More hedge fund shenanigans

1. I had a quick Google to see if there are any more funds that use the generic blurb I've found in dozens of cases to avoid compliance with the Stewardship Code. And... yes there are.

Curam Capital Management:

Curam Capital Management LLP (the "Firm") provides investment management services to a Fund that pursues a global equity approach with a focus on the healthcare sector. If the Firm were to invest directly in UK single equities these would represent only a small part of the Firm's business. Hence, while the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The approach of the Firm in relation to engagement with issuers and their management is determined globally. The Firm takes a consistent approach to engagement with issuers and their management in all of the jurisdictions in which it invests and, consequently, does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction. 

Cryder Capital

The Firm provides investment management services to a Fund (“the Fund”) that pursues an investment strategy that involve investing in a wide range of securities and instruments without limitation in various jurisdictions. If the Firm were to invest directly in UK single equities these would represent only a small part of the firm’s business. Hence, while the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The approach of the Firm in relation to engagement with issuers and their management is determined globally. The Firm takes a consistent approach to engagement with issuers and their management in all of the jurisdictions in which it invests and, consequently, does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction.

Tencendur Capital

When the Firm does invest directly in UK single equities these would represent only a small part of the Firm’s business. Hence, while the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The approach of the Firm in relation to engagement with issuers and their management is determined globally. The Firm takes a consistent approach to engagement with issuers and their management in all of the jurisdictions in which it invests and, consequently, does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction. 


2. In addition to Inmarsat, there is also some interesting hedge fund action around the Sky takeover. Again we can see some funds piling in using derivatives to build positions of influence.

So there's Pentwater Capital with 1.92% in derivatives.

UBS O' Connor (their hedge fund business) with 1.17%.

Our old mates Elliott with 3.73%.

Farallon Capital - 1.87%

Canyon Capital - 1.8%

And another old fave Davidson Kempner with 2.16%

That's about 12.5% just on a quick trawl. Worth keeping an eye on.

Another snippet on Inmarsat takeover and hedge funds

Just to keep this updated, there are a lot of regulatory disclosures being fired out by Inmarsat now. So I'm just keeping track of the hedge fund related ones.

Marshall Wace, which is very active on the short side in the UK, now has a 2.38% long position using derivatives.

Melqart Asset Management, one of the firms that was active around GKN/Melrose, has a 1.17% long position, again using derivatives.

UPDATE: Citadel now has a 1.95% long position, again using derivatives, plus 0.16% short.

Plus Pelham has 1.82% long derivative position I blogged on Monday. So around 7% in long derivative positions held by hedge funds in total so far, just in terms of what we can see (I'm not sure what the disclosure threshold is). I expect this will rise. Presumably these positions are offset by a counter party bank holding actual Inmarsat shares, so we might see them start cropping up on the register as major shareholders as was the case with GKN.

Also worth clocking that some more funds have outstanding short positions in Inmarsat. In addition to the names on the FCA list, regulatory disclosures show that Renaissance Technologies and Millennium Investment Management both have short positions of just under 0.5%.

Inmarsat: in come the hedge funds

At the back end of last week the UK-listed telecoms business Inmarsat revealed that it has been approached by US-listed Echostar Corporation about a potential takeover, which it knocked back.

As a result of the offer, a different regulatory disclosure regime kicks in, which means that we can see all sorts of detail on which investors are doing what. And, as you might expect, we can already see some hedge funds piling in with fairly sizeable positions.

For example, Marshall Wace:

And Pelham:

As you can see from the disclosures, the long positions these funds have taken have been built up using derivatives rather than by buying shares. This shouldn't be any surprise to anyone who followed the detail of the GKN/Melrose bid. And obviously this will be a bloc of investors that will want Inmarsat to be taken over.

It also means that we should expect to see banks emerge as major shareholders on the Inmarsat shareholder register as they build up holdings as counterparts to these derivative positions. Plus we will probably see a notable short position in Echostar emerge.

Finally, here is a quick look at who the major shareholders (1%+) at the moment, data from Capital IQ.

UPDATE: for completeness it's worth noting that a few investors are actually short Inmarsat. So worth keeping an eye on this too. Latest from FCA disclosure below.

Old Labour policy on pension funds, takeovers etc

On holiday in Norfolk last week, I was pleased with a few great finds in second had bookshops. One of these was Economic Priorities for a Labour Government by Roy Hattersley, which was published in 1987. At that point I guess he was regarded by many as a terrible right-winger in Labour terms, so it's interesting to see just how far further to the Right (or, if you prefer, in an economically liberal direction) policy has shifted since.

So, for example, he has a whole chapter on 'Social Ownership and Industrial Democracy'. This includes support for employee representation in decision-making (though not spelt out, the references to the 5th Directive suggest this includes board representation) and the Swedish wage earner funds, also known as the Meidner Plan.

I'm particularly struck that he recognises the important point that we shouldn't rely on employee ownership alone to give employees a voice.

He writes: "Unless employee share ownership schemes are coupled with rights to information, consultation and representation they may be treated with justified suspicion by many trade unionists. Giving employees more say will not come for a long time - if ever in some large and multinational companies - if we just rely on ownership schemes."

This is a live issue, though rarely explicitly discussed, in the UK now. I think you would struggle to find anyone in politics arguing against the various benefits of extended employee ownership (most often advocated through ESOP type arrangements, rather than more extensive ownership structures). But the idea that employees should get representation or voice in governance - beyond that afforded to them through the ownership of a few shares - is far more controversial. The implication is that employees are allowed say if it's governed by a financial interest, but not as of right.

Hattersley is a proponent of a much more mixed economy, both in terms of the public/private split, and a plurality of ownership forms. And it all comes across rather well.

"I am for the diffusion of wealth and power - in principle. And I rejoice that the methods of bringing such a diffusion about are likely to improve our economic performance. The creation of co-operatives and the acquisition, by employees, of shares in the companies which employ them - coupled with rights to promote employee participation - is a far more effective way of providing economic enfranchisement than the creation of vast state monopolies which are insensitive to the needs both of workers and consumers..."

Onto my home turf, there are also chapters on 'Pension Funds and the Public Good' and 'The City, Takeovers and Mergers'. The former is largely a defence of pension funds adopting socially responsible investment policies, though there are a few barbs about fund manager behaviour, and increasing portfolio turnover (!). It's also interesting, though not surprising to see some familiar arguments deployed.

Here are a few examples:

"Socially responsible investment is not an alternative to financially sound investment - indeed its return looked at over a longer time horizon may well be better than conventional investment strategies."

"Too much concentration on takeovers tends to cause an obsession with short-term thinking by industrial managers to the detriment of the real economy. This is despite the fact that the long-term nature of pension fund liabilities ought to enable pension fund managers to take a longer term perspective."

"Despite the essential long-term interest of pension funds, the performance of their managers is often based on short-term results... That is certainly not the way to maximise the performance of the whole economy. It may not even be the best way to maximise the long-term income to the fund." 

Not a lot has changed in the following 25+ years.

Finally, he argues that the legal position regarding pension funds' involvement in SRI should become clearer but that, if necessary, "a Labour government... should legislate to clarify the position of trustees". This is, of course, what the Law Commission has just attempted. That's what's useful about reading Labour policy stuff from the 1980s - you get an insight into what might happen 30 years later... ;-) (e.g. the Wilson Committee proposed something a bit like the Stewardship Code, in 1981).

The chapter on mergers and takeovers is instructive, just to get a sense of just how interventionist Labour was willing to be. These days even minor tweaks to the system - like altering voting rights and approval thresholds - are characterised by vested interests as unreasonable meddling (or, more effectively in my opinion, as unlikely to make any difference). And, generally, the primary role afforded to shareholders in determining the outcome of deals is unchallenged, though there's been a bit of a shift here lately. In contrast the mid/late 80s Labour was proposing a far larger role for the state in determining what should be allowed. I will try and blog on this separately.

All in all, it provides a very useful sense of just how far Labour moved on policy relating to issues around finance, ownership and so on. The world of 1987 is long gone, of course. The City is more politically powerful, even after the crash, and the foundations for advocating policies within the Labour Party like those proposed by Hattersley were washed away by the Blairite tide. In my opinion, that in part explains the rather piecemeal nature of some of what is proposed now (e.g. employees on rem comms but not on boards, limited changes on M&A). We have accepted too much of the status quo as not contestable, because it is economically efficient. And in doing so the interests of working people - central to Hattersley's ideas - have become second to those of the functioning of the system itself.

Policy Network/LFIG report on takeovers and public interest

Now this is interesting, as it advocates both the introduction of a public interest test and a new Takeover Code. Will read and properly blog soonish.

Labour and takeover policy in 2010

OK, here's what we said in the 2010 manifesto:

We now propose to extend the public interest test so that it is applied to potential takeovers
of infrastructure and utility companies. (1:7)

Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needsreform. Companies should be more transparent about their long-term plans for the business they want to acquire. There needs to be more disclosure of who owns shares, a requirement for bidders to set out how they will finance their bids and greater transparency on advisers’ fees.

There should be a higher threshold of support – twothirds of shareholders – for securing a change of ownership and the case for limiting votes to those on the register before the bid should be examined. (1:9)

In contrast here's what the Cox Review said:

The law on takeovers should be changed, such that all shareholders who appear on the Register during the Offer Period (as defined by the Takeover Code) have no voting rights until the outcome of the bid has been concluded. (p 39)

And as a reminder Lord Sainsbury has suggested a higher threshold should be required for deals to be voted through, and for a qualifying period (ie a requirement to have held the shares for a few years) to be introduced for shareholders in the target company to be able to vote on the deal. 

So our 2010 position covers more ground than either of the subsequent suggestions.

Progressive Capitalism - a few thoughts

Lord Sainsbury has a new book out, called Progressive Capitalism, which aims to sketch out "a new Progressive political economy." Being the nerdy type I am, I was immediately interested in what he may have to say about corporate governance and ownership, so I bought a copy. 

I should stress I've only read the intro - which calls for a move beyond neoliberalism, but (as you would expect) not back to public ownership or anything like that - and then skipped straight to the section dealing with equity markets and corp gov. What I was looking for here was some indication of thinking about reform at the Labour supporting end of the business community.

So what does he say? Well, he shares a lot of common ground with the Kay Review, arguing that financial markets don't really serve savers or companies and often work more to the benefit of intermediaries. He argues that shareholders are insufficiently engaged with companies, with too much emphasis on trading. He also says that UK's corporate governance regime is more focused on avoidance of value destruction, rather than long-term value creation. Two symptoms he identifies as arising from the corp gov regime are the structure and scale of exec pay (he says it's now financial market style pay) and the financial bubble.

He's also scathing about the way that company/management underperformance is often dealt with, through the market for corporate control. He says: "Some poorly performing managers have been removed, many by takeovers, a tactic much approved of by investment bankers because of the huge fees involved, but not a good way of handling the problem."

No much to argue with there...

But the important bit is the proposed remedies. He argues that a Shareholder Advisory Board should be created, to advise shareholders (I think he means asset owners here) how to contract and deal with asset managers. This would be with the objective of putting a more long-term, value-creating focus into the system. It's not immediately clear who would sit on this board but, unfortunately, it sounds like he thinks the investor trade bodies would be able to nominate them. This is one thing Kay is very clear should NOT happen, and I think the experience of the ISC/IIC should make Labour very wary of this approach.

He's also a fan of the Swedish model whereby shareholders are represented on nomination committees. He says that the Shareholder Advisory Board could facilitate and promote the develop of nom comms like this. He argues that this could work so that you have an external nom comm, with shareholder reps, that proposes NEDs, and even the chair, and an internal nom comm of the board that deals with exec appointments. The external nom comm could also facilitate shareholder engagement with the company over strategy. As an aside, I have seen the Swedish example crop up in a few places now, so this might be one policy to keep an eye on.

On takeovers, he clearly wants to gum the wheels up a bit. He argues for both a higher threshold to be required for deals to be voted through, and for a qualifying period to be introduced for shareholders in the target company to be able to vote on the deal. Notably he talks about people holding the shares for "a certain number of years". This goes further than the Cox Review, and funnily enough is pretty much what the unions were arguing for post Kraft/Cadbury (tho they also wanted a public interest test), but it doesn't go any further than Labour's 2010 manifesto, or indeed the ideas that Lord Mandelson was knocking about at the fag end of the last parliament.

And that's kind of indicative of the corp gov section as a whole, I don't really see much new here. A bit more strengthening of shareholder engagement, a bit less liberal on the takeover regime. Not much to argue with, but it doesn't take us further forward. Which is fine if you think the system works OK pretty much as it is, but it's difficult to reconcile with the stated objective of a new political economy. The corporate governance proposals are, for good or ill, minor tilts within the existing framework. There's nothing bad here, but there isn't much real change either. Even on this turf, you can find more radical proposals coming from within the financial sector itself.

Probably the most disappointing bit is the failure (as far as I can see) to talk at all about what role employees might play in governance in the UK, particularly given that a) the German model is discussed b) the author accepts that shareholders have failed to rein in exec pay and c) Labour is already committed to employee representation on rem comms. I know the issue of employee voice is hardly popular with the business community, but if 'responsible capitalism' and 'an economy that works for the many not the few' are to mean anything, policy proposals cannot be restricted to what the business community thinks would be beneficial to it. I personally think we could develop proposals that both tackle the problems identified by Sainsbury (and Kay and Myners before him) and emphasise long-termism, and nod towards greater stakeholder accountability. For what it's worth I think some companies really do get this too.

I personally think we can go quite a bit further.

Cox Review on short-termism

Labour's own review of potential policy responses to short-termism, led by former IoD head Sir George Cox, is out and can be downloaded here.

Will try to blog on it later, but notable that there is a practical proposal for dealing with the way that M&A is voted on. Rather than a specific qualifying period, the proposal is that you can only vote on a deal proposal if you were on the share register at the time the deal was announced. However Cox does seem sympathetic to a qualifying period and says that this may need to be revisited.

Notably M&A was one of the areas where the Kay Review was weakest in terms of recommendations. In addition this is one area where I suspect that many business people do think a less economically liberal approach would be worthwhile. So there's a good bit of distance between Labour and the Coalition on this.

PS. Also spotted this -

There is also an important consideration of motivation of a company’s workforce to support the pursuit of a long-term vision, accepting change en route. Trade unions argue that the best way to bring this about is by having worker representation on boards, as is the case in Germany.
However, the many arguments for and against such a move are outside the scope of this study.

Labour on takeovers etc

There was a tiny sliver of corp gov related policy in Ed's speech on the economy this week.

We will stop takeovers that are waved through on the votes of speculators and hedge funds who flood in to buy shares once a takeover bid has been announced. Because when that happens it can destroy great British companies and the good jobs that go with them.

That sounds like an argument for something like a qualifying period to me. Iain Martin on the Telegraph (who was the first politico commentator to assert 'Ed actually isn't useless') doesn't like the idea, and his blog on this is worth a read.

I don't agree that it would be difficult to enact, it would take a change to company law, but it could be done, as the Takeover Panel concluded -

the Code Committee understands that qualifying periods (or weighted voting rights) could be introduced through changes in company law. If such changes were to be made, the Code Committee considers that it would be logically consistent for the Code to be amended accordingly. In the absence of such changes, the Code Committee does not believe that the Code should be so amended.

The real question is whether it is worth doing. It will certainly prevent some people who will almost certainly vote FOR deals to go through (because they expect an uplift) from doing so. However that may not be enough to stop a lot of deals given how easily they pass. In order to really 'throw sand in the wheels' of M&A activity you would probably want to raise the voting threshold too. I think Labour proposed this latter policy in the 2010 manifesto, with the aim of raising it to a two-thirds majority I think? Would probably be more consistent with other votes to raise it to 75%. (PS - the Takeover Panel also looked at raising the threshold and again said it's doable via company law but that no-one wants it to happen.)

Those two policies combined would send a significant message about Labour's attitude towards MnA activity. It would be very unpopular with the City. I think business would be more ambivalent - some directors definitely think the takeover regime is too liberal (at one point the IoD backed a higher threshold for instance), others don't see the problem. I reckon the CBI would be opposed though.

So the political judgment is whether this is worth the fight.

The same is question arises in respect of the idea of putting employees on remuneration committees. As I've written a lot, I like this policy and I think it could be put into force without too much technical trouble, but again the question is whether it is worth the fight. I'm now of the view that, since there will be a scrap over this, Labour might as well at least try and go further - ie advocate employee directors - rather than spill blood over a relatively small shift in the membership of rem comms.

I'm no strategist, and the relative silence of the Labour frontbench (as contrasted with left-of-centre think tanks etc) on corporate governance reform might suggest that there is some nervousness about this stuff. Obviously no-one wants to be characterised as being anti-business, or adopting an old school approach to these issues.

However, I would make a couple of small points in support of Labour being ambitious. First, I genuinely think the 1990s version of corporate governance is becoming hollowed out, as we've had 20 years to try and make it work. For example, I note that the main argument that the Takeover Panel used (or said respondents used) against qualifying periods  was that it breached the 'one share, one vote' principle. Well, it is just a principle, and people like Bob Monks and Simon Wong have openly questioned whether it is necessarily always a good one, in corp gov terms. I don't think anyone can make a strong case, now, against reforming voting MnA solely by reference to the sacred 'one share, one vote' principle. It's kind of reduced to saying "we can't have that type of policy because we believe we mustn't."

Similarly the idea of employees on rem comms is currently mind-boggling for many people brought up on 1990s vintage corp gov. But again we've had a pretty good crack at trying to make shareholder empowerment plus company disclosure work. Again, opposition to employee reps generally makes reference to a certain type of corporate governance ideology - accountability should be to shareholders, employees wouldn't be 'independent etc - there's not a big legal or financial barrier (though we probably would want to look at company law). I think arguments that we only need more shareholder empowerment and more disclosure, because that's 'the system' we have and employee representation would be heretical in that system, seem pretty weak and, as such, will be easier to overcome now than in the past. In fact overall the whole 1990s corp gov consensus feels pretty flimsy to me now.

Second, as I suggested in my post about co-determination, it would be a mistake for Labour to over-estimate the attachment that shareholders (principally asset managers) have to their 'ownership' role. Many asset managers still don't really buy that 'stewardship' has a (financial) value, though they will go through the motions a bit. I think that, provided that the role and financial interest of shareholders is protected (and why wouldn't it be?), there may be less serious opposition to employee representation, than we might expect. I have no doubt that the CBI will make noise about the shift away from shareholder primacy (though I think the IoD might possibly develop a different view) and I suspect they can get some people in the investment world to parrot their lines. But I wonder whether the investment industry as a whole (ie not just the corp gov microcosm) will really want a big fight over this, particularly when what we are really talking about is who gets to go to which meeting, not whether or not shareholders still get votes/dividends/whatever.

If we want to see a big shift in corp gov I think what we need to do, and pretty quickly, is to start talking about these ideas with those we need to win over. Largely to try and get them onboard but also, and presuming that many won't shift, to gauge the breadth an depth of potential opposition. 

A bit more on Cadbury

The other interesting thing that Roger Carr mentioned in his LAPFF presentation was the way that the ownership base changed during the course of the Kraft bid. By the end, as I think was fairly well known, hedge funds held something like 30% of Cadbury shares. There are a couple of points to note here. First most these funds piled in during the course of the bid with the aim of making some money quickly from an uplift in the shares. This is what funds like that do, so no big surprise. And they definitely made quick money for their clients as a result. But as I said, according to Carr most of them piled in after the bid had been announced, so they had no great insight into the market, it was a relatively simple bet that the company would get taken out, and as such there was a chance to cash in. Long-term holders may actually have made a lot more money from the deal, though over a longer timescale, obviously.

Secondly, the natural reaction of many (understandably) would be that short-term investors to a large extent determined the fate of the company, and obviously many of the post-bid investors were only looking for a quick return. But how did they get to hold 30%? In reality the hedge funds were only able to build up such a stake because traditional long-only institutions were also cashing in on the rise in the share price resulting from the bid. In a number of cases, according to Carr, they were top-slicing, so were still on the register right till the end, but with a much lower holding. So we should bear in mind, when tempted to stick the boot into hedge funds, that they were only able to have such an influence because traditional institutions allowed them to have it.

None of this is in any way new, nor is the behaviour inconsistent with the mandates given to institutions by their clients (us, and our pension funds). Just a bit of a corrective to the assumption of hedge funds = bad, traditional institutions = good.

Finally, on a separate point, I realise that one of the reasons I found Roger Carr's presentation surprising is that it was a little out of tune with what he had said previously about the deal, see here for example. I think there is a slight element of saying different things to different audiences.

Takeover Panel review

Response to the consultation from the Panel is now out here (PDF). No action on either threshold for a bid to go through, or qualifying periods for voting rights. But notably the text says:

the Code Committee understands that qualifying periods (or weighted voting rights) could be introduced through changes in company law. If such changes were to be made, the Code Committee considers that it would be logically consistent for the Code to be amended accordingly.

That, one could conclude, might leave the door open for a certain Lib Dem populated government department to muck about. All eyes on BIS then.

IoD u-turn on deal threshold

get a load of this:

April 2010:
"we agree with the Government that the threshold for approval of a hostile takeover should be raised to a shareholder majority of two-thirds"

July 2010:
"we are not convinced that raising the acceptance threshold for a takeover offer is the best way to tackle investor passivity"

wonder what drove this?

Standard Life response to Takeover Panel review

Is available here. Not surprising, but they are opposed to the two more 'political' proposals - raising the threshold required for a bid to go through, and/or introducing a qualifying period for voting rights (so if you acquire shares once a bid has been announced you can't vote them).

Standard Life are generally a good bellwether of mainstream investor views, and, as I have said before, I don't expect to see any significant change resulting from the Panel's review. Whether this is a sensible approach or a cop-out is up to you. This doesn't stop Vince Cable from approaching M&A from a public policy perspective either.

Takeover Panel review

What's the betting that the Panel's consultation concludes that the status quo is basically ok?

Govt responds to BIS committee on takeovers

Via Corporate Law & Governance

IoD on takeovers

The Institute of Directors has put out a position statement type thing on takeovers that is worth a read. Nothing earth-shattering, and some will no doubt read it as the voice of management entrenchment, but there is quite a bit of sense in there.

They say, basically, that takeovers may act as a discipline to directors, but there isn't much evidence that they add value, and actually they may make decision making (by both acquirer and target) more short-termist. As such they agree with raising the required vote for a deal to go through to 2/3rds (ie Labour's policy), though they don't agree with the idea of limiting voting rights to those already on the register at the time of the deal.

The issue with the 2/3rds threshold is that actually it wouldn't make much difference (most deals get much higher votes in favour). So when you hear someone argue that it will entrench management, see if they have any stats to prove this (I'm sure they won't have). It's simply a knee-jerk reaction. Also someone pointed out to me that you need a 2/3rds majority to change a company's articles (but not to decide who owns the company!) so there is a slight precedent.

All that said, I'm personally more inclined to tweak the voting side of things. Still, an interesting intervention.

PS - even this stuff gets partisan press treatment. The Grauniad, which treats this as a business story, says "Institute of Directors backs reform of takeover rules", The Telegraph, which treats this as an election story, says "General Election 2010: IoD criticises plans for 'Cadbury's Law'".

Pension trustees disrupt merger and acquisition activity

Interesting bit from Pwc. The implication seems to be that the progress of M&A is more important than the funding of pension schemes. First, I don't agree. If employers are running pension schemes they should fund them properly. Second, a lot of M&A activity is value-destroying - which means it costs pension funds money - so maybe it's not a bad thing that a brake is put on some of it. Actually I quite like the idea that trustees are able to through a spanner on the works of investment banks' deal activity.

From Prof Pensions:

TRUSTEE funding demands could scupper merger and acquisition deals as increases in interest rates and market volatility hit dealmakers, PricewaterhouseCoopers warns.

The financial services giant said increased market volatility over the past month had increased scheme deficits as equity markets and bond yields had fallen.

It added it was becoming a lot more expensive and much more difficult to raise debt to buy firms, meaning there was less cash around for dealmakers to make available to schemes in a bid to satisfy trustee funding demands.

PwC partner Marc Hommel said the combination of these two factors meant that trustees had to be increasingly vigilant about monitoring the employer covenant during deals and noted this would magnify the influence of schemes in deals going forward.

Hommel explained: “Finan-cing around deals has become tighter and the impact of each of the liabilities on each of the creditors on a deal has probably increased as a result.”

He added: “There is less cash around. Pensions, along with other creditors, are probably having even more of an impact than they were a month or two back.

“There may be some instances where dealmakers can no longer justify the sort of packages they were prepared to make available to trustees just two or three months ago in order to facilitate a deal happening.”

Hommel said the increase in volatility – with the associated drop in equity markets and changes in bond yields – had highlighted the fact companies and trustees needed to assess their appetite for retaining risk in scheme portfolios.

He said: “The real question is how much do you want to de-risk your liabilities and assets to take the volatility out of the situation?”

Trustees and transactions

More evidence of trustees asserting themselves more in the M&A market. Today's FT reports on the trustees of the ICI pension scheme (coincidentally one of the first big DB schemes to close to new members, even before the TMT-inspired market blow-out) insisting on a central role in ICI talks with Akzo Nobel.

Here's an excerpt from the FT article -

A spokesman for ICI’s pension trustees said: “We would have expected to have an early and direct conversation with anyone wanting to replace ICI as owner of the company.”

He highlighted the power of the trustees to determine the size of the deficit, which could range from £500m up to £2.2bn, depending on their view of a bidders’ financial strength and their confidence in the bidders’ willingness to fund long-term promises to pensioners.

The scheme’s liabilities are more than £9.2bn, against a market capitalisation of £6.5bn, according to the company.

He said: “If faced with someone who hasn’t talked with us, we would have to form a different, harsher view [of the owner]. That would be another factor in determining the size of the deficit.

“We are agnostic about who owns ICI, but not about the strength of the promise.

“If we perceive the promise [of whoever sponsors the pension scheme] is legally and financially weaker, that would increase the size of the deficit. It would be better to have an up-front conversation.”

Separately it looks like the trustees of the Boots pension fund have finally got KKR to play ball. This bit from The Observer yesterday.

EAI says research into M&A activity is lacking

Interesting bit in today's Professional Pensions (oh how I dreamt of saying those words when I was 21) about the lack of analysts research into merger and acquisition activity. I'll post the article below and try and track down the actual report. Given that evidence, even from consultants who may have an interest in M&A taking place, suggests many (if not most) deals are value destroying, it is surprising that institutions generally just nod them through. I've always thought this is very fertile territory for the Left - this is a real-life example where our interests as working people and investors coincide.

Anyhow here's the article:

EAI study finds research into M&A too low

by Jonathan Stapleton 16-05-2007

THE ENHANCED Analytics Initiative has released summary findings of a study on mergers and acquisitions research.

EAI – an international group of asset managers, pension schemes and other investors – aims to encourage investment research that considers the impact of extra-financial issues on long-term company performance.

The study, produced for the EAI by investment consultancy onValues, found the overall volume of enhanced M&A research was low – and noted that, while coverage of corporate governance issues was widespread, consideration of environmental and social issues was rare.

It said the overall analysis of extra-financial issues in M&A research was “lacking in sophistication and transparency”.
EAI chairman David Blood said: “In today’s market conditions, investors are regularly challenged to decide whether a proposed transaction promises value creation or destruction.

“The purpose of this summary study is to strengthen communications with research providers on the kind of research that best supports our investment decision-making and ownership practices — fundamental research that takes the long view and integrates material extra-financial issues.”

OnValues senior consultant Gordon Hagart added: “Investors want to understand how factors such as combining corporate cultures and governance systems and management incentives may affect the likelihood of a transaction delivering the value it promises.”