BREAKING THE BANK
For Hedge Funds, Hunting
In Packs Pays Dividends
Financier Hohn Sparks
Battle for ANB Amro,
Gets Help From Allies
By CARRICK MOLLENKAMP, JASON SINGER, ALISTAIR MACDONALD and EDWARD TAYLOR
September 19, 2007; Page A1
LONDON — The world’s biggest banking takeover battle began with a letter from a hedge fund with a heartwarming name: The Children’s Investment Fund. TCI, as the fund is known, donates a chunk of its profits to charities helping orphans and AIDS victims.
The Feb. 20 letter to the board chairman and chief executive of the largest bank in the Netherlands, ABN Amro Holding NV, alleged they were doing a “terrible” job for shareholders. It demanded that the bank be broken up or sold. (Read the letter.)
Behind TCI is one of the hedge-fund world’s most combative financiers, Christopher Hohn of London. The 40-year-old son of a Jamaican car mechanic, Mr. Hohn is part of a network of hedge funds that have swooped down several times on companies and insisted on change.
Executives at some of the targeted companies have complained that the funds push close to the boundaries of securities laws requiring investors to disclose it when they work together. One German chief executive, having been shot down in one of Mr. Hohn’s sorties, wrote a book about the experience titled “Invasion of the Locusts” and called the hedge-fund boss’s style “poison.”
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TCI says it has followed the law in each case and acted independently of the funds to which it has ties. Mr. Hohn relishes the fights. A family New Year’s card in 2006 described his “exceptionally exciting year overthrowing German CEOs.”
The $100 billion bidding war over ABN Amro is the biggest example yet of Mr. Hohn sparking change. A bevy of other London funds — some with ties to TCI — joined his campaign. After a furious battle among Europe’s leading banks, a consortium led by Royal Bank of Scotland Group PLC is in the driver’s seat to acquire the Dutch bank. ABN Amro’s shareholders meet tomorrow to discuss the consortium’s offer and a lower bid by Britain’s Barclays PLC.
Hedge funds often hunt in packs. In a typical case, several of them have independently acquired shares of a company perceived as undervalued, waiting for the right moment to push for a sale. Once one fund jumps in with a public demand, the rest follow.
That much is legally innocuous. The controversy arises when the attackers have connections among themselves. In some circumstances, laws require the ties to be disclosed, and the group must follow rules that apply to any single shareholder including disclosure of stakes above a certain size. The theory is that the target company and the public are entitled to know when investors acting together own a big stake.
National Differences
National laws differ on the details. In the Netherlands, the relevant jurisdiction in the ABN Amro case, shareholders needn’t disclose cooperation unless they have a formal agreement, Dutch lawyers say. Elsewhere in Europe, the requirement may kick in if funds have common directors or hold stakes in each other. In the U.S., a group is loosely defined as having an agreement or profit-sharing arrangement, among other factors, lawyers say.
Hedge funds are finding plenty of targets in Europe. Some targets are sprawling corporations with units that can be broken off and sold. Others are old-line underperforming businesses that formerly didn’t face activist shareholders. As debt-market troubles make buyouts more difficult, some expect hedge funds to step up their push for internal change at companies.
Mr. Hohn is particularly feared. A BlackBerry devotee, he reads and sends email messages to executives late into the night and into the next morning. Executives whose companies he has targeted talk of his calling them at all hours. In meetings, Mr. Hohn sometimes asks the same question repeatedly, people who have been present say.
His style was on display in September 2006 when he met with executives of Euronext, then an independent company operating stock exchanges in Paris and other European cities. Mr. Hohn said Euronext shareholders deserved the chance to vote on two potential merger partners, the New York Stock Exchange and Deutsche Börse AG. Mr. Hohn, whose hedge fund owned about 10% of Euronext, favored a merger with the German exchange, while Euronext Chief Executive Jean-François Théodore wanted a deal with the NYSE.
The meeting at Mr. Hohn’s headquarters soon turned contentious as Mr. Hohn began lecturing Euronext about shareholders’ rights. “I’m going to make [sure] that shareholders have a choice,” Mr. Hohn said repeatedly.
Mr. Hohn added another jab, alleging that Mr. Théodore wanted a deal with Americans so he could get an American-style pay package. The urbane Frenchman’s expression turned icy. “That is a very serious allegation,” he said, according to a person familiar with the exchange. Mr. Hohn didn’t raise it again. Euronext declined to comment, as did Mr. Théodore, through a spokeswoman.
Mr. Hohn gave up the fight late last year after NYSE’s share price rose, making its share-based offer more valuable, and Deutsche Börse dropped out. In June, Euronext and NYSE agreed to combine in a $20 billion deal.
TCI’s other campaigns have had mixed success. The hedge fund drove Mittal Steel Co., the world’s largest steel maker by output, to pay $2 billion more than it planned to shareholders of the Brazilian unit of a company Mittal had agreed to take over in June. But this year TCI lost a public fight to force Electric Power Development Co. of Japan to pay a big dividend as the former government-owned company marshaled support from establishment shareholders.
Overall, Mr. Hohn’s approach has paid off for his investors. Through August, TCI had risen 9.5% this year, according to a person who has seen the results, compared with a 6.17% gain on the HFRI Fund Weighted Composite Index, a broad industry measure of hedge-fund performance. Last year, TCI posted a return of about 40%, compared with 12.9% for the HFRI index. Its assets total about $10 billion.
Mr. Hohn grew up in Surrey, England. At private-equity firm Apax Partners, colleagues spotted his ambition. “It became obvious he wanted to leave when he published his CV by accident on the central server instead of his private PC,” says Jon Moulton, Mr. Hohn’s boss at the time, who now works at another private-equity firm.
Yale Endowment
After seven years at hedge fund Perry Capital, Mr. Hohn left to run his own fund. TCI opened for business in January 2004, backed by 25 investors, including Yale University’s endowment.
A few months after TCI opened, Mr. Hohn began aiding allies in the business. He helped Edoardo Mercadante, a former asset manager at Merrill Lynch & Co., start a hedge fund called Parvus Asset Management (UK) LLP. Mr. Mercadante says he gave TCI a minority stake in Parvus in return for investor introductions and back-office support. TCI’s two co-heads of business management have served in similar roles for Parvus. TCI has an 18% stake in Parvus, according to TCI filings to U.K. authorities earlier this year.
It’s not uncommon for a hedge fund to lend its infrastructure to a newcomer, in exchange for some kind of remuneration such as a stake in the newcomer. TCI and two funds it assists — Parvus and another fund called Algebris Investments — say they maintain complete autonomy in making investment decisions. They “do not have access to each others’ portfolio positions or trading activity,” TCI said in a statement.
Mr. Hohn has also tapped an influential acquaintance: Lord Jacob Rothschild, a London businessman from the famed European banking dynasty. Lord Rothschild’s investment company or his family have put money into both Parvus and TCI. Lord Rothschild calls Mr. Hohn a “harsh and brilliant critic.” He says, “We heard about Parvus through TCI. We have him to thank for that.”
In January 2005, Mr. Hohn started his first big public fight: trying to force Deutsche Börse to drop its $2.46 billion offer to buy London Stock Exchange PLC. Mr. Hohn thought Deutsche Börse was overpaying. By the end of February, TCI had acquired at least a 5% stake in Deutsche Börse.
Following the TCI move, a New York hedge fund in which Lord Rothschild’s son is a partner chimed in with its own public protests. Around the same time, Lord Rothschild’s fund, of which Mr. Hohn was later named a director, acquired a stake of about £31 million, or about $62 million, in Deutsche Börse, according to that fund’s annual report.
A spokesman for the son’s fund, called Atticus, said in an emailed statement that the fund makes “independent investment decisions.” Lord Rothschild says his fund acted independently of both Atticus and TCI.
The pressure worked. After months of trying to fend off the hedge-fund campaigns, Deutsche Börse Chief Executive Werner Seifert withdrew his offer.
Mr. Hohn wasn’t finished. Next, he called for Mr. Seifert to resign. Mr. Hohn and Lord Rothschild went to Frankfurt to meet with Mr. Seifert and Deutsche Börse Chairman Rolf Breuer in April 2005. Mr. Hohn also took Parvus’s Mr. Mercadante to at least one meeting with Mr. Seifert. A month later, Mr. Seifert threw in the towel and announced he was quitting.
Mr. Seifert bitterly recounted the events in a 2006 book of which he was co-author with a German professor. The title: “Invasion of the Locusts: Intrigues, Power Struggles and Market Manipulation.”
Recalling one conversation with Mr. Hohn, Mr. Seifert wrote, “Hohn claimed that he, together with his allies, had control of between 60% and 80% of Deutsche Börse’s capital and began to read out a long list of owners. At the end, he boasted, ‘My position is so strong that we can bring Mickey Mouse and Donald Duck onto the supervisory board.’”
“His rules of the game are poison for an open and fair market,” Mr. Seifert wrote.
A subsequent investigation into hedge-fund trading of Deutsche Börse by German markets regulator BaFin found there was insufficient evidence to ask prosecutors to bring charges. BaFin didn’t disclose which hedge funds it was investigating, but an official says TCI was among them. Mr. Hohn said at the time, “We have not acted in concert with other shareholders according to the law.”
Mr. Hohn was riding high. In January 2006, a Hohn family holiday card recounted the achievements of the four Hohn children, their mother and the paterfamilias.
Holiday Greetings
“Chris has had an exceptionally exciting year overthrowing German CEOs and expanding his investment conquests to China and Brazil,” the Hohns wrote. The holiday greeting noted that “Chris and his team’s investment performance” was “50% this past year and over 100% return over the last two years.”
Mr. Hohn met his American-born wife, Jamie Cooper-Hohn, at Harvard. He attended the business school there, and she went to the Kennedy School of Government. Formerly an employee at nonprofits in New York and Washington, she now runs the charity funded by TCI, called The Children’s Investment Fund Foundation. It has given grants to former President Clinton’s foundation and AIDS-support groups in Kenya and India.
TCI charges investors a fee, on average, of 1.5% of assets under management, plus 13.5% to 16.5% of profits. Of the management fee, a third goes to the charity. If net return exceeds 11%, investors must pay an additional 0.5% of assets to be directed to the charity.
In the year ending August 2006, the foundation received about $459 million from TCI and other sources, according to its U.K. filings. The money has flooded in so quickly that the foundation says it is unable to give most of it out yet. Last year, its grants totaled about $10 million. A spokeswoman said the figure is projected to rise to about $60 million next year. The Hohns have said they approach the charities they fund with the same exacting method Mr. Hohn brings to investments. The foundation employs “portfolio managers” to oversee its donations and track progress through numerical results.
Mr. Hohn is hoping to reap another windfall in his campaign at ABN, but he faces a reprise of the questions about his tactics. At an initial meeting this January with ABN Chief Executive Rijkman Groenink, Mr. Hohn brought along Davide Serra, who manages Algebris Investments. TCI has a minority stake in Algebris and the two funds have offices on adjacent floors of the same Mayfair building.
Mr. Groenink says he figured the two funds had a relationship. “Otherwise why then would these two hedge funds together ask for an appointment?” he asks. “I understood that indeed Mr. Serra had been doing all the analysis on ABN.”
In addition, Lord Rothschild’s fund acquired an undisclosed number of ABN shares between Feb. 21 and May 22. A spokesman for the fund says Lord Rothschild didn’t discuss the purchases with Mr. Hohn.
On April 23, ABN announced it had agreed to sell itself to Barclays for about $90 billion in stock, while breaking off an American banking unit for a separate sale. Mr. Hohn was upset. He favored a higher potential bid from the consortium of European banks, which wanted to keep the U.S. unit.
A few days later at ABN’s annual meeting, Algebris’s Mr. Serra asked Mr. Groenink why ABN shareholders weren’t being given the chance to vote on the offers. Before answering, Mr. Groenink said, “Mr. Serra is related or linked to TCI for those of you in the audience who don’t know that.”
Mr. Hohn wasn’t in the audience, but his lawyer was. Frank Peters took a microphone from a person sitting nearby. Mr. Serra “doesn’t work for TCI. He is not representing TCI,” said the lawyer.
Mr. Groenink had another reason to feel troubled by the hedge funds circling the bank, people familiar with the situation say. ABN’s board became concerned that someone was leaking information to Algebris’s Mr. Serra, a person familiar with the matter says.
In April, the European bank consortium sent a letter to ABN expressing its intention to bid for the bank. That same day, Mr. Serra telephoned a person close to ABN to inquire how the bank would respond to the bid, according to people briefed on the conversation. ABN directors and executives hadn’t yet received the consortium’s letter and didn’t know about the approach.
Mr. Serra said he didn’t make such a phone call and declined to comment further on alleged leaks. An ABN spokesman declined to comment.
Justice’s Inquiry
In late April, ABN’s chairman, Arthur Martinez, informed the board that the U.S. Department of Justice would be looking into allegations about an ABN executive as part of its previously disclosed investigation into ABN’s handling of money transfers from countries under U.S. sanctions. Mr. Serra called a person close to ABN and said he was aware of the new twist in the probe, according to people briefed on the conversation. Mr. Serra declined to comment on this reported call. Mr. Martinez and an ABN spokesman declined to comment about any possible leaks.
Mr. Hohn’s quest for fresh investment targets continues. In recent months, TCI has bought about $700 million worth of stock in railroad operator CSX Corp. Atticus, the hedge fund of Lord Rothschild’s son, owned 17.8 million CSX shares in March, according to a U.S. securities filing then, a holding worth about $730 million now. An Atticus spokesman reiterated that the fund makes its decisions independently and noted that Atticus owns shares in three other major U.S. rail companies.
A spokeswoman for CSX said company executives have met with TCI multiple times in recent months. Mr. Hohn accuses the company of refusing to lay out a clear plan for improving performance. A spokesman said the company has “the most aggressive financial targets in the industry.”
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com, Jason Singer at jason.singer@wsj.com, Alistair MacDonald at alistair.macdonald@wsj.com and Edward Taylor at edward.taylor@wsj.com
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