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EUROPE: BOSSES UNDER FIRE (int'l edition)European CEOs are scrambling to meet demands from shareholders
Christian Strenger, an unassuming 55-year-old, hardly looks like a guy who could send tremors down CEOs' spines. But as chief executive of DWS, Deutsche Bank's mutual-fund arm, he controls assets of nearly $95 billion. Since the early 1990s, he has quietly prodded companies to boost shareholder returns, and lately he has made real headway. In just the past two weeks, three pillars of Germany Inc.--conglomerate Siemens, retailer Metro, and, most recently, chemical maker Hoechst--have launched or sped up long-awaited restructurings, partly thanks to Strenger's persistence.
After years of struggling behind the scenes to influence corporate behavior, shareholders across Europe are starting to achieve results. In recent months, they have fired CEOs and dismissed entire boards. They have blocked plans to relocate corporate headquarters and forced companies into greater disclosure. And they have banded together to prod corporate laggards into restructurings and mergers.
The rise of shareholder activism comes just as Europe's CEOs are under pressure from powerful global forces to improve performance. For one thing, the ongoing crises in Asia and Russia are hurting their bottom lines. Perhaps more important, the advent of the single currency is changing the way equity investors approach Europe. Beginning on Jan. 1, stocks in all the member nations of the European Monetary Union will be priced in euros. So institutions and individuals alike are increasingly looking outside their national borders for higher returns. ''Investors will make their comparisons on a pan-European basis,'' says Michael Tory, a managing director at Morgan Stanley Dean Witter in London.
Even some of Europe's most seemingly impregnable corporate fortresses are under fire (table). The CEOs of these companies may blame their problems on economic tumult, but investors aren't accepting any excuses. Take British Airways, which bills itself as ''The World's Favourite Airline.'' With the unraveling of its long-planned alliance with American Airlines, the company's international strategy is in tatters, and its stock price has been halved since the start of the year. CEO Bob Ayling is feeling the heat, as some of BA's biggest investors start to question his leadership. Says one: ''Two and a half years after announcing the merger, you have to ask whether this could have been done differently.''
Publicly voicing doubts about a corporate chieftain marks a dramatic shift for European fund managers. Until now, their performance was largely measured against that of other managers in the same country. Now that they must compete internationally for investment capital, they are far more eager to wring the most out of their assets. ''There has been a sea change in the willingness of institutional investors to flex their muscles,'' says Stewart Bell, research director for Pension & Investment Research Consultants Ltd., which has about 55 pension funds as clients. More agitation on the part of big stockholders could help small investors, too. Companies such as France's Alcatel have responded to investor demands by promising share buybacks and further restructuring.
Strenger, for example, has long agitated for faster change at chemical giant Hoechst, which is trying to focus itself on life sciences. Partly in response to Strenger and other investors, the $26 billion giant on Nov. 17 announced that it would break itself up into a drug company and Celanese, a separately listed chemical concern. ''We see the pressure. We are facing it. We are prepared,'' says CEO Jurgen Dormann.
Scrutiny of Dormann is likely to continue. Since he surprised investors by reversing course on a restructuring plan last year, Hoechst's stock has been more volatile than many other German blue chips. But in the past month, the shares have jumped 35% on talk that Hoechst will merge with France's Rhone-Poulenc Inc. A deal could be announced soon, say an investment banker and a management consultant close to Hoechst.
PUSHING HARD. Investors are taking aim at other big European companies. Swiss industrial conglomerate Alusuisse-Lonza is talking with German energy giant VIAG about merging their packaging businesses. Although the companies have been flirting for years, this time, investors--including Switzerland's fearsome Martin Ebner, who has an 11.2% stake in Alusuisse--are making it clear that they'd like to see action. ''Ebner is pushing left and right,'' says a top German investment banker. Similarly, to keep institutional investors content, Siemens CEO Heinrich von Pierer announced earlier this month that he would divest $10.2 billion in businesses, including the chips unit.
In another coup, a group of British institutions led by Schroders PLC and Legal & General on Nov. 7 blocked auto parts maker Lucas Varity PLC's plans to move to the U.S. ''It's quite a thing for a British institution to vote against what management wants to do,'' says Vanessa James, Legal & General's director of British equities.
The Asian crisis and a slowing European economy are spurring shareholder activism by highlighting lapses in disclosure and corporate governance. When such lapses send stock prices skidding, the fireworks begin. For example, earlier this year, the huge Swiss product-testing company Societe Generale de Surveillance Holding failed to inform shareholders fully about troubled contracts in emerging markets. On Sept. 7, infuriated investors and poor half-year results helped oust the company's chairwoman, Elisabeth Salina Amorini, and her entire hand-picked board.
Some institutional investors in Europe are joining forces to push for change. In March, 15 Dutch pension funds with $42 billion worth of holdings in Dutch companies teamed up to investigate the corporate-governance practices of all the companies on the Amsterdam market index. At the top of their hit list is long-struggling Royal Philips Electronics (page 26). Fund managers at the company's Mar. 13 annual meeting protested its juicy options scheme, then worth $175 million, that Philips had put in place without fully disclosing its details to investors. Company officials promised to take the objections into account when handing out options this year.
Institutions have another fight to pick with Philips CEO Cor Boonstra: a controversial antitakeover plan that's up for renewal next year. Warns Paul Frentrop, co-director of Dutch Corporate Governance Services: ''We can't let them have an eternal poison pill.'' Many analysts say Philips would generate more value if it were broken up.
Sometimes the action of disgruntled shareholders can lead to formal investigations. Norwegian investment company Odin Forvaltning recently aired its loss of confidence in Erik Tonseth, CEO of Anglo-Norwegian engineering and shipbuilding company Kvaerner. In 1996, Tonseth took on $1.7 billion in debt to buy Trafalgar House, a British conglomerate several times the size of his company. Kvaerner's share price plunged from $64.70 before the takeover, to $10 last month. Furious, Odin called for Tonseth's head, and he was kicked out on Oct. 14. Now, the Oslo Stock Exchange and Norwegian securities officials are investigating alleged insider trading in Kvaerner stock.
DON'T FLINCH. There could be more showdowns as American institutions partner with Europeans to turn up the heat on complacent managers. California Public Employees' Retirement System (CalPERS), with assets of more than $126 billion, is on the verge of announcing alliances with local investors in Britain, France, Germany, and Japan. CalPERS has nearly doubled its international equity holdings since 1995, to $22.8 billion in 1998. So it wants to participate in efforts to boost shareholder value in the biggest foreign markets where it has holdings.
For example, CalPERS in January announced it would invest $200 million in London-based Active Value Capital, a small fund that targets underperforming companies and aims to shake them up. Active Value Capital has successfully taken on such British companies as footwear maker Scholl, whose chairman was ousted and whose stock price has since risen steeply.
While Active Value Capital's managers don't flinch from confrontation, Hermes Lens Asset Management fund, launched on Oct. 1, takes a different approach. Giant British pension fund Hermes teamed up with U.S. shareholder activist Robert A.G. Monks, who has attacked such underperformers as Sears, Roebuck & Co. ''We Are able to talk to companies behind closed doors and have a significant impact, especially when we coordinate with other shareholders,'' says fund CEO Peter Butler.
Another aggressive fund, France's ABF Euro VA, invests widely in European stocks and benchmarks itself against the FT Europe index. But it overweights its portfolio with companies that it exPects to restructure or take other steps to enhance shareholder value. Andre Baladi, a Geneva shareholder-rights activist and consultant, helped set up the fund in January, and it has outperformed the index so far.
The arrival of the euro will accelerate change, as asset managers compete for capital. Starting in 2001, for instance, employees in the Netherlands will no longer be restricted to investing their money with certain Dutch funds. Already, Dutch pension funds can look outside the Netherlands for investment. The euro could also help drive a convergence of global corporate-governance standards. And some experts figure it will lead to more shareholder activism, since investors will find it easier to move their money around Europe.
At least some European companies are getting the message. Like Germany's Hoechst and Siemens, former monopoly Telecom Italia has responded to shareholder demands--and watched its stock recover. The giant last month replaced Chairman Gian Maria Rossignolo with turnaround artist Franco Bernabe. All eyes are on Bernabe, who turned troubled oil giant ENI into an efficient and profitable company, to work the same magic in his new job.
Of course, companies that have raised money in the U.S. or merged with an American company are quickly getting in line with Anglo-American practices. DaimlerChrysler, for instance, is setting up a performance-related pay scheme unlike anything seen in Europe before. And a new generation of European managers recognizes that unless they make shareholder value a priority, raising capital will be tough for them in the future. Plenty of European companies still don't get it (page 24). But the cozy world in which managers could shrug off investors' concerns without feeling the consequences is fast disappearing.
By Julia Flynn in London, with Thane Peterson and Karen Lowry Miller in Frankfurt, William Echikson in Brussels, Gail Edmondson in Paris, and bureau reports
Updated Nov. 19, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.