Tweaking Tweeter

Mark Wattles knows which buttons to push.

Wattles, a recent but suddenly large shareholder of Tweeter Home Entertainment Group Inc., has been writing to the board of the struggling Canton electronics retailer a lot this month, generating immediate and prickly responses. Their exchange yesterday was just the latest example.

What started as subtext to their public correspondence rapidly turned into overt suggestion. Wattles thinks Tweeter could be on the ropes if the company's business of selling high-end televisions and other electronics doesn't improve soon. He's in position to scoop up the pieces, or at least force the issue with shareholders and see what happens.

Wattles is best known as a founder and former chief executive of Hollywood Entertainment Corp., the video-rental business that competed with Blockbuster and others. He acquired Ultimate Electronics Inc., another home entertainment retailer, out of bankruptcy this year and runs it today. Wattles also has a second job managing his own hedge fund, the investment vehicle that has been snapping up Tweeter shares and owns more than 12 percent.

Wattles first popped up in public as a Tweeter investor three weeks ago, when his Wattles Capital Management disclosed a 9.7 percent interest in the company's stock. He said he had acquired the shares for investment purposes. But red flags go up any time someone operating a company in the same business reports owning nearly 10 percent of your stock. The price of Tweeter shares climbed on the news.

A week later, Wattles wrote to the board, suggesting Tweeter was thinly capitalized and facing trouble if turnaround plans stumbled. ''While some may consider your stock undervalued, it is my opinion that if everything doesn't go according to management's near-term plan, the stock will be worth much less," he wrote. Wattles said he might be willing to write a big check, under the right terms.

Tweeter's chief executive, Joe McGuire, answered in an unusual press release. He said Wattles had told him in recent conversation that Tweeter shares were purchased as a ''sound investment." McGuire said the suggestion Tweeter may be undercapitalized was ''highly inappropriate," considering Wattles's control of Ultimate Electronics.

The latest note arrived yesterday. Wattles told the board he wanted shareholders to vote on two proposals: to eliminate the company's ''poison-pill" defense against hostile takeovers, and to ditch the staggered election schedule for directors (a change that would make it possible to vote out the entire board in a single election). Wattles conceded he didn't have the standing to force either question on to next year's proxy ballot, but argued they were in the best interests of stockholders.

McGuire had more to say within hours. He said Tweeter's arrangements were fine the way they were. A statement concluded that Wattles and his proposals ''do not have standing" to be included in the company's 2006 proxy. This is what a public company writes when it means: ''P.S.: Drop dead."

That doesn't obscure the fact that Wattles is more right than wrong. Tweeter really does have problems that will come to a head unless the company's plans work out soon. A bad Christmas season would dig a deep hole.

Tweeter raised about $200 million between 1998 and 2000 by selling stock, spending it to buy other retailers. Like most growth plans based on lots of acquisitions, it worked well only on paper. Tweeter has lost money in each of its last three fiscal years, and its stock is down about 90 percent from its peak. McGuire replaced Jeff Stone as chief executive this year. He has a real chance to turn his company around, but only that.

Wattles could make a pile of money if Tweeter's rebound works. He could be pushing more than buttons if the plan doesn't pan out.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.