PAUL Myners, the Marks & Spencer chairman who led a review of institutional investment for the UK government, has warned that companies’ traditional means of fending off takeovers are redundant because of the pressures of hedge-fund investors in the UK market.
He said he was “shocked” to discover that M&S’s share register had “effectively collapsed” while the retailer was fighting off a bid from Philip Green’s Revival vehicle in summer 2004.
He told the Sunday Herald: “What it meant was that the arguments you normally go to your shareholders with — such as, ‘look don’t sell the company, look at the excellent long-term value’ — became irrelevant. For them, it became a simple cash arbitrage decision. They were saying ‘Green’s offering 400p’.”
Speaking at an Alternative Investments debate organised by law firm Maclay Murray & Spens, in Edinburgh, Myners said that it is disturbing that around 40% of the trades made on the London Stock Exchange are being made by hedge funds, even though such funds own just 5% of the shares by volume.
“It’s a zero-sum game. In every trade there’s a winner and loser, “ he added.
Myners, who steps down as M&S chairman in July 2006, said traditional defence tactics employed by boards in hostile takeover situations are redundant when dealing with hedge funds with big positions on the share register. “Bid tactics now have to include tender offers to buy out hedge funds, “ he said.
Brokers estimate the hedge funds would have made at least 10% on their investments if HBOS-backed retail buccaneer Philip Green had been successful, equivalent to an annualised return of about 30%.
The hedge funds were instrumental in forcing M&S to overturn its original defence strategy to include a sale of its financial services arm to HSBC and the return of £2.3 billion of cash to shareholders.
Asked what might be done to overcome such a situation, Myners said: “There’s no easy answer. But you might look at ideas such as requiring a minimum hold period before you are entitled to vote [on] shares. There are some precedents elsewhere in the world —for example you don’t get to vote for the first year.”
But he does not personally advocate such a policy. “I’m not a governance geek. I hope I’m a practical person with a sense of humour. But I am one of a relatively small group of people who have been on both the fund management and the corporate management side, “ he said.
On the bitter battle which ended with Green withdrawing his 400p per share, £9.1bn, bid for M&S last July, Myners said: “By the time Green withdrew, something like 30% of our shares were held by hedge funds. There had been a massive transfer of ownership from long-term investors to hedge funds.”
Myners said that without the removals of his predecessor as M&S chairman, Luc Vandevelde, and of former M&S chief executive Roger Holmes “that rapid deterioration of the share register would have been even more rapid”.
Although a motion backing the importance of hedge funds was passed at the Maclay Murray & Spens event by more than four to one, Myners warned that hedge-fund investing is not without risk.
He said: “We’ll see a progressive dilution at the margin in the quality of investment managers, which will be one of the contributing factors to declining returns, which will ultimately increase the pressure on fees.”
Professor Bill Fung, visiting professor at London Business School, said that only 15.5% of hedge funds are delivering “alpha” — the investor’s holy grail of above average investment performance. He advised potential investors to “be prepared to be disappointed. You may not get Libor (London interbank offered rate) plus three.
“Indeed, until the market calms down, you may not even get Libor. You have to wonder why investors are prepared to pay charges of 2% and 20% for that level of performance and risk”.
Newton Fund Management’s head of private investment management in Scotland, Harry Morgan, said: “The rhetoric on how wonderful hedge funds are has not yet caught up with the reality of acceptable, yet unspectacular returns. Do people really know and understand what they are getting into? Due diligence is vital.”
This article was published in the Sunday Herald on 9 October 2005