Activist investors flex their biceps

Date: Monday, June 18, 2007
Author: Louise Armitstead, Times Online

THREE weeks ago, Marcus Agius, chairman of Barclays, received a call from Nat Rothschild of the New York hedge fund Atticus requesting a meeting.

The timing seemed odd, given Agius was trying to execute the world's biggest banking deal - the proposed £93 billion merger with ABN Amro. Because Rothschild is his wife's cousin, however, Agius agreed.

But a few days later, on Monday, June 4, Agius was swamped with work and called Rothschild to cancel, promising to hook up for a chat when the bid was complete.

Rothschild refused to be fobbed off and, rather than argue, Agius jumped in his car and headed to Atticus' office in London's St James's. Even as Rothschild greeted him, Agius had no idea that their meeting would threaten to torpedo Barclays' deal with ABN completely.

Rothschild gravely handed Agius a letter signed by Timothy Barakett and David Slager, chairman and vice-chairman of Atticus. Agius read with astonishment a detailed demand for Barclays to drop its bid for ABN.

"It is clear that you are not the best owner for ABN Amro's sprawling collection of assets ... we share the market's concern that Barclays' thirst for an acquisition will lead you to increase your already full takeover offer. If you proceed we will vote against the deal and encourage others to do likewise," the letter read.

Agius was furious - but careful not to underestimate Atticus's determination. By Wednesday, June 6, Bob Diamond, head of Barclays Capital, was dispatched to meet Slager in Atticus's headquarters in Manhat-tan's Park Avenue while Barclays' chief executive, John Varley, met Rothschild in London. The next day, a video conference call was set up between Atticus and Naguib Kheraj, Barclays' former finance director running the bid. Meanwhile, bankers from Citi-group were sent in on Friday afternoon, including the bank's head of financial services, Hamid Biglari, with Gary Sheldon from the New York office and Chris Williams who flew over from London.

But Atticus refused to back down and published the letter, claiming to have the support of a group of other shareholders. At a stroke, Barclays' deal was deemed to be in jeopardy - hamstrung by one investor.

Barclays was not alone. In the past three weeks, some of Britain's biggest companies have been caught out by aggressive activists.

A series of "poison pen" letters have landed on the board tables of Vodafone and Cadbury Schweppes from relatively small funds demanding the companies' immediate break-up; and last month Martin Reid was suddenly removed as chief executive of Log-ica CMG in the wake of investor demands.

These moves came only a few months after the activist investor TCI sent a letter to ABN demanding the bank's break-up and sparked what has become a global bidding war.

Just as corporates thought investor relations couldn't get any worse, last week it was announced that Third Point, the New York hedge fund famed for its bullyboy treatment of corporate America and use of scathing public letters, was planning to start its first European fund.

Shareholder rights under UK company law have hardly changed since the late 1980s. The big difference is the change in the shareholder register to include a growing number of activists motivated by the rich rewards that turning companies round can bring. Atticus, which has $17 billion (£8.6 billion) under management, last year generated 35% returns.

Although more prolific in America, investor rows are hardly new in Britain - few could forget Fidelity's ruthless removal in 2003 of Michael Green, chairman-designate of ITV, while Atticus itself was instrumental in toppling Werner Seifert at Deutsche Börse. But corporates and their advisers have been shocked by both the proliferation of cases and the boldness of the demands.

One senior banker said: "In recent years, activism has evolved from a few quiet suggestions in a chairman's ear to louder complaints about specific deal-related issues, such as price. What seems different now is that activists are demanding to set a company's strategy and agenda themselves."

Even Fidelity's Anthony Bolton - who has a reputation for being the City's "Quiet Assassin" - has been spurred into public comment, complaining that Cadbury Schweppes had bowed too easily to calls for it to break up.

In March, Trian, an American hedge fund co-founded by the activist investor Nelson Peltz, bought a stake of almost 3% in the British company. Three days later Cadbury announced it would separate its American drinks operations from its confectionery business.

Bolton said he feared this "could represent a come-on to every corporate raider or activist investor". He added: "I don't think that the relationship between UK companies and their shareholders will ever be quite the same again."

Atticus's Slager said: "Directors need to understand that they don't own the companies - we do. They shouldn't be persuaded by individuals, but if the collective body is in agreement, they must act."

Many argue that companies and managers have only themselves to blame because the hedge funds are filling a vacuum left by inefficient, foot-dragging directors and institutions.

But others are also uncomfortable with the new activism. One objection is that activists demand a far higher level of attention than their shareholdings deserve.

The most obvious example is that of Vodafone where John Mayo, the former director of Marconi, has exploited a little-known loophole of company law to use a tiny stake - 0.0004% of the shares - to demand a complete break-up of the company. Commentators have branded the attempt of Mayo - who has gathered some heavyweight former investment bankers to help drive his investment vehicle ECM - as wrong and absurd. The demands, which look set to be put on the agenda at Vodafone's annual meeting, include forcing it to spin off its 45% interest in Verizon Wireless, its US joint venture, and taking on additional debt of £34 billion.

While the loophole might be an extreme example, institutional shareholders complain that financial derivatives - especially contracts for difference (CFDs) where only 10% of a stake is actually paid for in cash - allow hedge funds to wield power disproportionate to the actual risk they are taking. The Association of British Insurers (ABI) has called for City regulators to insist that hedge funds disclose their large positions at all times, not only when they are bidding for a business.

Last week Atticus converted its stake in Barclays from swaps to cash in answer to criticism that it should put its money where its mouth is.

Atticus was also wrong-footed by accusations that the fund was trying to block Barclays in order to protect the bid from the rival consortium headed by Royal Bank of Scotland.

Atticus remained silent as rumours flew that one of its managers had contacted the broker Cazenove to buy RBS stock just days before its letter to Barclays was published.

Slager told The Sunday Times: "We did have a small position in RBS, but we sold it at the beginning of the week to avoid confusion."

Activists are also charged with accusations of collusion since in the most high-profile cases the same names - most frequently, TCI, Atticus and Tosca Fund - are all present.

Peter Montagnon of the ABI said the power of activists should not be overestimated. "Hedge funds only have a big impact if they touch a nerve. And often they raise issues that have been the point of discussion among institutional investors behind closed doors. In these cases, their ideas quickly gain the acceptance of other shareholders - if not, their demands go nowhere."

Equally, the size of the targets is not only down to increased aggression but because some of the larger companies have underperformed other sectors and are cheap.

Montagnon added: "The world has changed with hedge-fund activists, but this doesn't mean institutions sit around doing nothing. Instead, it is often a close relationship with institutions that allows company directors to understand investor issues and deal with them quickly - for instance, with Cadbury Schweppes or ABN."

Niall Paul, head of equities at Morley Fund Management, said: "People don't see the robust discussions held behind closed doors between us and company directors, which often result in subtle strategic changes.

"Hedge funds need publicity and noise to back up their small positions - we don't."