When worlds collide

Globally ambitious, the Netherlands, Vedior paid lip service to shareholder values. Then shareholders pushed out management.

Globally ambitious, the Netherlands, Vedior paid lip service to shareholder values. Then shareholders pushed out management.

By David Lanchner
February 2001
Institutional Investor Magazine

For European companies that pay lip service to the concept of shareholder value without actually heeding investors, wishes, the former executives of Vedior have a cautionary tale to offer.

The operative word, of course, is “former.” Amsterdam-based Vedior, once part of Dutch retailing conglomerate Vendex International, is the world,s third-largest provider of temporary personnel, with more than E6 billion ($5.64 billion) in annual revenues. By the time it was spun off in June 1997, Vedior had built up a European market share of 14 percent.

But things have gone downhill ever since. Vedior hasn,t met earnings targets in any of its three years as a public company. At E14.05 per share its stock price is off 54 percent from its September 1998 high. European market share has fallen, and profit margins lag behind the average for its peer group.

Vedior chairman Gert Smit had higher aspirations a year ago. In September 1999, hoping to kick-start growth, he acquired Select Appointments Holdings, a thriving U.K. temp company. Trouble was, to help finance the E2.28 billion deal, for which he took on E1.55 billion in debt, Smit needed to raise roughly E450 million in the equity markets. Until then, most of Vedior’s shareholders had been Dutch institutions; Select brought with it a new class of more activist investors, including London-based Henderson Global Investors, Jupiter Asset Management and Merrill Lynch Investment Managers. Their message was clear , they wouldn,t buy any new stock as long as Smit stayed in charge.

So, last August, Smit and three members of his five-person supervisory board resigned. Vedior’s stock shot up 29 percent on the day of the announcement (see graph). Now, despite a recent retreat in the share price, plans for a new offering are back on track. (None of the former executives would comment for this story.)

The ouster of a top corporate leader was a major event in the Netherlands, where the laws that govern shareholders, voting rights shield companies from both unwanted suitors and meddlesome investors. “To see that kind of management change in the Netherlands is unprecedented,” says Vedior chief financial officer Zachary Miles, who previously held the same title at Select. But Vedior had reached a dead end. Strapped for cash and rapidly losing competitiveness in a tough market, it had to meet investor demands or risk its independence.

The upheaval resonated beyond Dutch borders. As the single currency accelerates development of Europe,s financial markets, and as cross-border investments and acquisitions become more common, companies increasingly have to compete for capital. That’s hard for European CEOs, many of whom have little practice at making shareholders happy. Traditionally, it has been perfectly acceptable to prevaricate about financial results, squelch any buzz about possible acquisitions or divestments and keep mum about major management changes.

These days, European executives are more likely to pay a price for flouting U.S.-style standards of transparency. In September Belgian speech-recognition software maker Lernout & Hauspie Speech Products refused to cooperate with an informal U.S. Securities and Exchange Commission inquiry into its accounting practices. The result was a formal fraud investigation and the resignations of the co-founders in November.

“European companies are going through severe growing pains,” says Elizabeth Snyderwine, a Frankfurt-based investor relations consultant. “As they list on foreign exchanges and confront sophisticated investors, they are being forced to take investor relations seriously.”

Dutch executives, along with their counterparts elsewhere on the Continent, have been largely insulated from demanding investors by cross-holdings or preference share systems that don,t accord voting rights equally. Vedior was especially complacent; as a member of the Netherlands, 25-stock AEX index and the 25-stock Amsterdam midcap index, it could count on a core constituency of Dutch institutional investors who were obliged to hold the stock in their domestic index funds whether they liked it or not. Vedior had an investor relations department whose members visited major shareholders regularly. But like many European companies, it talked the talk of accountability without walking the walk.

“In the past, the attitude here was that it was not really that important to court shareholders,” says Anthony Martin, the former Select chairman now at the helm of Vedior. “Now that the company needs to raise money, it’s been obliged to be more responsive.”

Because of the size of their capital markets, the U.K. and the U.S. are the best places to go for the kind of money Vedior needs to eliminate the debt it took on with the Select acquisition. But U.K. and U.S. investors are accustomed to full disclosure, frequent hand-holding and a say in decision making. So Vedior,s new management has introduced quarterly reporting, halted the distasteful practice of revising annual budgets every quarter and pledged to eliminate nonvoting shares.

Of course, shareholder activism remains far more widespread in the U.S. and the U.K. than on the Continent. And until now, the European CEOs most likely to respond to investors, demands have presided over companies with an Anglo-Saxon connection, such as Finland’s Nokia Corp., which is listed in the U.S. and dominates the mobile phone market there, and France,s Vivendi Universal, which just acquired North American beverage and entertainment giant Seagram Co.

But even in Europe, investors are getting fed up with poor communications and turning up the heat under executives who don,t deliver value. Homegrown activists such as Switzerland’s Martin Ebner and France’s Colette Neuville have been making waves. Dutch investors are threatening to sue European Internet service provider World Online International and its bankers for inadequate disclosure of a share sale last year, before the company’s IPO, by chief executive Nina Brink. And in Spain, Basque lawyer Fernando Lamikiz Garai has launched the country’s first major shareholder rights battle, trying to block a merger between Iberdrola and Endesa, Spain’s two biggest electricity companies, and force Iberdrola to consider a higher bid from oil giant Repsol. Increasingly, when investors are ticked off by bad communication or bad management, they,re making their displeasure felt in the corner office.

Just ask Vedior, which seemed like a visionary company when it was assembled in the early 1980s from a series of acquisitions by its former parent, Vendex. Politicians in the Hague, spooked by intractable unemployment, were revamping the Netherlands, rigid labor laws to permit more part-time and temporary jobs. By the early 1990s, Vedior had become one of Vendex,s fastest-growing divisions. When it went public in June 1997, it had operations in nine countries. The stock opened at E22 and climbed to E30.58 by September 1998.

But after the IPO, the profit margin in Vedior,s Continental business stagnated at about 4 percent, despite Smit’s repeated promises to improve it. Smit also infuriated investors by talking about his company as if it were one of the sector’s best performers, even in the face of disappointing results. In January 2000, after surprising his shareholders with two consecutive profit warnings, he confidently proclaimed that in the event of a market shakeout, Vedior could hold its own. “We got the impression [Smit] was living in his own reality rather than listening to a market that had sent his share price tumbling,” says one London-based analyst.

Vedior’s new chairman acknowledges that he inherited problems. “Quarterly reports were nonexistent, and the company regularly increased annual administrative and marketing budgets in an effort to gain market share at the expense of profits,” says Martin.

Ironically, the spending didn,t help Smit stem a slide in Vedior’s market share, which had dropped from 14 percent in 1997 to 10 percent when Select was acquired in September 1999. One reason: At a time when corporate clients were rapidly expanding contract work in such fields as information technology, accountancy and law, 90 percent of Vedior’s business still came from the slower-growing market for secretarial and clerical workers. Buying Select, which specialized in the higher-margin temp fields, was an effort to correct this imbalance.

Vedior shareholders had few ways to voice their displeasure. Like many Dutch companies, Vedior doesn,t issue common stock with voting rights. Shares are held in a so-called friendly trust, while investors are issued certificaten. These provide the economic benefits of shares, but the company-controlled trust exercises the voting rights.

“It’s a pro-management system,” says Stephen Peak, who runs the $171 million Ivy Global Opportunity Fund at Henderson Global Investors in London. With just under 1 percent of Vedior, Peak is among the company,s 20 largest institutional shareholders. He began buying the shares in February 2000, anticipating correctly that after the Select deal closed, investors would gain more leverage over operations as Vedior turned to them to help fund the acquisition.

To be sure, the deal broadened Vedior’s shareholder base considerably. Analysts estimate that more than 75 percent of investors in the old Vedior were concentrated in the relatively small Dutch equity market. Retail investors accounted for about 25 percent of Vedior’s Dutch shareholder base. And they weren,t happy. But when the Netherlands, biggest retail shareholder organization, the Vereniging van Effectenbezitters, complained about the certificaten system and the lack of accountability at Vedior,s annual general meeting in May of last year, Smit told the organization that the company’s voting structure actually protected shareholder value. His reasoning: It allowed management to concentrate on long-term strategy instead of taking radical measures, such as selling off assets, to boost the share price in the short term.

Vedior’s reluctance to adopt shareholder-friendly financial controls, and its insulation not only from investor complaints but also from takeovers, depressed its shares. Vedior’s earnings had grown 19 percent in 1998, only slightly below estimates, pushing the stock to its September high. But the company increased spending just as its main markets, the Netherlands and France, started to see slower economic growth. At the time of the Select acquisition, Vedior’s stock was trading below its issue price, at a price-earnings ratio of about 12, compared with 20-plus multiples for competitors such as Adecco International, a Swiss company now headquartered in the U.S., and U.K.-based Hays. When Vedior revised its predictions of 10 percent profit growth in 1999 to flat growth in May of that year, the stock plummeted below E20, where it has remained ever since.

This wasn,t the kind of performance that Select,s stockholders were used to. Select shares had appreciated 87-fold since a 1991 reorganization. Its 6 percent profit margin was one of the industry,s highest. Unlike Vedior, Select combined tight financial controls with an entrepreneurial management style. Rich incentive plans encouraged staff to meet budget and profitability goals, and the company was known for giving its investors top-quality guidance. Before its acquisition Select had exceeded market expectations a stunning 36 consecutive quarters.

At 35.1 times earnings, Vedior’s all-cash bid seemed generous, especially to Swiss investor Martin Pestalozzi, who had organized Select’s restructuring in 1991 and still held 37.7 percent of its shares. But Vedior arguably got its money’s worth for Select, which expanded the Dutch company’s presence to 25 markets around the globe, including the U.S. and U.K. More important, the acquisition “meant an infusion of truly professional, shareholder-friendly management,” says Henderson’s Peak.

In an effort to boost investor confidence, Smit appointed Select CEO Martin vice chairman of Vedior, and Miles took on the CFO role. Miles promised to introduce quarterly reporting and end Vedior’s practice of revising annual budget and profit targets every quarter. Vedior’s share price initially rose as former Select shareholders, including Merrill Lynch and Jupiter, bought in.

But it was too late for the Dutch leopard to change its spots. True to form, Smit issued profit warnings in late September 1999, only weeks after announcing the acquisition of Select, and again in November. Led by former Select shareholders, investors dumped the stock, especially after the November warning. Smit was defensive. “In less than three years, we have increased sales to 10 billion florins [$4.2 billion], from 2 billion florins; surely investors will have to recognize that,” he insisted in January 2000, when his stock price fell to E10.

Investors knew perfectly well that much of that sales growth had resulted from the debt-laden purchase of Select and from VediorBis, a 1997 French acquisition that had not lived up to expectations. Says Robert Jergens, a portfolio manager at Thompson, Siegel and Walmsley in Milwaukee: “We are value investors, and we had the stock on our radar screen as one of the cheapest, if not the cheapest, in the sector. But we were not going to buy it as long as Smit ran the company.”

In March, with Vedior’s stock at about E9 and its market cap under E1 billion , considerably less than the price paid for Select and much less than Vedior,s estimated E2 billion breakup value , new CFO Miles canvassed his principal investors. The company desperately needed new financing, preferably equity, to reduce its debt burden, but the markets were not receptive. “That left us in a hole, with a lot of debt on our books and no way to finance further acquisition in a rapidly consolidating industry,” says Miles.

He offered to arrange meetings with Smit, but investors refused. Instead, they said they would be willing to listen to a new management team headed by Martin. “I duly reported back to the board,” says Miles.

The board commissioned J.P. Morgan to conduct a study on how asset sales could be used to pay off Vedior’s debt. The study concluded that only Select was valuable enough to cover its own cost. Dumping the new crown jewel was an unacceptable course; the board reluctantly bowed to investors with a management housecleaning. On August 10, the day Smit stepped down in favor of Martin and the majority of the supervisory board resigned, Vedior shares soared by nearly 30 percent, to E15, and volume rose 46-fold, to 19 million shares. The stock has lost about two thirds of that gain, largely because of slowing growth in the temp sector and sales by hedge funds that took profits after the August shake-up.

Martin and Miles are promising to abolish the certificaten and to institute the one-share-one-vote rule by the annual meeting in May. They are also planning asset sales and probably will do away with many of Vedior’s low-margin clerical and administrative temp operations. They plan a share offering in either London or New York, probably by the end of the year. And shareholders have been moving back into Vedior. According to New York,based Lionshares, which tracks SEC filings, of 17 U.S. investment funds that had positions in the stock during the third quarter, 14 indicated new or increased holdings.

Vedior learned its lesson the hard way. Other European companies looking to play in the world,s capital markets with the grown-ups should take note.

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