Hedge Funds Hit European Blue Chips

These hot funds have already muscled their way into the heart of Europe Inc. Could they now spark a mega-merger in European banking?

Editor's note: This is an updated version of a previously published story.

On Mar. 19, shares in Dutch bank ABN Amro (ABN) surged to record highs on reports of a possible takeover bid by British bank Barclays (BCS). Such a deal—intended to thwart hedge funds and other activist shareholders who have pushed for a breakup of ABN Amro—would be Europe's biggest ever cross-border banking tie-up, creating a global bank worth about $160 billion. Barclays said it would clarify its intentions by Mar. 20.

(On Mar. 20, Barclays and ABN Amro issued a joint statement confirming that they are engaged in "exclusive preliminary discussions" about a potential combination. While the companies note that the talks could fail to produce a deal, they did indicate agreement on a number of significant points, including that the combined entity would be headquartered in Amsterdam but have its primary stock listing in London and a single, Britain-based board. ABN shares closed up 3.5% in Amsterdam trading on Mar. 20, while Barclays shares climbed 3.7% in London.)

Despite the apparently advanced nature of the talks, analysts think the story may not be over yet. "If Barclays' talks progress to something serious, it will bring other bidders out of the woodwork," predicted James Huston, a London-based financial-services analyst with Keefe, Bruyette & Woods, on Mar. 19. He identified France's BNP Paribas and Spain's BBVA (BBV) as other potential suitors, raising the possibility of a bidding war.

A cross-border deal is hardly a sure thing. The Dutch Central Bank, expressing doubts about a foreign takeover of ABN Amro, has said it would cap the voting rights of hedge funds at 10% of the bank's shares. Dutch authorities might, however, encourage a tie-up with ING (ING), another Dutch bank.

"Like an Easter Egg Hunt"

Still, the maneuvering underscores the increasing boldness of hedge funds and other activist investors in corporate Europe. They're putting the squeeze on some of Europe's biggest blue chips, from oil giant Royal Dutch Shell (RDS-B) to French retail group Carrefour, to streamline operations and shed underperforming assets. They even scratched a planned linkup of the Frankfurt and London stock exchanges.

Private equity players such as the Blackstone Group and Kohlberg Kravis Roberts also are combing the Continent for values. Blackstone recently snapped up the Tussauds chain of wax museums and amusement parks (see BusinessWeek.com, 3/6/07, "No Mystery in Blackstone's Wax Museum"), while KKR may wade into the scramble to take over Franco-Spanish tobacco company Altadis (see BusinessWeek.com, 3/15/07, "A Tobacco Giant Arises in Europe").

"For shareholder activists, Europe is like an Easter egg hunt," says Chris Young, head of mergers-and-acquisitions research for U.S.-based Institutional Shareholder Services, which advises shareholders worldwide on proxy votes. While many U.S. companies yielded to investor pressure years ago, "Europe still has lots of companies that are conglomerate, inefficient, old-style structures," Young says. "Even if the hedge funds own only 2%, we've seen situations where they've put companies in play."

Scoring Some Victories

ABN Amro is a prime example. Its share price has stagnated for the past seven years, as the bank has lagged its rivals in cutting costs and focusing on its most profitable business lines. Enter the Children's Investment Fund Management, a London hedge fund known as TCI that owns about 1% of the bank's stock. It kicked off a shareholder campaign in late February to break up the bank's far-flung operations.

TCI, with an estimated $6.5 billion under management, has already earned a reputation as one of Europe's most aggressive investors. In 2005, the secretive fund led a shareholder revolt that derailed a planned merger of the London Stock Exchange with Frankfurt's Deutsche Börse, and led to the resignation of Deutsche Börse's hard-charging Chief Executive Officer Werner Seifert (see BusinessWeek.com, 5/23/05, "A Little Fund with Big Demands").

Other activist investors have scored equally impressive victories. Knight Vinke Asset Management, a hedge fund run by the Dutch-born Eric Knight, forced Dutch group VNU, the owner of AC Nielsen Research, to abandon a planned $7 billion acquisition of a U.S. market research group. That led, in turn, to the sale of VNU last year to a group of private equity investors.

Worth the Push

Just this month, U.S. real estate investment fund Colony Capital teamed up with French luxury mogul Bernard Arnault, in a bid to force retailer Carrefour to sell off its real estate holdings (see BusinessWeek.com, 3/8/07, "Scent of a Bargain for European Tycoons").

Hedge funds such as TCI often hold as little as 1% or 2% of shares in companies they target. But they can still bring down big prey, by allying with other disgruntled shareholders. That isn't terribly hard to do at outfits such as Carrefour and ABN Amro, that have suffered years of weak stock-market performance.

Certainly, investors have an incentive to keep pushing. A European hedge fund run by New York-based Atticus Capital, which teamed up with TCI on the Deutsche Börse-LSE battle, returned an astonishing 62% to investors, according to data gathered last year for Institutional Investor magazine. With $9.2 billion under management, Atticus vaulted from 62nd to 21st place in the magazine's ranking of the world's biggest hedge funds. TCI ranked 46th.

Lots of Hurdles

Despite the attention lavished on the Barclays-ABN mating dance—and the potential involvement of other banks—analysts say there's no sign yet that a deal for ABN could spur a wave of other cross-border mergers in Europe. As in ABN's case, tie-ups with foreign banks can be complicated by political and regulatory resistance. Just witness the fight ABN faced trying to take over Italy's Antonveneta Bank in 2005. What's more, says Huston, "Cross-border deals are always going to be harder than in-market deals, because the potential for cost savings is much less."

But with ABN shares up nearly 10% on Mar. 19, the hedge funds already have something to cheer about. And, says Young, "These guys aren't shy. They're raising money hand over fist, and they're going to put it to work. So we're expecting even more of this kind of activity."

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