You’ve built it up from scratch. Years of hard work. Late nights. Stress. Tension. Now, just as the company’s beginning to bear fruit, it needs capital to expand. Not just a bit of input from a few sleeping partners or the bank, but large amounts of capital from outside investors. Floating is the only way forward yet you don’t want to give up control. Maintaining a stake of more than 50 per cent may seem the obvious answer but that would still mean having to provide answers to those other investors when you’re used to running the show yourself…
It’s a common enough scenario all over the world. In continental Europe many family-controlled companies carry on in the same vein for years: handing over power to one generation after another; and voting in family members to executive positions. But are such companies reluctant to recognise the importance of outside shareholders? That all depends. Susan Noble, continental European investment manager at Flemings in London, believes that control of a company by a family group can make a difference to an investment choice in certain circumstances. ‘When you approach a company, shareholder structure is obviously one of the considerations,’ she says. ‘It won’t stop an investment but it can make things a bit difficult.’ Having said that, Noble is at pains to point out this would not apply to all companies with such a background; and she cites two – Pernod-Ricard and BMW – as being ‘fine’ in this respect.
The level of information flow is the main concern for Noble, who says she sometimes applies a discount if a company does not communicate well with the market. ‘If company A and company B are the same in all respects I’d tend to put a lower valuation on the one with family control. It’s practical. It’s a matter of asking who controls this thing and are their interests the same as mine?’ The potential treatment of institutions as second rate shareholders by family-controlled companies is pivotal. Austrian construction company Maculan stands accused of misleading the market earlier this year and leaving many investors out in the cold when things collapsed.
In fact, Felicity Smith, an analyst at ABN Amro Hoare Govett, believes that the Maculan case could just as easily be attributed to bad management. But she concedes that some family-controlled firms may find it difficult to view financial institutions as complete equals. ‘They can take the view: We can’t sell when we want to; therefore we’re taking more of a risk; therefore we can’t treat you as equals.’
Pierre-Henri Leroy of Paris-based Proxinvest disagrees. Leroy says that many of the French examples of family-run companies tend to be fairly solid ones with a ‘good capitalistic approach.’ That does not, of course, make them the best communicators in the world; and they may well be old-fashioned and conservative in this regard. But Leroy claims that they are protective of shareholder rights: ‘Not in the context of voting power,’ he hastily adds. ‘But with earnings per share and dividends. Clearly, family businesses are aware that you don’t make money with the capital side of the balance sheet, as opposed to those companies which increase the capital side of the balance sheet for nothing. {The latter}might be innovative in terms of finance but, at the end of the day, that’s not where you make the most money.’
Some commentators go further than Leroy in lauding the family-controlled approach, despite accepting that such companies are often not much good at selling their story to the market. Vincent Bourgeois, strategist at Oddo in Paris, says that in France such companies are often better managed than those with a diversified institutional holding. ‘Until we get a powerful mutual fund industry in France, you won’t have a developed, responsible institutional ownership base,’ says Bourgeois. ‘At the moment, you tend to find a positive correlation between family-controlled companies and performance.’ The alternative being a shareholding structure where the level of commitment to control is very weak.
Indeed, while family-controlled companies may lose marks in the IR and corporate governance stakes, they easily make them up on their in-depth knowledge of the company. In the short-term it’s fairly pointless being the most investor-friendly company in terms of voting rights distribution, if it is failing to pay decent dividends. It’s not as if one-share, one-vote minority shareholders are any better off if a family group refuses to dump the management.
John Andrew, a director at Schroders in Milan, ascribes to this view. He notes wryly that out of some 220 quoted companies in Italy, around 98 per cent can be described as family controlled. ‘The entire market is like that,’ he says. ‘So you either go along with it or you don’t invest in Italy.’
Andrew believes that if the family control is reflected in a hands-on, enterprising management style, which takes the business forward, then the effect of the shareholding structure on market perceptions will be neutral or positive. The system fails, he says, when there are a whole lot of family interests boxed on top of each other, forming a block vote but having little or no knowledge of – or contact with – the company.
‘What people really don’t like is the issue of different classes of shares,’ says Andrew. ‘Those with no voting rights but enhanced dividends.’ He believes there is an inherent paradox here, however. It makes little odds what an institution’s voting rights are if it holds 2 per cent and a family has control of 55 per cent: by definition, there simply cannot be much power.
Agns Catineau, a director at Omnium in Paris, points to the problem of a listed company raising further capital to fund growth and still maintaining a controlling stake for the family. The family owners may dilute their ownership to, let’s say, 38 per cent of the capital and still retain a control in voting rights. ‘Voting restrictions may be good for small shareholders as it will have a better yield,’ says Catineau. ‘But people tend to prefer one-share, one-vote.’ Leroy chips in that capital protections are more acceptable if they are created by those who originally floated the firm. ‘It is tragic if the company is already public and then builds up protection,’ he says. ‘The markets should discriminate against such action. It’s also sad to see voting restrictions used to give power to sons who are clearly not ready to play the game.’
Germany is currently experiencing its own version of the debate over voting restrictions. The forthcoming flotation of Eff-Eff, the security systems company, puts the majority family group’s shares into a limited company in its own right. Fears have been expressed that this could overrule the power of the supervisory board in the main public limited company. Others remain nonchalant about the danger of this innovation. Benedikt von Westphalen, managing director of B&L Corporate Communications, reports that there is a feeling that as there are already 21 types of shares available, what does it matter if there are 22? One of the primary concerns about companies of this type is the fear of insider dealing. Where links between ownership and management are also tied up with blood relations, those on the outside looking in can easily become suspicious.
For the most part, however, such fears are unfounded. Many of the family groupings behind the larger public companies in continental Europe are locked in to their investments, so there is no danger of any insider knowledge being used to advantage. And the majority have strict guidelines on parallel dissemination of information to external shareholders and the family group. Whether these are followed or not is another matter, but that doesn’t mean insider dealing regulations are being broken.
Hans Joachim Langmann, chairman of the management board at Merck (see box opposite), recognises that this fear exists but says that there should be little concern: the family members and management board are acutely aware of the dangers and make sure that the insider dealing rules are followed. ‘On the other side of the coin, you should compare the situation with that of another corporation with a majority shareholder,’ says Langmann. He and others stress that being a family member does not imply being privy to inside information.
‘Insider dealing is obviously very difficult to prove,’ says Noble at Flemings. ‘Internationally it’s very different. One consideration to look for is whether the family wants to sell because of the tax date.’ Smith of ABN Amro Hoare Govett adds that the insider dealing problem in family controlled companies is not such a concern in larger markets, like Switzerland. ‘It’s more of a concern in Austria,’ she says. ‘If you’ve got a small market then that’s part of the risk.’
Perhaps the last words should be left to those working on the inside of these companies. Christiane Perruche, investor relations manager at Ecully-based Groupe SEB, shrugs off any idea that having a controlling family group behind the company affects the way it relates to the market.
‘We have a very strong policy regarding our relationship with investors and analysts,’ says Perruche, noting that the company recently received a prize for its transparency. ‘Of course, we are a family group but before being a family company we are a registered company. All our communication is oriented to all shareholders.’
Bright Light in the Shade
When the Italian sunglasses manufacturer De Rigo went public back in October, it wasn’t the Milan Stock Exchange which benefited from the deal. The De Rigo brothers, who founded the company in 1978, took the company straight to the United States for a listing on the New York Stock Exchange.
The decision to brave the US market and incur the extra costs which go along with the NYSE was made with good reason in the eyes of the founders. De Rigo has been highly successful in selling its premium-priced fashion sunglasses in Europe, Asia and the Middle East, but lacks a strong foothold in the lucrative north American market. With a strategy for international diversification as one of the company’s primary goals, it is hoped that the NYSE listing will aid its name recognition both in the US and elsewhere.
Investor relations was recognised as a key function by the founders as soon as the flotation was on the cards. And that meant hiring someone who already knew the fundamentals. Mara Di Giorgio was subsequently lured away from Benetton to launch De Rigo’s IR and corporate communications programme.
Di Giorgio is upbeat about the challenges her new role offers: ‘It’s an opportunity to follow a company right from the beginning,’ she says. ‘I already knew what Consob wanted and what Italian analysts wanted. This offered an international challenge.’ She believes that the NYSE listing was of vital importance as it provides a high level of international awareness for De Rigo – the commercial side of the business benefits from that visibility in the financial community.
During the book building process the management spent three weeks out on the road meeting the financial community and explaining the company story. The first and last weeks of that period were dedicated to an Atlantic to Pacific tour of the US, with the middle week in Europe calling in on potential investors in London, Paris, Zurich and Milan, among other cities.
Even though the founders remain in majority control with nearly 80 per cent of the company between them, Di Giorgio does not see any difficulties inherent in that situation. It is a one share, one vote arrangement and the management is well aware of the need for IR from all levels.
‘Generally speaking, if the family understands what it means to be a public company and has a clear strategy to deal with that then there should be no problem,’ says Di Giorgio, who adds that she thinks that De Rigo recognised the need to be open with the market at a very early stage.
So does the US listing mean that Di Giorgio will be forced to move from the company’s headquarters in Longarone to a new base in Manhattan? That’s not in her scheme of things. She says that she may hire a US investor relations firm at some point in the future, but for the time being she is flying over to the company’s New York office at least once a month. Other than that Di Giorgio intends to remain firmly ensconced in Italy.
Making a Merck: A Fairy Tale
Once upon a time there was a German pharmaceutical company called E Merck which wanted to go public to step up its equity ratio in case of dangerous times ahead.
And so it was that the family group behind E Merck created a new limited partnership company – Merck KGaA – which would float and take over the running of the business under the new name. Then a lot of little shareholders and big shareholders in Germany and around the world were enticed by many expensive advisers to pay DM2.45 bn to own 26.2 per cent of the floated company. The remainder of the bright new company’s capital was left in the hands of the old family grouping under the name of E Merck. And then Merck listed happily ever after – fingers crossed – on the Frankfurt and Zurich stock exchanges.
It’s not quite a fairy tale but the Merck flotation at the end of October was one of the biggest IPOs in Europe this year and was healthily oversubscribed. Hans Joachim Langmann, chairman of the Merck board of management, is well aware that the large family holding behind the company could have been an issue but says that the fact that E Merck had been publishing annual accounts for many years helped concerns. ‘In our case, the family took no advantage of the flotation,’ says Langmann. ‘All funds remained with the company.’
Merck’s somewhat strange legal structure does afford some protection for those minority shareholders who invested when it went public. Certain decisions, such as nomination of the supervisory board and accounting firm, can be made by the outside shareholders without the threat of being overthrown by the family through the E Merck holding. Dividends and capital increases are agreed by both groups of shareholders, while the choice of the management board is left solely to the block vote of the family. ‘But that is no different from the normal case of a corporation with a majority investor,’ says Langmann.
Married to a direct descendent of the family which founded the company over a century ago, Langmann is the only ‘member’ of the family on the executive. ‘The family takes the line that the company must be run by professionals and not by laypersons,’ he says. ‘It remains very strict about not interfering in the company itself.’ They maintain a keen interest in the affairs of the firm, nevertheless: ‘The wealth of the family lies in the company,’ adds Langmann. ‘Shareholder value is of the utmost importance.’
That means good investor communications. Frankfurt-based B&L Corporate Communications launched a corporate image campaign back in May, followed by the IPO campaign which included an international roadshow with 26 presentations in 14 countries. Benedikt von Westphalen, B&L’s managing director, says that a comprehensive communications programme was vital since Merck was competing with the Adidas float and three or four other IPOs around the same time in a market not renowned for its equity culture.
As it turned out the float hit its greatest difficulty in the country boasting the world’s strongest equity culture: the US. The disappointing American take-up, according to von Westphalen, may well have been confusion with Merck USA – which has the same family roots but has been a completely separate company since after the First World War. Now there’s a family problem.
