comparative corporate governance

Textile machinery and transmission system maker Saurer is used to fight – more or less successful – battles against potentially hostile investors. But the last one was particularly nasty! Since Laxey Partners, a UK hedge-fund, announced in July 2005 that it held a considerable position in the tradition Swiss company Saurer, a fierce battle between the investor and the Saurer management set in. This episode shows in an extremely clear way how two different economic principles clash: the Anglo-Saxon shareholder-oriented way of managing a company, and the European industrialist’s way. This struggle has started in Europe somewhere during the 1980s but especially during the 1990s when more and more investors started to adhere to the idea of shareholder value, which was at that time mainly propagandized by American pundits such as Alfred Rappaport. Due to the liberalisation of capital and product markets during the 1980s and 1990s and the increasing competition between companies all around the world, many observers predicted the fast decline of the European way of doing business. In fact, the Anglo-Saxon approach, based on the supremacy of the owners (i.e. shareholders) was considered to be the most efficient way of managing a company. Hence, less efficient approaches would soon disappear. The fundamental difference between the Anglo-Saxon approach and the European approach is the respective position of the shareholder and other stakeholders: in Anglo-Saxon countries, managers are considered to be trustees who administer “other people’s money”, the company being nothing more than a way for owners to increase their wealth. The mission of the management is hence to maximise shareholders returns on investment, i.e. creating shareholder value through the maximisation of the company’s market value. In Europe, on the other hand, the company is traditionally seen as being more than the sum of its parts. The company is a quasi-public entity with multiple interests and responsibilities. Sometimes it is even seen as an organic entity with an interest of its own (e.g. in the German theory of the Unternehmen an sich). This multiple interests give a large leeway to the mangers (and other insiders) in deciding what interests should be privileged: should the companies exceeding cash flow be reinvested in the production, used in order to increase salaries or be distributed to shareholders? In European corporate governance systems, this decision is often not made by shareholders during the Annual general meeting, but by the management or the board who has enough power to retain earnings for instance through the creation of hidden reserves.

The fight between Saurer and Laxey Partners illustrates in an impressive manner the clash between these two conceptions of the stock company and shows that the shareholder value idea does not yet prevail in certain parts of the Continent. Industrialists – despite political discourse that indicate the contrary (cf. Franz Müntefering’s last year’s speech on the plague of locusts in Germany and the ensuing debate on capitalism) – still seem to have the means to defend themselves against the evil force of globalised capital (and especially its spearhead the hedge-funds)!

The story begins on July 15 2005. That day, Laxey Partners Ltd. announces that it holds 7.61 % of the capital (which corresponds to 7.61% of votes since Saurer introduced in 1994 a single share). One month later, Laxey had increased its participation to 15.02%. Already at that point Laxey made clear that it considered the company – and more precisely its transmission system branch – as being fundamentally undervalued (NZZ August 12 2005).

From this date on, Laxey started to exert pressure on the Saurer management. The main contentious issue is very revealing of what I called the clash of two different economic mindsets. Thus, the chairman of Laxey, Preston Rabl, argued that, even though the Saurer management did a good job, the company was undervalued on the stock exchange, which was – according to Rabl, due to the fact that the management retained to much cash for its investment projects (NZZ March 18, 2006). The remedy was hence to distribute this money to shareholders, to increase transparency concerning its acquisition policy, and possibly to review the structure of the company. Concretely, Laxey attacked the fact that Saurer was built around two pillars, which did not generate any synergies, i.e. a textile machinery and a transmission systems division.

Also, Rabl reproached the Saurer management with being inclined to engage into ‘empire building’, i.e. to acquire new companies in order to increase the company’s size without consideration for its value or profitability. This is of course a real danger in any company that works well and generates good money (as was impressively illustrated by Swissair’s McKinsey-made ‘hunter strategy’ during the 1990s). However convincing Laxey’s argumentation may appear from a shareholder’s perspective, the management of Saurer has compelling arguments as well. In fact, the management put forward that the two divisions – textile machinery and transmission systems – constitute a very good combination for the company’s stability. In fact, the textile machinery branch generates a lot of cash with only little investment. In the transmission technology branch, on the other hand, profit margins are higher, but more investment is needed (NZZ March 5, 2006). The combination of the two branches constitutes, therefore, a good complementarity, allowing the company to operate successfully in both branches.

This argumentation, in turn, is compelling from an industrialist’s point of view. However, shareholder value textbooks clearly state that diversification is not the role of the company, but of investors. Or in other words, by diversifying its activities in order to achieve a more stable course of business, Saurer reduces the profitability of the investors stake, who themselves have already diversified their portfolio.

Before the Annual general meeting of May 2006, Laxey increased the pressure by putting several points on the agenda for the AGM. Firstly, Rabl demanded a seat on the board of Saurer. Secondly, CHF 140m should be paid back to shareholders (through a capital repayment), and, thirdly, the company’s strategy concerning its internal and external growth strategy should be reviewed by external experts. The Saurer management rejected especially the second point of this agenda. In fact, according to them, the spare cash was needed for investments (i.e. acquisitions) in different parts of the world in order to consolidate Saurer’s position in these markets. Also the amount of CHF 140m was, according to the management, more than the company had in surplus, implying that the level of debt would have to be increased if this proposition was accepted by the AGM.

Who was right? Does the company’s management have the right to use profits in order to pursue growth strategies or does the undervaluation of the company constitute an expropriation of its owners? Hard to tell of course. Especially because this question is very much steeped with ideological considerations.

Be that as it may, on May 11 2006, Laxey – who had meanwhile increased its stake to 20% – got in part what it wanted: Preston Rabl is elected (with 50.7% of the votes) on the Saurer board despite the opposition by the Saurer management. (This was in fact not the first time that a hostile investor acceded to the board of Saurer. In 1988, Tito Tettamanti bought an important participation in Saurer and acceded to the board where he staid until 1994). This move of Laxey was condemned even by pro-shareholder actors such as the company Institutional shareholder services (ISS), which considered that Rabl’s presence on the board of Saurer could constitute a source of conflict of interests (NZZ, May 5 2006). Also, it was in principle agreed upon the mandating of an external expert with a strategic review concerning Saurer’s acquisition strategy. The repayment of capital, however, was not voted during the AGM because Laxey finally renounced putting this point on the agenda.

However, despite Rabl’s election, the tensions between Saurer and Laxey did not decrease during the following months. In fact, it seems that the communication among the board members was very difficult. Thus, Rabl stated later that several important decisions were taken without even being discussed during board meetings (NZZ, August 30, 2006). Consequently, Laxey started a new attack during the summer 2006: on July 5, 2006 it announced that it had now a stake of 25%, which increased further to attain 25.94% on August 25, 2006. The following day, a new charge was undertaken: Laxey demands the holding of an extraordinary AGM during which four out of eight board members of Saurer should be replaced by representatives of Laxey. Together with Rabl’s seat, this would have meant a majority for Laxey. The justification of this move was that, despite the AGM’s decision of May 11, no strategic review had been order by the company’s management.

In the beginning of September, Laxey finally informs the public of its plans for Saurer. The most likely option that was considered was splitting Saurer into two, and selling one of the divisions (probably the transmission system business), and concentrating all the efforts on the other (NZZ, September 4, 2006). A second option would have been to raise more capital and develop both branches. However, this latter strategy was clearly not Laxey’s first choice.

However, on September 6, 2006, many there was somewhat of a commotion when, Laxey announced that it had sold its 25% stake and that Rabl resigned immediately from the board. The buyer of this stake was Unaxis (which has recently renamed into Oerlikon) – a formerly Swiss company now controlled by the Austrian Investors Georg Stumpf and Ronny Pecik through their company Victory. Unaxis/Oerlikon held an additional 20.94% in Saurer in the form of stock options, and Oerlikon announced the same day that it intention was to launch a public takeover bid in order to acquire a majority stake.

Several observations can be made: Firstly, it is interesting to see that a supposedly so powerful hedge-fund did not achieve its goals despite the fact that Saurer constitutes – for Swiss standards – a rather open company respecting important corporate governance principles. Thus, Saurer applies since the early 1990s international accounting standards, it has a single share without restrictions to the exercise of voting rights or their transferability and it was not controlled by any large historical blockholder. Yet, the Saurer management still managed to repel the attacks. It is difficult to say what was decisive in this battle. In fact, the reasons for Laxey’s decision to stop the tug-of-war with the Saurer management and to sell its stake at a moment where it was about to obtain an extraordinary shareholder meeting are not completely clear yet.

A second observation is that Unaxis/Oerlikon – which made the headlines when it was taken over by the Austrian investors and when an additional considerable stake was acquired by a Russian investor – is welcomed by the Saurer management as “white knight”. Contrary to what usually happens in situations when Swiss companies are acquired by foreigners (cf. my previous post on this blog from August 1, 2006), this time, the nationality of the owners does not seem to play a role. In fact, more important than the nationality seems to be the strategy of the investor: Stumpf and Pecik are – despite what one could read in newspapers before their takeover of Unaxis – considered to be investors that pursue industrial goals, i.e. that aim at the company’s development in the long run and not short-term financial benefits to shareholders. Thus, a formerly dreaded foreign institutional investor became the saviour of a Swiss company that was threatened by an even eviler foreign investor. Globalisation sometimes really seems to blur national frontiers…

# posted by Gerhard Schnyder @ 12:28 PM