Institutional Investor's Alpha Magazine - September 2008 - (Page 38)

Christopher Hohn their correspondence with the CSX board of directors. The simple fact that TCI allowed that degree of transparency may have helped Hohn prevail at the shareholders’ annual general meeting this summer, as four of the ﬁve dissident directors were elected. Remarkably, even after the vote was certiﬁed by an independent auditor, CSX still refused to seat two of the new directors — including Hohn — claiming the shareholder vote was still controversial and ﬁ ling an appeal trying to have TCI’s votes invalidated after the fact. But CSX ﬁnally ran out of options when, on September 15, the U.S. Court of Appeals for the Second Circuit issued a summary order denying CSX’s appeal and supporting Judge Kaplan’s previous decision not to enjoin TCI from voting at the shareholders’ meeting. The ﬁrm’s votes stand; Hohn is now one of CSX’s 12 directors and will ﬁnally be allowed to take a seat at the boardroom table. Hohn’s other major proxy battle, however, shows no sign of letting up. In January, TCI applied to the Japanese government to double its investment stake in Tokyo-based energy wholesaler J-Power after a quiet two-year struggle. The government turned the ﬁrm down cold. “We knew that TCI had already demanded that J-Power double its return on equity,” says an ofﬁ cial from the Ministry of Economy, Trade and Industry, who spoke on the condition that he not be identiﬁed. “We asked TCI how it proposed to do this without interfering with the planned expenditure for the Ohma nuclear power plant, and they said that it was none of our business. But the Japanese government is legally bound to investigate whether there is a possibility of price dropped by nearly 7 percent on the news of the vote, to close at ¥3,810 ($35). “Corporate governance in Japan is nonexistent,” Hohn says bluntly. “The government passes laws to stop foreign investors, but it doesn’t do anything about Japanese companies adopting poison pills and increasing their crossshareholdings to insulate themselves. Until it does, the overriding message is: Don’t bother to invest in Japan. It is a stagnant economy and stock market.” T “It would be a mistake to sell our individual business units to anyone.” — RÜDIGER ASSION, SPOKESMAN, DEUTSCHE BÖRSE damaging national security by allowing this investment to go forward, so we said no.” Hohn was deeply frustrated. The decision was the ﬁrst time that the Japanese government had used the Foreign Exchange and Foreign Trade Law to refuse a foreign investment ﬁrm, and Hohn immediately lobbied politicians in the U.K. and Europe to respond. Peter Mandelson, the European Union’s trade commissioner, voiced support for TCI during a speech in Tokyo, condemning Japan as “the most closed investment market in the developed world,” but his criticism fell on deaf ears: At JPower’s annual general shareholders meeting on June 26, TCI’s shareholder proposals failed miserably. If some institutional shareholders had been hoping that TCI’s activism might affect the company’s stock price, their hopes were quickly dashed. J-Power’s share 38 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008 he battles with CSX and J-Power have set Hohn back on his heels. Until now he has been conﬁdent in his ability to wear down opponents and rally enough support from other shareholders, including fellow hedge funds, to win any given vote. But these recent difﬁculties have forced him to reconsider the personal and political costs of shareholder activism. Hohn seems ready to take a less bare-knuckle approach to investing and to avoid costly skirmishes that sap his energy. “Buffett has always said that he looks for good management teams, because they’re easier to work with,” Hohn says. “We’ve often done just the opposite. We’ve frequently looked for excellent companies with underperforming management — Deutsche Börse, Euronext, CSX. Activism has been proﬁtable for us, but it’s getting much harder; the political and regulatory environment is changing.” As tough as TCI’s investment in CSX has been, Hohn has still made money on it. When the ﬁrm bought into CSX in October 2006, the company’s stock was trading at about $35 a share. By late May, it had doubled to nearly $71 a share but it had retreated to $58 by mid-September, pulled down by the recent broad market sell-off in equities. By comparison, TCI’s long-standing position in Deutsche Börse has cost Hohn dearly this year. At a moment when exchanges all over the world are consolidating, Deutsche Börse has no intention of breaking up or spinning off its three main businesses — the exchange itself, posttrade processing ﬁrm Clearstream and derivatives exchange Eurex. On an investor call in mid-July to report TCI’s second-quarter results, Hohn spoke about needing to ﬁnd a way to capitalize on the value of Deutsche Börse’s subsidiaries and said that he didn’t think the company ought to exist in three pieces. “If Eurex were a stand-alone company, a pure play,” he said on the call, “it would be valued at 25 times forward expected earnings.” Deutsche Börse, by contrast, is valued on a blend of its three businesses at ten times forward earnings. The news this month that TCI and Atticus are teaming up to try to salvage their investments in Deutsche Börse made headlines. Atticus, which this year has seen its two largest funds fall by 32.9 percent and 25 percent, respectively, through August, was also ﬁghting market rumors of a complete meltdown. It was no accident that TCI and Atticus went public and declared their allegiance. Hohn was loath to have anyone accuse him of forming an investment group without giving regulatory

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

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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