Wyser-Pratte Co.

Wyser-Pratte & Co.

As we take a seat in his spartan, no- nonsense Wall Street office, which is reminiscent of a Marine Corps command post, and offer an introductory explanation of the seven guiding principles of maneuver warfare , Guy Wyser-Pratte responds matter-of-factly, Oh, sure, we use them all the time. Let me tell you about Rheinmetall, COMSAT, Taittinger . . .

Wyser-Pratte invests the several hundred million dollars his firm has under management in poorly managed, underperforming companies and battles fiercely to influence their corporate strategies ”for the benefit of shareholders. Critics call him a corporate raider, a term that typically carries a negative connotation. But Wyser-Pratte sees himself as correcting corporate governance malfunctions ” misalignments between the interests of shareholders and those of management ”which have significantly depressed companies share prices relative to their potential unobstructed value. Two respected sources concur. Barron s magazine has praised him for a solid record of adding value as a result of confronting management about poor governance. ^[2] Echoes the Washington Post , [his] track record shows . . . [he has] been involved in several successful efforts to shake up the management of genuinely ailing companies, often in concert with respected shareholder activists. ^[3]

To close the value gaps created by corporate governance malfunctions, Wyser-Pratte purchases and holds, generally for one- to three-year periods, large blocks of companies shares and employs a variety of tools to persuade or pressure management teams and their boards of directors to enact lasting change. The tools he employs include good ideas, letters to management and boards , public solicitations of shareholder votes by proxy, ^[4] special shareholder meetings, coalitions with other influential shareholders, lawsuits, changes in board of directors representation, the media, and a willingness to fight from within. Resulting reforms may come in the form of overhauls in corporate strategy, share buybacks, spin-offs/divestitures of noncore businesses, companywide restructurings/reorganizations, or an outright sale of the company.

Wyser-Pratte has long been a force to be reckoned with in the United States. In recent years he has expanded his theater of operations to continental Europe, where many closely held businesses have been slow to respond to technological advances, globalization, a unified currency, the relaxation of restrictive corporate governance measures, and an increasingly demanding investor base. In France he has begun to break the unholy alliance between the government bureaucracy and wealthy, established families. In Germany he is challenging a labyrinth of government agencies and laws that choke and inhibit the efficient functioning of equity capital markets.

No matter the clime and place, Wyser-Pratte s pursuit of corporate governance malfunctions clearly illustrates the application of the maneuver warfare philosophy in the business arena. In the numerous investments he has made since he adopted his proactive investing approach in 1991, we see all of the principles that we have been articulating in the previous chapters.

Targeting Critical Vulnerabilities. After accumulating a sizable stake in Rheinmetall AG, a publicly traded German automotive, electronics, and defense conglomerate, Wyser-Pratte launched a public campaign in 2001 to enhance shareholder value. This campaign aimed to separate the company into three divisions and implement measures to improve poor profitability. The primary impediment to the realization of this plan was the Rochling family, which controlled 67 percent of Rheinmetall s voting rights. To convince the family of the merits of his ways, Wyser-Pratte targeted its critical vulnerability ”a fear of media exposure.

When the family, divided as to whether it should cooperate with or resist Wyser-Pratte s plan, signaled its fear of discussing in the public forum allegations of mismanagement of Rheinmetall s defense business, Wyser-Pratte pounced. He made a series of announcements that culminated in an article titled Conglomerate Forced to Sharpen Up Its Act, which was featured in the Financial Times on October 26, 2001.

The media exposure caused the Rochling family a good deal of embarrassment. Rheinmetall yielded to this pressure and reorganized into three divisions, sold noncore assets, and entered into strategic alliances that increased its presence in international markets. Moreover, before Wyser-Pratte agreed to sell his stake ”at a 115 percent increase from his initial purchase ”the Rochling family pledged to take further measures to enhance shareholder value, among them a program that tied management compensation to business unit performance.

Boldness. Wyser-Pratte s high-risk, high-reward investment approach defies traditional theories of portfolio diversification. To establish credibility in the eyes of a management team or board of directors, he must first act boldly and accumulate a sizable stake in the target company, normally 5 to 8 percent of total shares outstanding. Then, to attack corporate governance failures and enhance value for shareholders, he must undertake costly measures that may or may not be successful in effecting change. Finally, to realize an attractive return, he must find a way to liquidate his large holdings without flooding the market with the company s shares and driving the share price down. While the risks associated with this bold approach are substantial, they nevertheless merit the rewards, as we saw with Rheinmetall and as we will see later with other investments.

Surprise. Stealth precedes every corporate governance initiative Wyser-Pratte launches. He accumulates his shares in target companies through anonymous agents so as not to signal his intentions prematurely. Such notification eventually occurs in the form of public disclosure of ownership, as required by country-specific securities laws. In 1996 the share price of French investment company SIPAREX rose approximately 25 percent following a public announcement by Wyser-Pratte that his and another firm had acquired 10 percent of SIPAREX s outstanding shares. Had Wyser-Pratte tipped his hand to the market, most likely he would have eroded the majority of his returns. As it was, he ultimately sold his stake in SIPAREX at a share price approximately 35 percent higher than it was when he made his announcement public.

Wyser-Pratte s use of the element of surprise is not limited to stealth. He has also employed deception, as we will see in the case of French company Taittinger SA, and he has cleverly used the media to create sunshine where there were shadows, ^[5] thereby influencing the reasoning and behavior of his rivals, as we saw in the case of Rheinmetall.

Focus. As previously mentioned, acquiring a 5 percent or greater stake in a company s total shares outstanding entails a sizable commitment of financial resources from the outset. In several instances, most notably French avionics manufacturer Intertechnique SA, Wyser-Pratte has over time increased his ownership of shares outstanding and associated voting rights to exert greater influence on management teams and boards. In the case of Intertechnique, Wyser-Pratte increased his holdings from 5 percent of capital outstanding to a whopping 18 percent over a ten-month period. His intent was to convince the Dassault family and company management, who jointly controlled the majority of voting shares, to consider a sale of the undervalued company. Ultimately, French bidder Zodiac SA bought the company at a 46 percent premium to Wyser-Pratte s initial purchase. ^[6]

Decentralized Decision Making. With just four investment professionals and nine support personnel, Wyser-Pratte does not have a large enough staff to canvass the United States and Europe in search of investment opportunities. Instead he relies heavily on an informal network of in-country agents ”businesspeople, investment bankers, and consultants who are familiar with his unique approach and who are attuned to local markets, culture, and politics. Wyser-Pratte provides these individuals with clear commander s intent with respect to investment criteria, gives them considerable latitude to exercise their judgment, and then trusts them to bring the right opportunities to him. Both Rheinmetall and Intertechnique are direct results of this process.

Tempo . During a 1997 “98 campaign to turn around COMSAT, a laggard U.S. telecommunications provider and former government agency, Wyser-Pratte s rapid reaction to an unexpected event and radical redirection of strategy narrowly averted disaster and ensured success. Had he hesitated, COMSAT s board would have been able to mount an effective response. Instead his quick decision making enabled him to keep the upper hand.

COMSAT s exclusive access to the twenty-four-satellite Intelsat network afforded it a commanding advantage as a provider of communications services into and out of the United States. But the board s authorization of an ill-advised attempt to diversify into entertainment via acquisitions ”a basketball team, a hockey team, a movie studio, and a hotel movie service ”weighed heavily on COMSAT s share price. Sensing opportunity, Wyser-Pratte joined forces in early 1997 with investment firm Providence Capital to oust COMSAT s board of directors. Only after he accumulated a large stake in COMSAT and initiated a costly proxy fight to oust its board did Wyser-Pratte learn that Providence Capital was a faulty ally that had been involved in the bankruptcy of a Russian satellite maker just one year earlier. The taint associated with this involvement threatened to undermine the legitimacy of Wyser-Pratte s claim to be acting for the benefit of shareholders.

Upon receipt of this news, Wyser-Pratte immediately decided to abandon his relationship with Providence and continue his efforts to enhance shareholder value from within COMSAT. Seamlessly transitioning to the role of insider, he secured a seat on COMSAT s board of directors and assumed a more harmonious stance. Concurrent with Wyser-Pratte s appointment, COMSAT completed the spin-off of its noncore entertainment assets.

As a newly appointed board member, Wyser-Pratte moved quickly to form a special committee to review COMSAT s strategic plans and evaluate proposals from potential acquirers . He also began working with management to instill a more commercially focused mind-set in the company. As time progressed, owing to his relationships with influential U.S. government officials, Wyser-Pratte s role on COMSAT s board expanded ”to that of key congressional liaison. He played an instrumental role in ensuring the enactment of two pieces of legislation that deregulated the company and enabled its ultimate sale to Lockheed Martin for $2.7 billion.

Combined Arms. In 1997, Wyser-Pratte launched a three-year campaign to unlock the potential value of Taittinger SA, one of the most celebrated of French family-controlled companies. His use of combined arms systematically eliminated all means of resistance available to the Taittinger family, whose disproportionately high voting rights had historically insulated the company from the demands of public shareholders. Indeed, owing to the family s disregard for the bottom line, from 1991 to 1996 the company s share price halved, while during the same period the Paris Bourse SBF 250 index more than doubled . Wyser-Pratte realized that Taittinger s assets ”a famous champagne business, opulent hotels, and prestigious brands such as Baccarat crystal and Annick Goutal ”were considerably undervalued; accordingly , he began amassing shares and launched a combined arms assault shortly thereafter.

The first arm was direct pressure on the Taittinger family from within the shareholder base: by forming coalitions with other minority shareholders, Wyser-Pratte accumulated sufficient voting power to prevent Taittinger from issuing additional shares and diluting its shareholder base in 2000. The second arm was the media: a series of announcements by Wyser-Pratte drew considerable public attention to shareholders dissatisfaction and cast a negative light on the Taittinger family. The third arm was a reliance on outside financial advisers whose objective analyses validated Wyser-Pratte s claims of undervaluation.

To deliver a final blow, Wyser-Pratte employed a fourth arm: deception. Under the auspices of raising more capital to purchase an even larger stake in Taittinger, Wyser-Pratte organized a private road show, during which he met with leading hotel and real estate operators across Europe. His actual intent was not to raise additional capital but rather to ferret out a buyer for his stake in Taittinger. Two buyers emerged, one of whom was wealthy Belgian industrialist Albert Freres. Freres purchased Wyser-Pratte s stake at the end of 2000 ”at a share price approximately 145 percent higher than the original purchase price in 1997 ”and continued the quest to unlock the potential value of Taittinger s assets.

Rheinmetall, SIPAREX, Intertechnique, COMSAT, and Taittinger are but a handful of many investments, forty-eight in all, that Wyser-Pratte has completed since 1991. During this twelve-year period he has achieved an impressive 30 percent annualized rate of return on capital employed.

Leadership Lessons

As a mere minority shareholder, Wyser-Pratte has managed to exert considerable influence on numerous companies, move equity markets, and create lasting value for shareholders. At the heart of this ability to influence is a unique approach, born of his experience as a U.S. Marine, that exemplifies the application of maneuver warfare in the business environment.

Decentralized decision making pulls Wyser-Pratte to key opportunities. When a corporate governance failure is verified , he quickly weighs the risks and rewards associated with acting boldly and makes the investment decision. Immediately thereafter, he begins to focus his resources ”under the cover of stealth so as to conceal his intentions ”to establish a beachhead (incidentally, if, at this point, you find yourself asking why the authors have not articulated this series of actions as reconnaissance pull plus boldness, then you have learned something from this book). Once he makes public his corporate governance initiative, Wyser-Pratte masterfully uses the media to influence the behavior of his rivals and shape the rules of the game. As events unfold, he uses combined arms to eliminate systematically a rival s available responses, and, ultimately, he deals the decisive blow by targeting the rival s critical vulnerability.

While this kind of commitment to maneuver would not be surprising in a corporate raider with the morality, ethics, and resource endowment of a pirate, what is striking is that Wyser-Pratte has maintained his integrity throughout. He captures value for his firm and his investors, to be sure, but he succeeds because he has widespread shareholder backing, present only because of the value he delivers to all investors in his target companies.

^[2] Smalhout, James, Doing Well by Doing Good: There s Some Evidence Good Corporate Governance Can Pay Off for Investors, Barron s , January 27, 2003, 35.

^[3] Knight, Jerry, At COMSAT, It May Be Back to Redrawing the Board, Washington Post , May 19, 1997, F29.

^[4] Proxy: Individual shareholders give written authorization that enables selected representatives to vote on their behalf .

^[5] Wyser-Pratte, Guy, personal interview, March 18, 2003.

^[6] This price represented a 20 percent premium to his last purchase.