October 1, 2001
Time Atlantic
With reporting by Bruce Crumley/Paris
MILAN-- If you have an image in your mind of a fearsome corporate raider, chances are Romain Zaleski doesn't fit it. Visit the Frenchman at his compact suburban townhouse near Milan's Linate Airport, and he'll amble down to the driveway to greet you and then introduce you to his big, too-friendly dog named Elliot. There's a makeshift office in the basement from which Zaleski, 68, keeps in touch with the business manager of his closely-held steel company, Carlo Tassara, based in the northern Italian town of Breno. He holds meetings on his sunporch overlooking the little back garden. It's pretty much what you would expect from a prosperous small businessman easing toward retirement.
Don't be fooled. This summer, the relatively unknown Zaleski helped organize one of the most audacious hostile bids in Italian history. A group of investors including Zaleski, the state-owned utility Electricite de France (EDF), and Turin's Fiat in August finally took control of the energy-industrial conglomerate Montedison. The deal won EDF, a French monopoly, a foothold in the lucrative Italian power market, and it even made Mediobanca, the influential Milan investment bank that owned 15% of Montedison, look vulnerable to hostile outsiders itself.
But the biggest impact of the takeover may be this: it showed how relatively small but canny investors like Zaleski can come out of nowhere to shove European corporations into radical change, whether they like it or not. A fierce new breed of disruptive capitalists--including wealthy industrialists like Zaleski and his countryman Vincent Bollore, as well as private investment companies such as Switzerland's BZ Group--has emerged on the Continent. They have fought to rip companies out of the hands of the old families and venerable financial institutions that have always been in charge. They can become heroes to their fellow minority shareholders and to traders, who stand to make big gains from the takeovers, mergers and breakups they inspire. For better or worse, they are changing the rules of the European economy.
Not that they always set out with such lofty intentions. Zaleski's involvement in the Montedison affair began in 1995, when he was looking for a cheap stock in which to invest some of Tassara's assets. A former French civil servant, he had first come to Tassara in the early 1980s to work as consultant for the family company then on the edge of bankruptcy. He soon became Tassara's majority owner, returning the steelworks to profitability in part by keeping its power costs under control. When he had about $100 million or so to invest--"Not big money," he says--another family-controlled steel group called Falck seemed a natural choice. It was developing its own promising energy business, and it traded below $2 a share.
Zaleski eventually collected some 40% of Falck, more than the Falck family itself. In autumn 2000, Mediobanca-backed Montedison (then called Compart) made a public offer of $8.30 for Falck shares. Zaleski resisted at first, arguing the price wasn't good enough, but he figures that when he cashed out he had tripled his money. Next he bought shares in Montedison itself. "My hope was to get back a part of the profit I had to renounce," he says.
What he got was another fight. To complete a Montedison takeover of Falck, Mediobanca supported an offer to buy the Falck family's stake in a share conversion worth more than $12 a share, or almost $3 more than everybody else got. Zaleski and other shareholders managed to block the move, and the victory showed him that a full blown coup (his word) was now possible. In May, he went to Paris and met with EDF. Zaleski sold a third of his 15% stake in Montedison to the utility, giving it 20% of the firm. EDF insists that it had no plans at that time to participate in a bid for Montedison. But the rest, as they say, is history.
Though it took the mighty Agnelli family, which controls Fiat, to mop up at the end, the raid may never have happened without Zaleski. He owned a swing vote in Montedison that the other big players wouldn't or couldn't buy for themselves. "I think big companies have the advantage of being strong, but they have difficulty taking risks," he says. "Fiat and the Agnellis cannot fight and not win. I can lose, and they cannot."
So does Zaleski have any more plans to turn corporate Italy on its head? "No, no," he says, laughing. "Once is enough."
Some of the brightest names in French business doubtless wish that Vincent Bollore was so easily satisfied. For the past half-decade, Bollore has been making big investments in companies and then loudly telling management exactly what he thinks they ought to do. Do these companies listen? Sometimes. But Bollore can make his money just by showing up.
Like Zaleski, Bollore is an industrialist by trade. His company, which grew out of his family's paper business in Brittany, had sales of over $4 billion last year, with interests ranging from shipping in Africa to a so-far-unsuccessful line of paper casings for sausages. Bollore describes his stock market exploits as a part-time thing. "I am not sitting in my office with two assistants trying to find good investment opportunities," he says, casually leaning back on the sofa in his office suite, which overlooks the Seine. "Ninety-nine percent of my time is spent managing the group."
If that's true, consider the returns on the remaining 1%. In 1997, Bollore invested in the construction and communications group Bouygues. His public clashes with chairman Martin Bouygues--Bollore wanted Bouygues out of the telecom business--prompted market speculation of a takeover bid and helped drive the share price up. Bollore sold his 12.6% stake to Francois Pinault in 1998 at a profit of over $250 million. Next he invested in the film company Pathe; he got out of that one just two months later with a similar gain.
Last year, Bollore challenged the Lazard group, which includes the giant investment bank Lazard Freres. Like many French businesses (including, ironically, Bollore's), Lazard is controlled by a cascade of holding companies, each one owning a bit of another. This system can make it hard for outsiders to understand what's going on, or to exert much influence; as a result, the stocks tend to be thinly traded and cheap. So Bollore thought he saw a bargain in Rue Imperiale de Lyon, one of the companies in the Lazard chain. Bollore called for Lazard to simplify its ownership structure, and it eventually did so. But the payoff came for Bollore when the bank Credit Agricole bought his shares out. Another $250 million profit.
In France, this is not a polite way to make money. (When Carl Icahn started doing this sort of thing in U.S. in the 1980s, it wasn't much appreciated there either; they called it "greenmail.") A source close to one of Bollore's targets gripes, "Bollore's plan was to excite markets about a takeover without him ever having to put up the money." But Bollore thinks he's just helping the French market recognize undervalued but overcomplicated companies. He is to unfashionable stocks what Jean-Paul Sartre was to the Cafe de Flore. "Bouygues was like a restaurant or a bar that you are interested in but don't dare to enter," says Bollore. "When I went in, then everybody followed me."
Now, Bollore's sights are trained on Italy, where he has become one of the key shareholders of Mediobanca, Zaleski's old sparring partner. It looks like a classic Bollore bargain-hunting play, since Mediobanca has loads of valuable assets, including a coveted position in insurer Assicurazioni Generali, and trades at a modest share price. This time, though, the terms are friendlier: Bollore invested at the request of longtime adviser Antoine Bernheim, deputy chairman of Mediobanca.
It's easy to admire the likes of Zaleski and Bollore. They are clever and iconoclastic where their adversaries can seem hidebound and arrogant. But the rise of the lone raider in Europe isn't a blessing for everyone. Companies are learning that they are accountable not just to one or two friendly investors, but to volatile and demanding capital markets. That puts an ever greater emphasis on the short-term--meeting quarterly targets and improving margins. Companies will be quicker to sell off divisions that don't grow fast enough and more willing to fire workers who aren't productive enough.
The tension between a manager's long-range plans and a stock trader's natural desire for instant gratification is very much on the mind of CEO Marcus Wallenberg these days. His Stockholm investment company, Investor, seems a prime example of Old World capitalism. Though it is publicly traded, shares are split into voting and nonvoting classes. Wallenberg's family interests (primarily two non-profit foundations) control about 45% of the company's votes, while owning just over 20% of the firm's capital. Essentially a listed stock portfolio, like Warren Buffett's Berkshire Hathaway, the firm allows the Wallenbergs--a dynasty that shaped Sweden's economy over the 20th century--to maintain their influence at some of the country's best-known companies, such as Ericsson and AstraZeneca.
For Wallenberg, the point of Investor is to help nurture the companies in its portfolio by fostering contacts between them and bringing management expertise to their boards. "You can't be involved in a company like AstraZeneca or Ericsson unless you have a long-term view of the business," he says. This approach mostly works: though Investor shares have dropped sharply recently, its average total return over the past five years is a healthy 15%. But for some outside shareholders, Investor has another, simpler attraction: it usually trades at a steep discount--these days about 22%--to the net asset value of the shares it owns.
Swiss money manager Martin Ebner, perhaps the most successful activist investor in Europe, wants to close that gap. His BZ Group, based in the tiny town of Wilen, manages four mutual-fund-like investment companies. Ebner goes for the strategic strike--his Spezialitaten Vision portfolio, for example, holds just five stocks--and the size of his individual stakes gives him substantial sway over the companies in which he's invested. Ebner sticks around longer than Bollore, but the goal is the same: to get the share price up. In the late 1990s, for example, Ebner dogged Union Bank of Switzerland, of which he was the largest shareholder, into a merger with Swiss Bank Corp. that cost 13,000 employees their jobs. This year, he amassed 11% of the voting shares of Investor.
Ebner wants Investor to pump up its stock by either buying back some of its shares or splitting the firm into two parts, with one devoted to core holdings like Ericsson and the other to Investor's group of technology and health-care start-ups. These slimmed down portfolios would be easier for investors to understand, so they might be more willing to pay something close to net asset value for the shares.
"I do not intend to debate my shareholders in the media," says Wallenberg. "I think they have a complete right to their opinion." But Wallenberg is not planning any changes. Breaking the group up would mean severing Investor's business network. And a buyback would permanently shrink Investor: because it has no real business operations of its own, it would be difficult for the firm to go back to the stock market to raise cash later. "When we buy back shares, it's a form of liquidation," says Wallenberg.
Chances are, Ebner won't win this skirmish outright--it's tough to beat the Wallenbergs' 45% vote--though he could help push up the share price just by drawing the market's attention to the fact that Investor may be too cheap. And that may be the point. It takes a long-term investor to build a company, but sometimes you need a speculator to tell you what it's worth.
