Fogel & Partners Quarterly

Dear all,

Welcome to the second edition of Fogel & Partners Quarterly in which we plan to give you an update of what happens in our neck of the woods, trends and movements around strategic communications in the financial market.

First of all, many thanks for the positive feedback we received for the first issue. It gave us enough strength and courage to proceed with this tradition, and we humbly hope that you will continue to find some interest in our updates.

Late last year, most of us had high hopes for 2013: a livelier M&A market, some interesting bellwether deals, maybe even an IPO or two… The days of credit crunches, financial turmoil and general austerity might finally come to a welcome end. And how have we fared so far? Well it is a bit like the famed Loch Ness monster: everyone talks about turn to the better, but no one has seen it. Not yet.

True, there have been a number of eye-wateringly large deals including Dell, Heinz, Virgin Media and American Airlines, but as $10bn+ transactions go, they cannot really be seen as trendsetters. The Lex Column summed it all up with its usual flair and panache: “Dullsville M&A: Big Boring Buyouts”. We will most likely see a continued focus on addressing balance sheet issues and a subsequent interest in corporate bonds, but eventually we will also signs of a more solid market. Maybe the permafrost – not just seen in the streets of the Swedish capital – will melt away, and give way to a warm and inviting spring of classic deal making. For whatever it is worth, here is a small anecdotal note of expectation: in 2012, Nasdaq OMX received in all 35 formal IPO applications. In late February this year, they had already got more than half of that. Also: stock market valuation is competitive, and market sentiment stable – two excellent preconditions for launching IPO’s. “Dual track” is perhaps no longer just a convenient expression used by private equity owners to hike up the prices for their long overdue holdings in the usual auction processes.

There is one element from Warren Buffett’s $20bn+ acquisition of Heinz that is worthwhile looking into; an all too familiar and dreaded phenomenon that markets, regulators, even individual companies have a hard time fighting, and something that a recent ruling by The European Court of Justice might turn into a complete nightmare for everybody involved: insider trading.

But let us leave the Securities and Exchange Commission to look into the actual Heinz dealings, and instead focus on the EU ruling and its unforeseeable ramifications. One thing is certain: if handling disclosure of information has been difficult to handle for most companies, it can now turn into a complete nightmare; a big fat WHEN has been added to the mystery – When does an insider actually become an insider?

This was the central topic of a well-attended panel debate arranged by Fogel & Partners and legal adviser Hannes Snellman in Stockholm earlier in March. Representatives from large cap companies, the Ministry of Finance, Nasdaq OMX and other segments of the financial markets grappled with the consequences of the EU ruling.

Short background: on 17 May 2005, DaimlerChrysler CEO Jürgen Schrempp – the man deemed responsible for the ill-fated Smart car, the ruinous $36bn merger with Chrysler in 1998 and subsequent erosion of more than 30% of the company value since the merger – discussed his plans to resign three years ahead of his time with the Chairman of the Supervisory Board, and subsequently, other members of the Supervisory Board and the Board of Management were also informed. Not until 10 July did the company start drafting a press release. After Mr Schrempp’s resignation was announced, on 28 July, DaimlerChrysler shares surged — by 9% in Frankfurt and almost 10% in New York. The dramatic rise was the steepest intraday gain posted in the company’s history. More than 61 million shares were traded on that day, 10 times the average volume. The minority shareholders filed a complaint, claiming that, “insider trade had opened the floodgates”. Eventually, in June 2012, the Court of the European Union delivered a judgment: A step preceding a decision by a listed corporation may constitute inside information, which must be disclosed to the financial markets.

Unfortunately, what initially was meant as a well-meant move might in fact make life even harder for everybody concerned. Most corporations have extensive, fine-tuned communications policies, where disclosure of information is a natural section. But are they really helpful? Do they really tell us exactly how to act in a situation that could be – but not necessarily is – deemed as leading up to potential insider trading? If a company fails to live up to the quarterly expectations from the analysts, does this require a profit warning in order not be judged withholding information? And how do you handle the preliminary work with reports etc.? Such matters are often summarily treated in the policies, leaving a lot to chance, personal beliefs and, ultimately, imprecise decisions.

You can even lift the discussion all the way up to the top level of the office building – who wants to be a board member if the board’s work is undermined by a framework destined to create more questions than answer them? And is it worthwhile to put a company in a public environment if further rules and regulations only produce more work and uncertainty? Today, with directors having personal liability, regulatory issues are rapidly taking over board agendas. One can easily envision scenarios where directors, scared of exposing themselves to increasingly higher personal risks, avoid raising sensitive topics at board level. They rather raise the topic in other forums, thereby managing the potential insider problem outside of the boardroom. Should not the focus be on developing prosperous businesses in an increasingly competitive world? This is the one key advantage of staying private, and the one key challenge for stock exchanges trying to attract new listing candidates.

But let us not just believe in doom and gloom. Our recent work with a number of clients have proven that by putting more edge to your disclosure policies ensure that information flows all the way to the top, you are at least better prepared in case of eventualities, including visits from the Court of the European Union.

Another trend that gives board members and company directors a headache is the rise of shareholder activism. Unwelcomed suitors go under the radar screen and accumulate stock in a target company, then flag out of the blue and demand a seat on the nomination committee, proposing board members. Christer Gardell’s Cevian Capital has been the most visible one in Sweden, but there are several more activists lurking around. They argue that companies with increasingly stronger balance sheets and a lack of imminent M&A activities should start distributing hard earned cash. US activist David Einhorn at Greenlight Capital, known in Sweden for shorting Elekta, recently pressured cash rich Apple to issue high yielding preference shares, thanks to a positive ruling in a US court.

This tendency means that companies need to start thinking in terms of effective defence plans, in order not to be taken hostage by unwanted intruders. We have worked intensely with some clients to make sure that they are well prepared. The old Roman adage “If you wish for peace, prepare for war”, attributed to Vegetius, is valid even today, more than 1,500 years later.

Our next newsletter will be distributed at the end of Q2 2013. Will our predictions come true? Safe to say, we will continue to monitor the market closely.