ACTIVIST INVESTORS

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US investor Guy Wyser-Pratte tells it straight: "Wake up and smell the napalm." Source: Bloomberg

The email from the shareholder based in New York came out of the blue. It demanded that OHB, a Hamburg-based satellite manufacturer, should make more acquisitions, get a more professional supervisory board, and expand into military technology. And do it quickly.

It was the sender’s name that really got the management worried: Guy Wyser-Pratte, a corporate raider renowned for forcing radical reforms on companies and who once told change-resistant managers to “wake up and smell the napalm.” Seven years ago, Mr. Wyser-Pratte was the first US activist investor to turn his attention to Germany. By forcing toolmaker IWKA to sell off its robotics arm, Kuka, he increased his own investment tenfold.

OHB, his new target, is puzzled. “I have no idea what he’s up to,” said Chief Executive Marco Fuchs. OHB is making solid profits, its share price is healthy, and its family owners have no intention of selling their 70 percent controlling stake. Mr. Wyser-Pratte owns 2 percent of the company, a trivial investment by his standards. Even if he manages to drive up the share price by 50 percent, he will only earn €6 million ($7 million) — peanuts, surely, to an investor of Mr. Wyser-Pratte’s caliber.

Activist shareholders, once an American phenomenon, are on the rise in Germany, and the question “we’re doing fine so what do they want from us” is likely to become an increasingly common one in German boardrooms. The investors buy a small stake in a company, then start loudly campaigning for the firm to cut costs, sell off divisions or replace senior executives. That alone often succeeds in driving up the share price as other investors pile in behind them. In the past, activist investors have been criticized as opportunistic, bullying and destructive, but they claim they promote good governance and efficient investment.

“Listed firms have often put on a bit of fat. They frequently lack proper controls.”

Florian Schuhbauer, founding partner, Active Ownership Capital

Activist Monitor, a specialist consultancy, estimated that Germany currently has 35 cases of companies being targeted by such investors. Worldwide, the number is around 600, and rising. High profile activists like veteran Carl Icahn, who forced Apple to increase dividends and stock buybacks, are just the tip of the iceberg.

Private investors may be delighted at rising stock prices, but activism can be hell for managers. At worst, they lose their job, at best they get a more demanding, interfering supervisory board. Investment banks now even offer “shareholder activism defense” packages to help fight off raiders.

OHB won’t speak to Mr. Wyser-Pratte: they say he’ll get no special treatment over other shareholders. Some even see conspiracy theories behind his actions: might the American government be trying to weaken a leading European satellite-maker? Mr. Wyser-Pratte said it’s simple: “There’s huge potential there. OHB has first-class people, but they lack structures to exploit business opportunities.”

Mr. Wyser-Pratte says German family-owned companies can be targets like any other: if companies don’t want outside investors interfering, they shouldn’t go onto the stock market. OHB’s governance has to change, he added: “You can’t have the son reporting to his Mom.” OHB’s chairwoman is Christa Fuchs, the mother of chief executive Marco Fuchs.

Active Ownership Capital (AOC) is among the most successful German activist investors. Its founding partner Florian Schuhbauer says he would never take on a family-owned firm. His focus is on listed European companies worth between €50 million and €1.5 billion. “Listed firms have often put on a bit of fat,” he said. “They frequently lack proper controls.”

Guy Wyser-Pratte, an ex-Marine, has rattled the management of Bremen-based satellite manufacturer OHB by saying its current management structure has “more of a resemblance of a feudal barony, with vassals paying homage to the lord of the manor.” Seven years ago, he was the first US activist investor to turn his attention to Germany. By forcing toolmaker IWKA to sell off its robotics arm, Kuka, he increased his own investment tenfold. Famously outspoken, he once said change-resistant managers should "wake up and smell the napalm." Picture source: Bloomberg
Florian Schuhbauer, one of the founding partners of Active Ownership Capital (AOC), is among the most successful German activist investors. He said he would never take on a family-owned firm. His focus is on listed European companies worth between €50 million and €1.5 billion. “Listed firms have often put on a bit of fat,” he said. “They frequently lack proper controls.” Picture source: PR
Jens Tischendorf is the head of German operations at Swedish investor Cevian. He said he prefers persuasion over coercion: “The Anglo-Saxon model – controversy, publicity and quick divestment – is not for us.” Currently worth €15 billion, Cevian favors a longer view, investing for between 5 and 7 years. Between them, the company’s 12 major investments brought a return of over 10 percent last year. Cevian owns a 15 percent stake in the industrial group Thyssenkrupp, where management are currently trying to spin off the steel-making division in a mega-merger with Tata Steel.
Former Goldman Sachs banker Klaus Umek co-founded Petrus Advisers, a London-based investment house. “We’re not cowboys riding into town… But we can act like that too,” he said. Petrus is now gunning for Comdirect, the online bank owned by Commerzbank, Germany’s second-largest bank. In a recent letter to Commerzbank CEO Martin Zielke, Petrus said Comdirect was “without ideas,” with “no interest in growth.” Fire the management team, it demanded. Picture source: picture alliance/APA/picturedesk.com
Sir Christopher Hohn founded British hedge fund TCI Fund Management, which has been pushing for change at Volkswagen, urging it last year to end boardroom "extravagance" and to reduce the “huge sums of money” paid to executives. Picture source: Getty Images

Activists focus on improving capital investment, cutting administration costs and forcing a better deal out of suppliers. Often that’s enough to improve margins and free up money for acquisitions or dividend increases. At Stada, the generic pharmaceuticals company, activist pressure pushed up the stock price: AOC profited by €200 million in one year. Now Mr. Schuhbauer is looking to invest that money and do it all over again. His first target is wind energy supplier PNE Wind. He has six more, he said.

Many activist investors dislike their aggressive image. Consensus is a better approach, said Mr. Schuhbauer: “Companies often come to us, so we’re hardly that threatening.”

Franck Tuil, a senior portfolio manager at Elliott, a major activist hedge fund worth $37 billion, said: “Management has to understand that we want to be constructive. We help companies.” But he added: “Of course, sometimes it escalates.”

Often, the smaller the stake an activist holds, the louder their demands. “We’re not cowboys riding into town… But we can act like that too,” said Klaus Umek, managing partner of Petrus Advisers, a London-based investment house. Petrus, having grown rich on property deals, is now gunning for Comdirect, the online bank owned by Commerzbank, Germany’s second-largest bank. In a recent letter to Commerzbank CEO Martin Zielke, Petrus said Comdirect was “without ideas,” with “no interest in growth.” Fire the management team, it demanded.

Mr. Umek said Commerzbank had not been responsive: “Basically, they say ‘Be happy we survived the financial crisis. What more do you want?’” Mr. Umek likes to present himself as a Robin Hood figure, fighting for small investors who bought into Comdirect in 2000 and lost heavily. Petrus manages €350 million, he said, and can afford to be patient: “We’re going to buy shares in Comdirect, more than 5 percent.” One Commerzbank manager told Wirtschaftswoche that Petrus isn’t a serious danger: having failed to get the bank to buy back Comdirect stock, Petrus want to talk up the stock price, he claimed. The bank “sees no need for change,” he said. The fight seems set to continue.

“The Anglo-Saxon model – controversy, publicity and quick divestment – is not for us.”

Jens Tischendorf, head of Cevian, Germany

Jens Tischendorf, the head of German operations for Swedish investment fund Cevian, prefers persuasion over coercion: “The Anglo-Saxon model – controversy, publicity and quick divestment – is not for us.” Currently worth €15 billion, Cevian favors a longer view, investing for between 5 and 7 years. Between them, the company’s 12 major investments brought a return of over 10 percent last year.

Cevian owns a 15 percent stake in the industrial group ThyssenKrupp, where management are currently trying to spin off the steel-making division in a mega-merger with Tata Steel Europe. Labor unions oppose the move. Cevian will not be drawn on its position, but Mr. Tischendorf spoke highly of spin-offs in general: “Spin-offs have a bad reputation. But nothing is worse than having to concentrate on a loss-making division.” He pointed out that many recent German spin-offs made massive profits for shareholders, including energy company Uniper and lighting manufacturer Osram.

Demergers remain relatively rare on the German stock market, offering a wide range of targets for activist investors like Cevian, AOC and Mr. Wyser-Pratte. As one activist investor told WirtschaftsWoche: “The money is already sitting there. We just have to clear a path to it.”

Hauke Reimer is an editor with business weekly WirtschaftsWoche, a sister publication of Handelsblatt. To contact the author: hauke.reimer@wiwo.de

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