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The Sunday Times: No company is out of reach of activists

EXTRACT: But this is not necessarily the case with the mega caps, which are capitalised above that level. This is where shareholder activists believe they have an opportunity. Some of these stocks, such as Glaxo Smith Kline, BP, Shell and Vodafone, are still greatly undervalued on fundamentals. Shares in Shell bounced about 4% last week, partly due to the rise in the oil price, but even after this rally several top brokers issued buy notes. If the markets don’t attribute the right values to these stocks, an activist will try to shake the tree to ensure this.

July 8, 2007
Agenda
John Waples, Business Editor

A BIG talking point in the City is the resurgence of the activist investor. This is where an investor builds a stake in a company and agitates for the board to release value and change its corporate structure or management.

In the past few months we have witnessed a number of examples where activists have enjoyed success. Nelson Peltz was a catalyst for a break-up of Cadbury Schweppes; TCI, the hedge fund, in effect forced the Dutch bank ABN Amro to hoist the for-sale sign and Atticus, another hedge fund, is now trying to block Barlcays’ proposed takeover of ABN. Last week another activist investor emerged as a big investor in Rentokil Initial, the support-services group.

These are just a few examples, but this is only the tip of the iceberg. Shareholder activism is going to become one of the overriding themes of the second half of the year and the corporate targets are going to become bigger.

Investment bankers are spending a lot of time telling clients to take activism seriously. And to preempt their appearance on the share register, they are encouraging boards to look closely at ways to release value. One banker told me last week that any company with triple A or even AA plus status, is going to have to justify why it needs a blue-chip rating. What may have been the gold standard a few years ago no longer holds true.

This is particularly relevant to the handful of corporates that are so large they are out of the reach of private-equity bidders. The buyout threat has forced a huge number of firms (sub£10 billion) to look closely at how to make their balance sheets efficient. But this is not necessarily the case with the mega caps, which are capitalised above that level.

This is where shareholder activists believe they have an opportunity. Some of these stocks, such as Glaxo Smith Kline, BP, Shell and Vodafone, are still greatly undervalued on fundamentals. Shares in Shell bounced about 4% last week, partly due to the rise in the oil price, but even after this rally several top brokers issued buy notes. If the markets don’t attribute the right values to these stocks, an activist will try to shake the tree to ensure this.

According to Standard & Poor’s there are only a few nonfinancial corporates in the world that have the highest rating of AAA plus. These are Automatic Data Processing – America’s largest independent provider of payroll and auto-dealer services, the oil groups Exxon and Mobil as well as General Electric, Johnson & Johnson, Novartis, Pfizer, Toyota and United Parcels.

Closer to home, there are a clutch of companies in the FTSE 100 with double AA Ratings. These include BP, Astra Zeneca, Glaxo Smith Kline, HBOS and HSBC. Others include Legal & General, Lloyds TSB and Royal Bank of Scotland.

The success achieved by the likes of Atticus and TCI is encouraging some activists to step up their ambitions. Britain does not yet have the equivalent of Carl Icahn, the billionaire US corporate raider, but we are producing our own stable of high rollers who are prepared to take on large groups with consistent but underutilised cashflows. Make no mistake, chief executives like JP Garnier at Glaxo, David Brennan at Astra Zeneca and Paul Walsh at the drinks group Diageo are starting to take the threat seriously.

So, too, are the long-only fund managers. They are tired of the stock market’s deequitisation and an activist who wants to release value back to other investors, rather than allow a company to sell out to private equity, is knocking at an open door. You may not always agree with the motives of an activist (in the case of Vodafone they are barely credible) but they nearly always throw a torch on potential value creation and invariably the share price rises on the back of it.

This is the new game in town and it strikes at the heart of that elite group of Footsie companies that were previously seen as untouchable. For the time being, the activists will be setting the agenda.

Money talks

IN the cutthroat world of banking, Peter Wuffli paid the ultimate price last week when he was removed as chief executive of UBS. Wuffli hadn’t done a bad job at the bank. The private wealth-management arm has become one of the best in the game, investment banking is in good shape, as is the equity business. It was the problems in UBS’s fixed income and American arm that were causing grief and this is what led to Wuffli’s unexpected departure.

When you are taking on the likes of Goldman Sachs, underperformance costs money. Fixed income has been a boom area for most banks and there has been great frustration within UBS at its apparent inability to ride the wave. According to insiders at UBS, Wuffli’s won’t be the last head to roll. His replacement, Marcel Rohner, who is stepping up from deputy chief executive, will look at who is in the engine room and will take the appropriate decisions. Wuffli’s sudden exit comes at a time when the top management at the bank are still finding their feet after a wave of defections. Rohner needs to act swiftly.

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http://business.timesonline.co.uk/tol/business/columnists/article2041500.ece

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