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effectively engage with the management, the Board and other shareholders and stakeholders to address those opportunities.
RWC’s efforts as an active owner are focussed on addressing issues that are either directly or indirectly driving value:
• Improving economic value creation through strategy and capital allocation, operational excellence and capital structure;
• ReduciWng the discount of a company’s shares through interaction with capital mar- kets;
• Improving corporate governance as an enabler of economic value creation and contri- butor to reducing the discount of a company’s shares.
Figure 17: RWC EFF Investment Process (Source: RWC Partners, September 2013) The fund managers will build a detailed case for transformation and work with the compa- ny in a constructive manner in order to help unlock sustainable value. This will often require corporate governance improvements, such as changing the Board and improving sharehold- er rights. Environmental and social issues are similarly important if connected to materiality when they have a material impact on value creation (e.g., increasing revenue, productivity or improving the company’s risk profile). At the time of writing, the approach has delivered an- nualised returns of 8.87% in excess of its reference index of European listed companies since the fund’s inception in February 2009.
Improving corporate governance was key to the fund’s investment in Océ, a digital printing equipment company based in the Netherlands, which is one of the most successful engage- ments of the fund. The fund made the initial investment in November 2006, and exited in March 2010 when Océ was acquired by Canon. The investment case in Océ was predicated on the company having a high-end and innovative printing equipment business with a profit- ability and valuation that was not reflecting its potential. The fund maintained that there was a business logic for participating in consolidation for Océ in the oligopolistic printing equipment industry given that, although the company had strong positions in several niches, it was sub- scale in the more mainstream activity of developing, producing and servicing printing equip- ment for offices. As a result the company had been suffering and had seen its margins grad-
Idea Assessed Idea
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ually erode over a period of ten years. Combining Océ’s R&D activities as well as its installed base with one of the four leading players in the industry could be significantly synergistic and could substantially improve the competitiveness and cost structure of the company. At the same time, this would also unlock the fundamental value of the company for its shareholders, as the share price was strongly discounted. At the time of investing, the company was still in- sulated by several takeover defences and focussed on a standalone strategy. The fund initiated a process comprising three phases, each lasting about one year:
• Enabling change through corporate governance improvements,
• Negotiating a change in strategy through engagements with the board, and • Contributing to the process of maximising value before exit.
The first phase of the engagement process involved improving the corporate governance of the company by giving more power to shareholders on Supervisory Board nominations and reducing some of its takeover defences. The second phase involved making the case to the management and the Supervisory Board for strategic change. This was supported by the fund bringing to the Supervisory Board a trusted individual with strong experience in corporate transformations. The company reacted by initiating a strategic process to assess and evaluate all its strategic options, which was made public by the company in April 2009. In November of that year, Canon announced an offer for Océ that was supported by the Océ’s Supervisory Board. While the bid was at a 70% premium, many investors thought it was still too low given that it came at a low point in the company’s share price following the financial crisis. The fund attempted to engage with Canon, who at this point had obtained a substantial portion of the voting capital of the company, but Canon declined to enter into a meaningful dialogue with shareholders. At an EGM in February 2010, key governance changes were voted through by Canon, which consolidated their control. The fund challenged these changes in the Dutch enterprise court, in order to improve the rights of shareholders that did not want to ten- der their shares. Disappointingly for shareholders, the court decided that Océ’s Supervisory Board had appropriately represented all its stakeholders in its actions. Having no reasonable alternative, the fund tendered its shares.
The corporate governance and strategy changes initiated by the fund contributed significant- ly to unlocking value at Océ. The investment also contributed almost 6% to the excess return of the fund relative to its European reference index. In addition, the Océ case has informed a broader debate on the potential for the Dutch Ministry of Finance to modernise its takeover code.