Funds throw weight in M&As

LONDON: The potential merger of British bank Barclays and Dutch group ABN AMRO reflects the rising influence of investment funds in European corporate management, analysts said. The announcement on Monday that Barclays and ABN were discussing a possible tie-up followed pressure exerted on the Dutch bank by The Children’s Investment Fund (TCI), a British hedge fund holding 1% of the capital in ABN.

TCI wrote to ABN managers on February 20 calling for either a break-up of the bank, the sale of some of its activities or the sale of the entire operation. For Patrick Degorce, TCI co-founder in 2003 and a signer of the letter, the proposed steps would be in the interest of shareholders. The fund noted that ABN shares had stagnated since May 2000 compared with an average gain of 44% for its competitors.

But in the last month, during which TCI has been joined in its campaign by another British hedge fund, Tosca, ABN shares have gained more than 20% and are likely to rise further if a bid by Barclays materialises and is followed by other such initiatives, according to analysts. “Several other potential suitors for ABN AMRO have been discussed recently in the press,” said Merrill Lynch analyst Stuart Graham in a research note. He noted that ABN management had warned that talks with Barclays might fail, which should encourage rival offers.

Graham cited HSBC and Royal Bank of Scotland, as well as Santander of Spain, as competitors capable of outbidding Barclays. TCI in a statement on Tuesday encouraged other potential participants to come forward. It said it hoped that “the exclusivity granted to Barclays will not prevent the board of ABN AMRO from employing a process that considers bids by other credible institutions in order to produce the best result for shareholders.” The Children’s Investment Fund, so named because it finances projects aimed at protecting the rights of children, made its influence felt in May 2005 when it successfully sought the resignation of Deutsche Boerse executives Werner Seifert and Rolf Breuer after mobilising shareholders against their bid to acquire the London Stock Exchange.

Aggressive financial activism had until then been most pronounced in the United States, notably through the activities of business titans Kirk Kerkorian and Carl Icahn and the Franklin Templeton fund.

In Europe, with their financial firepower on the rise, investment funds have likewise been starting to assert themselves more vigorously in the management of companies.

Last week British confectionery and soft drink giant Cadbury Schweppes, facing mounting take-over speculation, outlined a plan to split itself into two separate companies. Cadbury said it would separate its confectionery and Americas Beverages businesses and would provide more details later this year.

Speculation had gathered steam over a potential take-over of Cadbury in recent days, with the company confirming last Tuesday that US activist investor Nelson Peltz had built up a 2.98% stake. The company, which had been looking for ways to cut costs, denied that it was under any particular pressure.

The growing clout enjoyed by investment funds has unnerved trade unions. At a meeting in Paris last Friday, union delegates from around the world called for a clampdown on “cold-blooded” investment funds that they see as a serious and growing threat to companies and jobs. European Union officials have likewise pressed for greater hedge fund regulation.

But Charlie McCreevy, the EU commissioner for internal markets, in recent press comments came to the defence of investment funds. “I believe that private equity houses and activist fund managers — including hedge funds — play a much more valuable role than government or any regulator in propelling the liquidity of our capital markets, in reducing the cost of capital,” he said.