Institutional Investor's Alpha Magazine - July/August 2008 - (Page 31)

we got out,” he recalls. But Roepers kept calling Hodge and telling him to reinvest. “Alex is not a quitter,” says Hodge, who returned as an investor in 2005 with an initial $20 million and now has $44 million in the Cambrian Fund. Roepers’s ability to navigate the dot-com debacle sent assets under management soaring, from $150 million in 2000 to nearly $1 billion by the middle of 2003. In 2004, Roepers created the long-short Rodinia Fund to take advantage of what he saw as increased opportunities in Europe and Asia; the fund quickly attracted more than $1 billion in assets. In the past 18 months, he has launched the long-only Cambrian Europe and Cambrian Asia funds, which between them manage about $400 million. ON AN UNSEASONABLY WARM day late last autumn, Roepers was sitting in a dimly lit conference room in Atlantic Investment’s New York ofﬁce, as images from a laptop computer were displayed on a wall screen. He holds such sessions with his analysts a couple of times a week to share insights about some of the 1,200 stocks they cover. Kristian Gevert, Guy Hardwick and David Brenner, three 30-something analysts who follow European equities for Atlantic Investment, were at the table as Roepers clicked through colorful screens ﬁlled with information about U.S., European and Asian equities. Blinking lights signal that a stock has moved up or down more than 3 percent that day. The screens contain a vast amount of corporate intelligence that Roepers has gathered over the years, noting the last time an Atlantic Investment analyst visited a company, as well as any unusual factors, like a reserve on its balance sheet for asbestos-related lawsuits. With each click the analyst who covers the company gave a quick proﬁ le. When Groupe Zodiac — a French manufacturer that invented inﬂatable boats in the 1930s — popped up, it was Gevert’s turn. Located in a suburb of Paris, Zodiac is a $2 billion-in-revenues company that makes aeronautical equipment, including air safety devices, telemetry instruments and cabin interiors. “They have very high U.S. dollar exposure, and that is something that has hit the entire sector and especially these guys because they are not hedged at all,” Gevert said. “For them it translates directly into lower earnings.” (Roepers has long liked Zodiac, but its stock has always been too expensive for his strict buying discipline.) Roepers continued to click through the computer screens until he found a photograph of Yoshitoshi Kitajima, the 73-year-old chairman, president and CEO of Dai Nippon, the huge Japanese printing company. Roepers says Kitajima — whose family owns just 1 percent of Dai Nippon — is running the company almost as his private business. His father was chairman and CEO too, and he’s planning to appoint one of his sons to succeed him. Of Dai Nippon’s 25 board members, 24 work for the company. By almost every measure, Dai Nippon operates in a way destined to spark Roepers’s brand of constructive activism. The company gets 80 percent of its revenue from printing and packaging and the rest from products it makes for semiconductors and LCD monitors. Dai Nippon owns several one-story factories located within a mile of Tokyo’s Imperial Palace and carries the property on its balance sheet at a fraction of the $1.5 billion appraised value. It also has more than $1.3 billion in cash and bank deposits and a valuable 51 percent stake in Hokkaido Coca-Cola Bottling Co. Roepers began investing in Dai Nippon in the fall of 2004. He had already realized he needed help navigating Japan’s culture and language, and in July 2004 hired Yamada to head up Atlantic Investment’s Asia coverage. Raised in Japan and a graduate of prestigious Tokyo University, Yamada understands the market. “Although they are getting better, business managers tend to be very conservative in Japan,” he says. “They fear giving up the cash.” At a meeting with Kitajima in May 2005, Roepers and Yamada suggested that Dai Nippon buy back 100 million of its — PETER HANFORD, ANALYST, 700 million shares and double ATLANTIC INVESTMENT its dividend. During the next 18 months, Dai Nippon repurchased a token 20 million shares as part of a previously announced plan but refused to meet again with Roepers or Yamada. Roepers hired a top Tokyo law firm, Nishimura & Asahi, to prepare shareholder proposals that, if passed at Dai Nippon’s annual meeting in June 2007, would have required the company to buy back 50 million shares that year, cancel its treasury stock, hike the dividend, sell noncore assets and improve corporate governance. The fact that a top Japanese law ﬁrm agreed to represent Atlantic Investment was a victory in itself. Roepers says he doubts that an elite Japanese law ﬁrm would have represented a more confrontational activist fund like TCI because, as he puts it, “they would have been reputationally unacceptable.” In May 2007, a week before the ﬁling deadline, Dai Nippon agreed to most of Roepers’s demands. Still, progress is slow. In February, Roepers stood in Dai Nippon’s boardroom, armed with a white board and markers, and walked the company’s management through his analysis. He asked if they thought they could achieve a 7.5 percent operating margin in a speciﬁc division. He told them to forget about setting higher sales goals for noncore, faltering units. His remedy: Sell the losers, use the cash to buy back shares, and watch earnings per share take off. “They need to make hard decisions about where they can excel, and do it nonstop to get earnings up,” explains Roepers, who is fond of saying that the best thing that can happen to a company is that it never hears from him. Alas, that’s not the case with Dai Nippon. “It still needs all kinds of encouragement,” he says. “If we had a nickel for every time we got close to a name we liked only to see it get away, we’d all be far wealthier.” JULY/AUGUST 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 31

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - July/August 2008

Institutional Investor's Alpha Magazine - July/August 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Mr. Big Goes Small The Good Guys: Adopt This School! Interview: Man's Great Hope Cover Story: The Gentleman Activist Strategies: The New Bankers Profile: Staying Alive Research Center: The Best of the East The Asian Sensations Alpha Bytes: Into the Light Unhedged: Commentary: Speculating on Washington

Institutional Investor's Alpha Magazine - July/August 2008

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