Activist investing case study
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Germany's large, publicly listed corporations used to be a closed shop, summarised by the expression "Deutschland AG" in foreign media. It was only during the early s that shareholder activism slowly started to become a more regular occurrence in Germany and across Continental Europe. Factors such as a generational change on boards, further legislative reforms, and a large number of newly listed companies managed by internationally trained directors and entrepreneurs led to an increased prevalence of the activist approach.
Once you join the dots from a 30, foot perspective and with the benefit of hindsight, it's incredible how long it takes to soften up a well-entrenched system. Quite literally, it required the generation who had created the system to die.
Abs' obituary from Britain's Independent makes for fascinating reading. How activist investing arrived in Continental Europe Germany makes for a tangible story, but the same problem existed in one form or another in most other major Continental European economies. Guy Wyser-Pratt is a useful case study for understanding how, since the early s, activist investing has been on the rise across Continental Europe. The American fund manager and activist was born in Vichy, France, in , and arrived in the US at age seven.
With his European background and successful hedge fund operation built and based out of New York, he was ideally suited to bring activist investing to Europe. In , Wyser-Pratt made waves in Germany when he intervened in the hostile takeover battle between Britain's Vodafone and Germany's Mannesmann.
As a scientific analysis of Wyser-Pratt's success and influence put it, "he was one of the first foreign investors who brought the investment strategy of shareholder activism to corporate Germany. Between and , Wyser-Pratt decided to take on an impressive number of high-profile family companies in Germany, France, Austria and Switzerland.
These were some of the most closed-off European countries as far as investor influence was concerned. You may remember the occasional flurry of horrified media reporting, which almost always included Wyser-Pratt's infamous quote that underperforming boards should "wake up and smell the napalm". The former US Marine Corps commander never minced words. In a article by Forbes , he was quoted: "Europe's business elite run companies for themselves.
They want absolute power. We're going to be a catalyst for change, and make a lot of money in the process. According to the scientific study of his activism, his investments in Europe outperformed the market by 6. Wyser-Pratt wasn't actually all that successful in achieving his demands. Merely shaking the cage and causing a stir in the media were enough to make his investments in undervalued companies become a bit less undervalued.
The Forbes article stated that investors in his fund enjoyed a Wyser-Pratt has scaled back his activist work in recent years, but he deserves credit for having had significant influence in bringing activist investing to Continental Europe. In his wake followed a slew of well-funded American and British hedge funds who took on sleepy companies across Western Europe.
Things are quite different now. Elliott Advisors, the New York-based hedge fund and world's largest activist investor, has already pursued a whole number of cases across Europe. Activist investing has become a part of the European landscape. There are now even a number of locally grown European activist investors.
One of them, who has been particularly successful, is the subject of today's Weekly Dispatch. This August article by The Economist provides a good overview. A German activist operating from Luxembourg When it comes to investing and fund management, nothing speaks louder than performance figures. The activist fund investigated by today's Weekly Dispatch has earned investors a return of During the same period, its benchmark has produced a loss of 1.
The fund isn't publicly listed, and it reportedly requires a multi-million minimum investment to become a member of the club. However, instead of calling themselves "activist", AOC has chosen the more polite European term "active owner". The fund's website states: "AOC is an independent, partner-managed investment company acquiring significant minority stakes in publicly listed, undervalued small- and mid-size companies in German speaking countries and Scandinavia.
AOC follows an active ownership approach and fosters value creation through operational, strategic and structural improvements. Together with management, we define value-enhancing strategies and measures and are ready to support their implementation as supervisory board members and advisors.
We have access to a dedicated pool of experienced industry experts, that help us to identify and realize strategic and operational improvement potential. AOC buys significant stakes in undervalued companies and finds a way to directly influence the fate of the company. The wording may be different, but the essence of the approach is identical. What's more, the results so far speak for themselves. Look no further than Agfa-Gevaert, the venerable Belgium company listed on the Euronext exchange in Brussels.
Until recently a sleepy company that investors had forgotten about, it's now at the centre of "active ownership" as propagated by AOC. Why the market had neglected Agfa-Gevaert for decades The company's name is likely to make you think of photographic films. Indeed, the company created by Lieven Gevaert was a pioneer in photographic papers, film for photography and cinematography, and X-ray panels. The roots of that half of the company's name go back to Agfa, in turn, was found in Germany in The company produced colour dye, which involved the chemical component aniline.
Both companies went through a turbulent history of their own, which ended with a merger in It continued to make headlines with products that improved the lives of millions and kept the widespread appeal of its famous brand name alive. For instance, in , it became the first European company to produce a "xerographic copier". The historical context may seem quaint, but it's very relevant for the investment angle of Agfa-Gevaert today.
Over the decades, Agfa-Gevaert has gradually turned into the kind of company that many observers from the more dynamic economies of Asia and North America would describe as typical European: Venerable history. Some remaining strengths in the core business divisions. Lacklustre growth. Little if any investor interest in the company. No dominant shareholder. A caste of risk-averse directors keen on securing their privileges. If this didn't sound like an appealing mix to attract investors, it's because it wasn't.
Since , Agfa-Gevaert shareholders have experienced no joy. Following an initial few years of moving sideways, the stock plummeted during the Great Financial Crisis and never recovered. EUR 1. Not only did Agfa-Gevaert lack a growth story, but it was also heaving under an outsized EUR 1bn in pension liabilities compared to a market cap of just EUR m.
The company had quite literally become the embodiment of what ageing, slow-growing Continental Europe has become known for in the eyes of so many. Still, the company was not without attractions. What was left of Agfa-Gevaert was a hotchpotch of businesses: Offset solutions printing services.
Digital print and chemicals printers and printer ink. Radiology solutions imaging technology to diagnose disease. Healthcare IT software for hospitals. Shareholders always knew that all of these businesses enjoyed a solid market position in their respective fields, and the group's revenue of EUR 2. However, the group's reporting was opaque, and the mixture of businesses from different industries made no sense in the eye of investors.
The investor community largely ignored Agfa-Gevaert. Few knew just to what degree the healthcare IT division packed a punch. It was the 1 market leader for hospital software in Germany. Led by a self-made entrepreneur, CompuGroup's stock price had increased by well over times since the mids. Despite the CompuGroup's stellar reputation and strong balance sheet, the bid approach failed.
Agfa-Gevaert's management was too entrenched and didn't want to play ball. It's reasonable to speculate that AOC buying a significant stake in Agfa-Gevaert was the result of the little-known healthcare IT division and the dismissive treatment of CompuGroup's potential bid. All of a sudden, the German active ownership vehicle had become the company's single largest shareholder. It didn't take long before he became chairman. As a reference shareholder, we believe in the long-term value potential", was about the only thing he wanted to say so far about his entry into Agfa.
The entire company was subsequently sold in a bidding war, and the share price tripled in just a few months, earning investors of AOC's fund a reported EUR m. The case did qualify as activist investing in every sense, including a variety of nasty public tussles and legal skirmishes. Call it active ownership or activist investing — it's all the same but dressed up to appeal to the more fragile Continental European mindset. Unsurprisingly, significant changes started to take place at Agfa-Gevaert, too.
In May , the company announced that it was going to sell substantial parts of the healthcare IT division. Shareholders were left somewhat in the dark about the exact extent of the business put up for sale, which is why, at the time, not many observers paid much attention to it. Expectations at the time were that Agfa-Gevaert was going to pocket around EUR m, which would have been about two times annual revenues.
In early , Agfa-Gevaert disclosed a deal to sell the relevant parts of the division for no less than EUR m — a stunning 3. Not only was the absolute price tag a surprise. It also happened to be almost exactly the amount that Agfa-Gevaert had in outstanding pension liabilities — EUR 1bn. The winning bidder was Dedalus, an Italian software company that had decided to consolidate the European market for healthcare IT by buying up competitors across the map. It had won the backing of a French financial investor, Ardian, which gave the Italians ample financial firepower.
CompuGroup had also entered the bidding process but lost yet again. All of a sudden, shareholders had the prospect of the pension issue taken care of altogether. Other possibilities beckoned, too. After all, Agfa-Gevaert has no short-term obligation to pay off these pension liabilities.
By now, it's already clear that Agfa-Gevaert has become a different investment proposition altogether. Key questions going forward are: How will the cash from the sale be used? What's the value of the remaining divisions? What are the likely next steps to revamp the company further?
AOC remains invested and is unlikely to exit the investment before other structural changes have been implemented. Lewis:Which is tens of billions of dollars, for that position. Niu:Yeah,no one has the money for that. I think, in Apple's case,the specific thing that he was gunning after, which was this really big push for capital returns Lewis:Via buybacks. Niu:Right,buybacks and dividends.
I think that was a very valid cause,because Apple had been getting criticized for yearsabout that. Their cash position had grownridiculously large,unjustifiably. You can't justify having that much cash. Again,as a public investor, you're just sitting there, and you're like, "Guys,come on, you have way too much cash.
That's not to say that Apple doesn't know better. I think Apple was justbeing stingy at the time, choosing to do that. They had already started a buyback program, but Icahn came in here andreally pushed them to make it biggerandreally meaningful. Of course, they didn'tlisten to exactly what he said. But I think he was successful atgetting them to increase it,in which case, it's definitely a good thing for investors, because otherwise, investors have no recourseto get Apple to start giving backall this money that's just idly on the balance sheetdoing nothing, earning really crappy returns.
Lewis:Andhis pitch was basically, "Shares arecriminally undervaluedand you have all this cash. You should be buying back shares. Niu:Something like that. Lewis:We've seen,in the last couple years,I think he began his position in and exited in , he had about a two-year holding period. During that time, we saw thecompany acquiesce to that a little bit, and decide, "We'regoing to be buying back shares at a pretty significant clip. Whichis a pretty crazy numberin itself. That's a megacap company.
They just bought back a megacap company.
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