An Open Letter To European CEOs: Work With Us, Not Against UsAlliance Bernstein
Dear European CEOs,
This letter has been a long time coming. It’s time for us to talk. Buyout funds are at your doorstep.
For way too long, many European equity investors have been reluctant to engage with European management teams. Perhaps we’re both at fault. Many investors in European companies haven’t always followed the lead of shareholders in US companies, who proactively engage with management to promote changes that help unlock returns for clients. But you haven’t made it easy. Our efforts to engage with European companies have often been snubbed because you think we don’t have your company’s best interests in mind. Perhaps you’ve forgotten that we are the owners?
But change is coming. Pay attention to recent high-profile cases. In March, GKN, the UK-based engineering group, received a hostile bid from Melrose Industries, a buyout firm. In February, Danish telecom group TDC made a US$2.5 billion bid for Modern Times Group (MTG) of Sweden after reportedly receiving a takeover bid from an infrastructure fund that we first learned about in the press.
What do these two stories have in common? In both cases, management refused to listen to constructive input by shareholders, which could have helped them improve performance and preserve their independence. Instead, their strategic weaknesses left them vulnerable to takeovers by buyers who could impose measures similar to those that shareholders had advocated.
As investors in GKN, we repeatedly tried to engage with management and the board of directors. Our analysis suggested that the company’s conglomerate structure made no sense. In our view, GKN’s operational performance—and shareholder returns—would have benefited from splitting the aerospace and automotive businesses into two separate entities. We were ignored. Then came Melrose, and GKN immediately put its auto business up for sale. Surely the abrupt U-turn raises questions about corporate governance.
TDC’s bid for MTG was obviously a poison pill, designed to create a company too diverse for a pension fund to swallow. Instead of engaging with shareholders like us on the merits of accepting a takeover offer, TDC remarkably developed a strategy to buy MTG and issue equity.
In both cases, management only took action when their independence was under threat and their jobs were on the line. Both stories could have ended differently if management had been open to communicating with concerned shareholders. For that to happen, a change of mindset is needed. Stop looking at engaged shareholders as your enemies. We are not. As long-only investors, we’re not renting your stock; we’re actually buying a stake in your company.
That means we’ve done our homework. Sometimes, we can help deepen your understanding of what’s going on across your industry and even inside your company.
Here’s what we’re asking for:
- Be clear about your strategy: stop hiding behind vague, long-term value-creation promises. Inspire our confidence with specific, action-oriented details of your business plans.
- Talk to us: debate is healthy. We might not have all the right answers, but don’t assume that you do either. Sometimes, an outside view is essential for change. We have skin in the game and, unlike others, we don’t charge for the dialogue.
- Don’t defer tough decisions: it’s a recipe for failure and an invitation for an unwanted buyer.
- Listen to the sceptics: speak with investors who are shorting your stock. Find out why they think you are destroying value. Sometimes they are right—and why would one spurn free analysis? Then act and prove them wrong.
- Improve alignment with shareholders: link your compensation to metrics that indicate how well your strategy is delivering and how well it is creating value for investors.
Ignore these ideas at your own risk. But if you fail to act, don’t be surprised when a private equity firm turns up at your doorstep unannounced, or shocked when a more vocal and hostile activist fund puts you in their crosshairs. Private equity funds are awash with cash and are on the prowl for deals. They can smell opportunity, especially since the return on equity of European companies is much lower than that of their US peers. And don’t be surprised if you find us helping them.
We want to work with you—not against you—toward the best long-term outcome for all stakeholders. We want to help build on your business strengths to improve profitability. And we would rather capture the value of your hard work through a public share price than give up that upside to another player—like a private equity buyer. There’s a new breed of activist investors on the European corporate landscape who aren’t aggressive and don’t seek to air disputes in public. We’re actually on the same team and have the same long-term interests. Just open the door and you won’t regret letting us in.
Sharon Fay—Head of Equities at AllianceBernstein (AB)
Tawhid Ali, CIO—European Equities at AB
Andrew Birse, Portfolio Manager—European Equities at AB
A version of this article was published in the Financial Times on July 16.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
Article by AllianceBernstein