An Open Letter to European CEOs: Work with Us, Not Against Us
Dear European CEO,
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.