The Children’s Investment Fund sounds so cuddly, doesn’t it? And in fact it
does give a large chunk of its profits to charity. But it gets those profits
by buying up stakes in undervalued companies and forcing management to shake
them up – and the latest
target is ABN Amro.
TCI was founded by Christopher Hohn, but the formal
letter to ABN Amro, which is reprinted at Alphaville, was written by TCI
partner Patrick Degorce. He’s not pulling punches:
Since the current chairman of the Managing Board was appointed in May 2000
ABN AMRO has given shareholders a cumulative share price return of 0% (excluding
dividends) compared to (a) the ABN AMRO selected peer group of approximately
44% and (b) the Dow Jones Euro Stoxx Banks Index of 44% (all numbers are for
the period 1 June 2000 to 31 January 2007).This terrible shareholder return
is a function of the fact that ABN AMRO’s underlying earnings per share
has been broadly flat for around 6 years, during a time when nearly all banks
globally have enjoyed a period of strong earnings growth.The Managing Board
has presented several restructuring strategies over the last 6years which
were supposed to accelerate earnings growth which would be reflected in a
higher share price. In 2006 they again committed to cut costs and they have
so far failed to deliver.
Degorce reckons that breaking up ABN Amro could "justify a price significantly
in excess of EUR30 per share" – which isn’t all that much higher
than the €27.25 the bank is trading at in the wake of Degorce’s letter
becoming public. But the real impetus behind the letter, I think, is not to
split up the banks in ABN Amro’s "home markets" of Italy, Holland,
Brazil and the US Midwest. Rather, it’s to force ABN Amro to get its own house
in order before embarking on a foolish and expensive acquisition of Capitalia.
On the other hand, other parts of ABN Amro, such as the capital markets and
asset management businesses, might well get sold off, along with its Asian holdings.
Either way, Degorce has managed, with one letter, to increase the value of ABN
Amro by over $3 billion in one day, which is pretty impressive.