French protectionism, shareholders, Arcelor, markets, Simon Nixon

Simon Nixon's City View: Why you can't buck the markets

23.06.2006

by Simon Nixon

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When Dominique de Villepin, the French prime minister, started blathering about “economic patriotism” last year, most observers saw it for what it was: another attempt by a dodgy French politician to dress up Gallic protectionism in pseudo-intellectual waffle. The only interesting question was: will it work? History, common sense and the laws of economics said it wouldn’t. Six months later, history, common sense and economics are being proved right.

De Villepin’s crusade focused on high-profile French companies that he said should be protected from foreign takeovers. The French state would do whatever it took to fend off predators, regardless of whether they were offering a fair price or good deals. To my mind, this smacked of bluff. For all the fighting talk, French companies are subject to market rules, same as anywhere else. Eventually, most governments learn that you can’t buck markets.

True, the war is not over yet, but shareholders are winning the key battles. Take Arcelor, for example – the steel-maker’s attempts to wriggle out of a bid from Indian steel magnate Lakshmi Mittal by handing control to a Russian oligarch have become a shambles. The company had to abandon a share buyback after an investor revolt, and the board is now renegotiating its deal with the Russians.

Or look at Suez, the French utility that tried to engineer a hasty marriage with Gaz de France in an attempt to thwart a bid from Italian rival Enel. The deal depended on a new law letting the government cut its stake in Gaz de France to 34%. But that’s proving politically impossible. Suez boss Gerard Mestrallet must rue the day he tied his and his company’s fate to such an inept prime minister.

Meanwhile, de Villepin’s efforts to defend Noel Forgeard, the French boss of EADS, could yet prove his undoing. The Franco-German aerospace group is in turmoil after it emerged Forgeard had sold shares ahead of a severe profit warning. Forgeard has lost his board’s confidence, but de Villepin seems more concerned with keeping him in place to preserve French influence over EADS.

At least one company seems to have drawn the appropriate conclusions. Euronext, the pan-European stock exchange, is under pressure to pull out of its planned merger with the New York Stock Exchange in favour of a ‘European solution’ with Deutsche Boerse. Quite rightly, it is sticking to its guns. Perhaps it has noticed that getting too close to de Villepin is potentially toxic for shareholders and management.

Still, shareholders mustn’t be complacent. They may have the law on their side, but the government can count on public opinion. After all, French MPs aren’t worried about the treatment of Suez shareholders; they’re opposed to the privatisation of GdF. Populist French governments will always be tempted to build financial Maginot Lines to keep the rest of the world at bay. The lesson of the past months is that determined bidders will find ways to get round them.

What hedge funds could learn from baseball

I recently got around to reading Moneyball by Michael Lewis, which I can highly recommend. It’s ostensibly about baseball, but you don’t need to know the game to appreciate the book. It tells the story of child-prodigy-turned-failed-pro Billy Beane, the manager of the Oakland Athletics, who fashioned a league-topping team year in, year out, but on a shoestring budget.

His secret? Beane realised the market was valuing the wrong attributes in a player. For example, it was focusing on how often a batter hit the ball into the carpark, rather than how often he got out. In a sport where the innings is over when the third batsmen is out, that was a mistake. This insight brought him into contact with a sub-culture of baseball obsessives who used information available on the internet to generate extraordinarily detailed statistics on every player in America. Drawing on their analysis, Beane was able to buy unfancied players with the skills to create a cut-price match-winning team.

When you think about it, this is not so different from how many hedge funds operate. Take Marshall Wace, one of London’s top hedge funds which regularly generates returns of over 20% a year. Its secret? Every day, it collects stock tips from thousands of brokers around the world and feeds them into its TOPS system which tells them who is most reliable. It has found the market is mis-pricing the huge amount of research spewed out by banks. That has created a lucrative arbitrage opportunity.

But will this opportunity last? The story of the Athletics suggests these arbitrages don’t last for ever. After initially dismissing Beane as a crank, other managers started to copy him. As the market started to price players more rationally, Oakland struggled. Hedge funds generating huge returns today should enjoy it while it lasts.

Simon Nixon is executive editor of Breakingviews.com