Smart companies beat raiders in search for hidden assets
There's no high-anxiety stock trading at Batterymarch's offices. Sequestered computers do all that, silently cruising the globe's financial waters to keep $8.7 billion invested in carefully chosen stocks. The calm, polite atmosphere in this aerie overlooking Boston Harbor makes it difficult to believe that Dean LeBaron thinks like a corporate raider. He is such a low-key, engaging gentleman, more like Dick Cavett than T.Boone Pickens or Carl Icahn.
But, says Mr. LeBaron, ``Boone Pickens, Carl Icahn, and others were the pointers - colorful, not members of the establishment. Many of the things they have espoused have been adopted by the establishment now.''
Corporate raiders look for the ``hidden assets'' of a company, the better to take it over. Companies now look at themselves that way, LeBaron says. This approach should guide investors all over the world today.
So Batterymarch analysts examine the assets of some 6,000 companies all over the world, breaking them up into 30,000 business segments. LeBaron says this is necessary because the world has entered a new era of ``corporate investing.'' He sees this as the third distinct phase of investing since the end of World War II:
In the first phase, from 1945 to 1965, financial markets were dominated by individual investors.
They used pent-up savings from the war years to buy into well-known companies. This was the era of the solid blue-chip companies. What mattered was a good name: General Motors, IBM, United States Steel - the companies that were rebuilding the postwar world.
From 1965 to the early 1980s came the institutional-investor phase.
Mutual funds, pension funds, and other money managers began using computers to figure out the best prices for securities. Names were not as important as price performance. Diversification and risk management were crucial, since institutional investors have a fiduciary responsibility to try to make money for the people who have entrusted them with their money. The Standard & Poor's 500 became the yardstick for measuring how well an institutional investor was doing.
Now, says LeBaron, comes the ``global and corporate'' phase. He expects it to last for several decades.
The corporate raider was the harbinger of this phase, corporate control the watchword. In the past, institutions and indi-viduals left decisions about corporate control to managements. But raiders/corporate investors examine hidden assets in companies they want to buy. They calculate market share, debt capacity, and breakup value. Potential is more important than performance.
They are not loyal, moreover, to companies in any one country but look around the world for asset buys through takeovers, spinoffs, leveraged buyouts.
This has led quite naturally, LeBaron says, to managers looking at their own companies this way and realizing that to head off a takeover they must maximize their assets. Good managers now think like raiders (or perhaps like portfolio managers) about their own companies, altering the businesses in fundamental ways should the need arise. This line was crossed about three years ago when corporations found that the only defense against takeovers was a high stock price. The recent explosion of corporate stock buybacks shows the popularity of this tactic.
In this new era, information dissemination - not secrecy - is crucial. LeBaron says a chief executive officer recently confided that his company's $600 million pension fund could be used by a raider to finance a takeover of the company if word ever got out. LeBaron urged the CEO to spread the word rather than keep it quiet. That way the stock market would begin to value the stock more highly - no more hidden asset, no more raider.
``Corporate disclosure helps set realistic value on securities,'' LeBaron says. ``Therefore, managements won't fear being taken over and ousted.''
A professional investor must try to understand how a company values its separate components by market share, sales, assets, and operating income; who its competitors are in each product line; who has corporate control.
Further complicating the calculation, he says, more and more corporations are forming ``global networks of affiliations of companies for marketing and technological information.'' Dow Chemical, for instance, recently bought 5 percent of the Italian chemical giant Montedison to play a part in the restructuring of Italy's chemical industry. ``Dow is worth more now because it has this membership,'' LeBaron says, ``even if the purpose is vague at present.''
Since 1985 LeBaron has been devising a ``global valuation model'' for stocks, chopping companies into components, mixing and matching with others around the world, and trying to quantify all of this information. With such complexity, says LeBaron, ``nothing works unless you can communicate it to the computer.''