(FORTUNE Magazine) – When word leaked out earlier this year that Michael Price had been snapping up shares of Dow Jones, many anticipated a public dustup between the embattled publishing company and the Wall Street heavy. After all, Price makes his living buying stock in underperforming businesses with entrenched management and then forcing changes. Being vocal and aggressive is usually part of the plan. But with Dow Jones, Price has been uncharacteristically quiet. Is it possible that Wall Street's most dangerous shark is suddenly content to be a passive investor?

Actually, no. Price--who as head of the fund company Franklin Mutual oversees $28 billion--has been up to his usual tricks, huddling with discontented shareholders and confronting management. But that's not all. FORTUNE has learned that Price has drawn up a bold, though admittedly sketchy, merger plan for Dow Jones that he believes will enrich not only himself but also other shareholders--in particular the Bancroft family, which controls a majority of the company's shares.

Price's plan is simple, on the face of it: First, merge Dow Jones into the Washington Post Co. Then, bring in Warren Buffett's Berkshire Hathaway, which already owns 16% of the Post, to provide additional capital and Wall Street cachet.

Is this plan a pipe dream or a serious proposal? Price has run the idea past only a few interested parties, and he hasn't taken it to Buffett, or to Donald Graham, CEO of Washington Post Co., or for that matter to Peter Kann, CEO of Dow Jones. (Each was unaware of Price's plan until contacted by FORTUNE.) It can be argued that the general principle of the plan--merging Dow Jones and the Washington Post--has a certain logic, but this is still only a rough outline with some gaping holes and some very questionable assumptions. For instance: Would the Bancrofts give up control of Dow Jones--and would the Graham family give up its control of the Post--in exchange for a smaller stake in a larger entity? Would the terms be sweet enough to induce Buffett to invest more in the newspaper business?

On the other hand, events at Dow Jones last month suggest that the company is going to have to do something to mollify its increasingly restless shareholders in the very near future. The company's electronic business information unit, called Dow Jones Markets, has become a severe drag on earnings. Management's plan to invest $650 million in the ailing division has come under fire. And with four new directors, the company's once complacent board appears to be in no mood to rubber-stamp management decisions.

On Oct. 8, Dow Jones reported that in its third quarter, operating income for the Markets unit plunged 83%, nearly wiping out the healthy profit turned in by the booming Wall Street Journal. Nevertheless, CEO Kann insisted in a conversation that day with securities analysts that the turnaround plan was on track and that the unit, formerly called Telerate, was not for sale. Then, a scant eight days later--and one day after a meeting of the board--Dow Jones changed its tune. For the first time, a spokesman said the company might be willing to sell the business.

It was the problems at Telerate, and their effect on Dow Jones shares, that led to a revolt within the Bancroft family last winter. Some younger family members, displeased that their stock had gone nowhere during this great bull market, began asking hard questions. The story of that revolt, as disclosed in FORTUNE (Feb. 3), drew the attention of big players on Wall Street, including Price. He now owns over 6% of Dow Jones stock, worth some $225 million.

Price is one of the most feared predators on Wall Street. He makes a specialty of buying stock in limply performing companies and forcing them to take action to enhance shareholder value. And because of his track record--Price has forced management out either directly or indirectly at Sunbeam, Dial, and Chase Manhattan--he isn't to be ignored. Even if his plan for Dow Jones doesn't pan out, it provides unusual insight into the way Price goes about shaking companies up. He focuses relentlessly on the endgame: making the stock go up. If, along the way, the means to this end seem unlikely (who ever thought Chemical Bank would buy the venerable Chase?), it makes no difference to him. The plan for Dow Jones can be read, in a sense, as a letter to members of the Bancroft family offering to enrich them, one way or another, if they will give up their control of the company. "The plan is really a 'What if...' " says Price. "Having said that, I think the deal makes an awful lot of sense."

Price had been playing around in Dow Jones stock before the FORTUNE story was published, but he took his biggest bite after the story appeared. In early February he filed a 13D with the SEC notifying the commission that Franklin Mutual owned more than 5% of Dow Jones stock.

Over the next few weeks Price and one of his analysts, Tom Price (no relation), began to really investigate the company they had invested in. What was wrong, they concluded, was not Telerate per se--what was wrong with Dow Jones was management. For instance, they noticed that the company's Ottaway regional newspapers had operating margins around 15%, whereas other regional papers, such as the Buffalo News, owned by Berkshire Hathaway, had margins above 30%.

Price knew, of course, that unlike other companies he had gone up against, this one had an additional and potentially intractable barrier: Because the Bancroft family owns just under half the company's common stock, and some 70% of its supervoting shares, no significant changes could ever be made at the company without family approval. In other words, for Price to make any kind of deal happen, he would have to make the Bancrofts very happy.

The comparison of the Ottaway papers with Berkshire's Buffalo News set Price thinking. Now there's a well-run newspaper, he mused. Wouldn't it be great to somehow involve Buffett in Dow Jones? But, Price realized, Buffett doesn't really run that newspaper, he owns it. Just as he owns a piece of the Washington Post. Hmm. What if Dow Jones were merged into the Washington Post? Both companies are controlled by families. Both have a dominant, blue-chip newspaper as their core business. Both have some other interesting media properties. Plus, Buffett would be involved. "Wall Street would love this company," says Price dreamily.

And so Price began working on structuring the deal in such a way that it would be irresistible to members of the Bancroft family--which for so long had been loyal backers of Dow Jones management--and also appealing to Buffett and the Grahams.

On Feb. 26, Price had dinner at Parioli Romanissimo, an elegant Italian restaurant on Manhattan's Upper East Side, with Lizzie Goth, the Bancroft heiress who had begun the family fuss over Dow Jones, and Ira Millstein, senior partner at Weil Gotshal & Manges, her sometime adviser. Price had never met Goth, but he knew Millstein because both had been involved in Macy's--Price as a director, Millstein as outside counsel. At the dinner, Price sprang his plan, and Millstein was apparently intrigued, as was Goth (neither could be reached for comment). Not long afterward, Goth visited Buffett in Omaha and mentioned that Price had a plan for Dow Jones. But Goth didn't go into detail.

Meanwhile, back in New York, Price met with Peter Kann on April 10. "I've been reading your newspaper since I was a kid," Price began. "And I have tremendous respect for this franchise." But, Price said, he believed that the Markets unit wasn't good for Dow Jones. Kann responded by saying he appreciated Price's position. "I would throw myself in front of a train for the paper," he told Price. He made no mention of self-sacrifice when it came to Markets, but he did say he planned to continue to try to fix it. Though no one yelled or screamed, Price told Kann he thought that was a mistake.

But Price didn't mention his plan to merge Dow Jones into the Post. Why? Price isn't saying. Perhaps he was waiting to see whether Lizzie Goth would express more interest before he pushed it on the company. And it's likely he was still working on the proposal. Or perhaps he wasn't ready to talk about a plan that would mean removing Dow Jones management from the helm. Kann, when told of Price's plan by FORTUNE, said, "Dow Jones is committed to remaining an independent company." Graham had no comment on the plan. Buffett couldn't be reached for comment.

We do know that at some point actual numbers were plugged in. Here's what the plan looked like with figures from a point earlier this year. Since then, obviously, stock prices have changed, which make these ratios out of date, but the general relationships would still apply.

Price envisioned that Dow Jones shareholders would receive one share of the new company--called perhaps Dow Post or, amusingly, Post Dow--for every seven shares of Dow Jones they owned. Given the Post's stock price at the time, about $350, that would make the effective buyout price of Dow Jones about $50 per share--a premium of roughly 25% over Dow Jones' then share price of $40. Washington Post shares would automatically be converted into the new company on a one-for-one basis. Washington Post management, i.e., Donald Graham--who knows Peter Kann from their days at the Harvard Crimson--and Post president Alan Spoon would run the combined company.

Next, Franklin Mutual would put $500 million into the new company in exchange for 1.4 million shares, in addition to the shares it would receive in exchange for its Dow Jones shares. Buffett would also pony up $500 million for 1.4 million shares. And Buffett would throw in the Buffalo News for an additional 1.4 million shares. Okay, question: Why would this company need an additional $500 million of Berkshire's capital when it already has plenty? "One reason is because it would look good to Wall Street to have Buffett involved," admits Price. And what would Buffett's (and Price's) capital be used for? Surprisingly, Price says, the Markets unit. "First of all, this business needs creative management," he says. "But after that it needs capital. We would fix it up first, then sell it. Either the whole thing or maybe 80%."

It's hard to fathom, though, Buffett putting a red cent into Markets. Dow Jones bought this business piecemeal in the 1980s for some $1.6 billion. In a 1989 tender offer, Dow Jones projected that the business would have net income of some $300 million in 1997. In fact, analysts now believe it will record a small loss this year. "I think the Telerate business is worth $20 million less every week," admits Price, who thinks Dow Jones could get no more than $500 million for it.

Buffett would be asked to participate in the company in another way. As an additional incentive to the Bancroft and Graham families, they would also be allowed to swap their new stock for shares of Berkshire Hathaway. In return, Berkshire would receive more stock in the new company. The idea is that some of the Bancrofts, in particular, might want to diversify their holdings into Berkshire stock, which is in a sense a holding company that owns a number of America's best-managed companies. But for this to happen, Buffett would have to like the stock of the new company more than he likes Berkshire Hathaway stock, which is another leap.

Price's plan dangles yet another inducement before the Bancrofts, particularly those members of the family who are yield-conscious. Should they choose, they could elect to be paid in convertible preferred stock issued by the new company yielding, say, 6%. In short, Bancroft family members could take either common stock, convertible preferred, or Berkshire shares--or presumably some sort of combination.

Clearly Price's plan is a rough one, with many wrinkles that would need to be ironed out. Price himself emphasizes that it is a framework. "But maybe someone will get interested," he says. The way things are going at Dow Jones, that's a real possibility. Fully 39% of the earnings in Dow Jones' third quarter came from a one-time gain, the licensing of the Dow Jones name for the trading of options and futures. Dow Jones stock has actually matched the market this year, but much of that gain reflects anticipation that the company will do something--anything--to solve the Markets problem and demonstrate that it has an effective plan to grow the company going forward. If Peter Kann doesn't show that his plan will work soon, then Michael Price's proposal will start to look less like a pipe dream and more like a bona fide option.

REPORTER ASSOCIATES Maria Atanasov and Lixandra Urresta