Christopher Hohn fears no one. In the four years since he founded his London-based investment firm, the Children’s Investment Fund Management U.K., Hohn, 40, has earned a reputation as one of Europe’s most influential, tenacious and wildly successful shareholder activists. After erupting into public consciousness in 2005, when TCI opposed Deutsche Börse’s offer for the London Stock Exchange -- inspiring a shareholder insurrection that killed the bid and ousted the German exchange’s chief executive, Werner Seifert -- Hohn is at it again. In late February, TCI issued a direct challenge to ABN Amro, demanding that the Dutch bank either solicit takeover offers or seek to sell or spin off some of its assets.
In a letter to supervisory board chairman Arthur Martinez and managing board chairman and chief executive Rijkman Groenink, TCI excoriated ABN Amro’s management for failing to improve the bank’s share price over time. Since 2000, when Groenink was appointed chairman, until the end of January, ABN Amro’s share price hasn’t budged, while the Dow Jones Euro Stoxx banks index has gained 44.3 percent. TCI also challenged the bank’s management for pursuing an acquisition strategy that has failed to produce any appreciable benefits.
By virtue of its stake in the bank, TCI has succeeded in putting five resolutions on the agenda for the annual shareholders’ meeting on April 26. These would require that management investigate a sale, spin-off or merger of some or all of its businesses. Hohn says his firm has been building its position in ABN Amro since early this year and now owns more than 2 percent of the bank.
Groenink has responded by entering into exclusive talks with Barclays, the U.K.'s third-largest bank, about a possible merger. Far from being satisfied, Hohn protests that the exclusive nature of the talks serves to protect Amsterdambased ABN Amro management and deny shareholders the chance to maximize value. He would like to see other potential bidders -- analysts speculate that Royal Bank of Scotland and Banco Santander Central Hispano may be considering a joint bid -- allowed greater access to bank data to perform due diligence and make potentially higher offers. ABN Amro is now in a race to work out terms with Barclays before their pact expires, possibly by midmonth.
In an exclusive interview with Institutional Investor Senior Editor Loch Adamson late last month, Hohn discussed his decision to lead a shareholder revolt against ABN Amro’s management, as well as the broader challenges of being an activist investor.
Institutional Investor: When you began building TCI’s stake in ABN Amro, was it your intent to engineer an event that would transform the bank?
Hohn: Yes. When we looked at the cost-income ratios of the different banks it owns -- like Banco Real in Brazil, LaSalle Bank in the U.S. and Banca Antonveneta in Italy -- and saw that ABN Amro’s own cost-income ratio is materially worse than that of its peers, we concluded that the earnings power of the bank ought to be dramatically higher. Our analysis of the company showed that its underlying earnings per share have been broadly flat for about six years, and the bank has substantially underperformed its global and European peer group, including world banks. ABN Amro actually has many good businesses, so this was a rather unusual situation.
Do you have an ideal vision of what ABN Amro should look like?
We’d like to see better management and the potential merger or breakup of the bank’s assets. ABN Amro is too geographically disparate, which has made it hard to manage, and these businesses have been run rather autonomously. ABN Amro’s share price has been flat in a giant bull market, so clearly, the current strategy is not working, and it shows no signs of working. I do think that the company needs to be part of something larger -- in whole or in part -- to extract benefits of scale in-country and globally. Beyond that, there are many possible permutations.
Do you have a preference for the bank’s selling off assets and breaking itself up or entertaining a merger?
They don’t want to break themselves up. Their argument is that there is execution risk in a breakup. However, the businesses are run autonomously, and we believe a breakup is a real, feasible option. But if the sale or merger of the whole creates the same or similar value, we would prefer a sale or merger of the whole. We’re not emotional about it; we’re just looking for value maximization for shareholders.
TCI has threatened legal action if ABN Amro fails to consider rival offers. Do you object to the merger with Barclays, or merely the exclusive nature of the talks?
We support a proposal from Barclays, but no terms have been released yet. And they haven’t actually disclosed the terms of exclusivity, either. Our assumption is that it is probably a nonsolicit agreement rather than an exclusive. It is fine in principle to try and close a deal on that basis, giving preference to one party, but if other parties knock on your door and you are only bound by a nonsolicit, you have a fiduciary duty to give the other parties equal access to due diligence and allow them to also make an offer.
The chief executive, Rijkman Groenink, has been with ABN Amro for his entire career. Are you concerned that he will fight to preserve the bank’s integrity as a business?
A breakup could create more value but not provide a job for him, so there is a conflict-of-interest issue there, yes. The main point that we are asking is that this be an open, transparent process. And it shouldn’t be that only one party gets access to the information and is called friendly by management. Friendly to whom? Friendly to management or friendly to shareholders?
Do you see it as your responsibility as a shareholder to catalyze change at ABN Amro?
We may be a catalyst, but we cannot win votes at the annual general meeting if the mainstream shareholders and Dutch shareholders don’t like what we propose or if they like the status quo. All shareholders have the ability to disagree with us, but, in fact, after we published our letter and our motions, the large shareholders called to thank us. Not hedge funds -- mainstream shareholders called us.
So much political noise has been made in Europe about the evils of shareholder activism by hedge funds. Do you feel the level of resistance rising?
No, just the opposite. Activism doesn’t have to be carried out in this high-profile way -- it can be privately influencing companies. I think that companies are more and more trying to run themselves for shareholders; they are moving in the right direction.
After the maelstrom of Deutsche Börse, do you worry more about political blowback?
I think that the European Union has welcomed activism. [Internal market commissioner] Charlie McCreevy has just proposed a new law that would prevent central banks and other regulators from blocking hostile takeovers in financial services for purely political reasons.
But there is a big political debate going on about shareholder activism generally. Our view on that is that shareholders should act as the owners they are because boards are not always aligned with, and occasionally fail, their shareholders. Although activism can be disruptive, that doesn’t mean that it’s a bad thing for economies.
