Revolution, of sorts

Shareholder activism is taking off in France. But it has yet to achieve much

WHEN Pardus Capital, an American activist fund, built a stake in Valeo, a French maker of car parts, its partners, Karim Samii and Behdad Alizadeh, frequently criticised the company’s strategy. Local advisers told them to keep quiet. To get anywhere in France Inc, Pardus learnt, it needed to be polite.

Shareholder activism in France is on the rise. Several big firms, including Saint- Gobain, a building-materials firm, and Carrefour, a retailer, have recently accepted shareholders onto their boards. But even for the most well-mannered and long-established investment funds, trying to influence corporate strategy is proving controversial and difficult.

In French business circles l’activisme is almost a dirty word. Activists are seen as short-term asset-strippers trying to make a quick return. In the past a handful of wealthy individuals, such as Vincent Bolloré, a billionaire industrialist, mounted campaigns against companies. But the phenomenon of investment funds taking large stakes in big, well-known companies is a new one. Managers used to run things with no counterbalance, says Dominique Senequier, chief executive of AXA Private Equity, but now “it will become more and more usual for big shareholders to challenge the managers of companies which are underperforming.”

Companies are not giving in easily, however. It took a prolonged war of words and a nasty public fight at the annual general meeting of Atos Origin, a computer-services firm, for Pardus Capital and a London-based hedge fund, Centaurus Capital, to win board seats at the end of May (Atos’s chairman was also ousted). The funds argued that Atos Origin is too small to compete as a generalist, but too big to focus properly on a niche. Their eventual victory was hailed as the first for activist hedge funds in France.

But then a French private-equity firm, PAI Partners, suddenly appeared as Atos Origin’s largest single shareholder two weeks ago, and said it backed the management’s strategy. The hedge funds, however, are optimistic. “We know PAI well, we share the same DNA,” says Bernard Oppetit, Centaurus Capital’s chairman. “They are interested in maximising shareholder value, just like we are.”

Mr Alizadeh at last won a single seat on Valeo’s board in May, having asked for two. Now he has invited its other board members to dinner to discuss the firm, according to one of them (who does not plan to accept). Pardus may find it difficult to convince other board members of the need for change. Although Centaurus, which is run by former traders from BNP Paribas, the country’s largest bank by assets, is reasonably well-regarded, Pardus, a foreign fund known for its abrasive style, is viewed with suspicion. But even though Pardus has just one seat, says a banker, people will pay more attention to Mr Alizadeh because of his firm’s 19.7% stake.

Some investment firms reckon that in order to succeed as a shareholder activist in France, it is best to pretend not to be one at all. In the past few months Wendel, a listed, family-controlled investment firm at the heart of the French business establishment, has paid about €5.5 billion ($8.7 billion) for a 21% stake in Saint-Gobain, and this June it won three seats on its board. Wendel wants Saint-Gobain to cut costs and increase its presence in energy-saving products, but also says it supports the firm’s strategy—a contradiction that may hamper its efforts to bring about change at the company, observers say.

Wendel’s first foray into activism has gone badly. Despite the softly-softly approach, Saint-Gobain has reacted defensively, and in May had to deny leaking information about Wendel to the French press. In June Wendel found itself under investigation by the French stockmarket regulator over the timing of its purchases of Saint-Gobain’s shares. Worst of all, partly as a result of weak housing markets in several countries, Saint-Gobain’s share price has plunged, so that Wendel’s stake is now worth some €2.5 billion less than it paid—though the position is partially hedged, and the firm has no intention of selling in the near term.

Other activists have also been caught out by worsening economic conditions. Colony Capital, an American investment fund which specialises in property, and Bernard Arnault, chairman of LVMH, a French luxury goods firm, banded together last year to invest in Carrefour, the world’s second-largest retailer. They now own a 10.7% stake. On June 26th the firm’s shares fell by 9% when it cut its operating-profit target. The activists’ main idea for Carrefour was to get the company to spin off part of its enormous property portfolio into a separate entity. But now that Carrefour’s core business is under pressure, it may not be able to afford to lose the cushion of owning its own property and thus avoiding rent, says Philippe Suchet, an analyst at Exane BNP Paribas in Paris.

Colony has had greater success with Accor, a hotel group in which it holds a 17.5% stake jointly with Eurazeo, a private-equity fund. Accor has already sold a significant amount of hotel property.

Whatever the short-term headwinds for activism in France, its proponents are adamant that the phenomenon will only increase. “French business is open to outside investors and local activists alike, albeit grudgingly,” says Jean-Baptiste Toulouse, a managing director of Leonardo & Co., an investment bank. He points to comments from Claude Bébéar, honorary chairman of AXA, an insurer, and a leading figure in French business. In the midst of the fight over Atos Origin, he said that the hedge funds had a right to representation on the firm’s board, given the size of their stake. Now that activists have successfully clawed their way onto boards, the next test will be whether they can make a real difference to the companies themselves.

Jul 3rd 2008 | PARIS From The Economist print edition

2. Now discuss the following questions:

• What are the signs of shareholder activism being on a rise in France?

• Why do you think " in French business circles l'activisme is almost a dirty word"?

• Why are companies reluctant to let in shareholder activists?

• How do you account for some shareholders' success?

3. Analyse the new phenomenon of investment funds taking large stakes in big, well-known companies.

4. Consider the example of the Atos Origin company. How did shareholders proceed? What was the management's reaction?

5. Do you agree that "in order to succeed as a shareholder activist in France, it is best to pretend not to be one at all"? Justify your point of view.

6. If you were a shareholder activist, what tactics would you suggest?

7. How do you think shareholder activism can change companies' performance?

8. What is the outlook for the movement in question?

Case Study 4