she said.

On Nov. 7, 2002, Highfields filed a 13-D with the Securities and Exchange Commission indicating that it had reservations about Stilwell’s plans and that it would “review and consider the issuer’s further announcements…relating to the reorganization and the DST sale to determine whether such plan will achieve the highest values attainable for shareholders,” thereafter either acquiring or disposing of its shares of the company’s stock as it thought best.

On Dec. 2, Highfields disclosed that it had hired investment bank Blackstone Group LP to assist in its review.

Later that month, Highfield principals Jonathon S. Jacobson and Richard Grubman wrote Stilwell’s chief executive to update him on their deliberations. “The range of alternative transactions is broad and the task of redesigning compensation arrangements is substantial,” they wrote. “The shareholders’ interest lies in allowing adequate time for alternatives of any kind to be explored and in the board having time to receive, deliberate and take action on them.”

Pursuant to further deliberations, they asked that Stilwell disclose the pay of managers at its Janus division based in Denver and that it re-evaluate the danger that the taxable spin-off of its stake in DST will prove “value-destroying.” Such moves might delay re-organization, noted Messrs. Jacobson and Grubman, but “so be it.”

Spurning this advice, at least in part, Stilwell has now transformed itself into Janus. Its spokespeople have said that various plans for the sale of DST remain under consideration.

The largest investor in Stilwell/Janus is The TCW Group Inc., a Los Angeles-based investment advisory management company. A spokeswoman there said that it is against company policy to comment on any investment.

Success with Readers Digest

Active efforts to change the plans of corporate management are standard operating procedure for Highfields. One of its recent success stories through this strategy is the matter of Reader’s Digest Association Inc., Pleasantville, N.Y. Last February one of the founders of Highfields, Jonathon S. Jacobson, met with Thomas O. Ryder, the chief executive of Reader’s Digest, at a dinner in New York and they discussed acquisitions policy. Mr. Jacobson sought to impress upon Mr. Ryder his view that acquisitions would not be wise, that Reader’s Digest must focus upon improving or selling existing properties.

In March, Mr. Jacobson saw press reports that Mr. Ryder was considering the purchase of Reiman Publications, a chain of periodicals based in Greendale, Wis., (Previous HedgeWorld Story) with demographics that skew toward the elderly and the rural. Mr. Jacobson wrote Mr. Ryder to express his concern that such a move “seems extremely foolish and reinforces our belief that the Company can take whatever actions the management wants with a rubber stamp from its controlling shareholder, the Wallace Funds.”

In April, Reader’s Digest’s stock price began a serious slide in value, from US$25 to less than US$14 by October.

The debate Highfields set in motion ended last month when a shareholder vote restructured Reader’s Digest’s equity into a single class of voting stock, one vote per share, reducing the voting power of the Wallace Funds from 50% to approximately 13%. Since then, the stock price has recovered somewhat, ending 2002 at US$15.10.

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