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THE WALL STREET JOURNAL: Icahn's Push in Korea Shows Rise Of Raiders Is Roiling New Markets

By LAURA SANTINI and JASON SINGER
March 2, 2006; Page A1
The rapid, global spread of shareholder activism has brought one of Wall Street's most battle-hardened corporate raiders to the gates of one of the world's more change-resistant emerging markets.
Carl Icahn, fresh from retreat in a prolonged showdown with New York media giant Time Warner Inc., is squaring off for what could be a long proxy battle with KT&G Corp., South Korea's biggest tobacco company by revenue. Just as he did with Time Warner, Mr. Icahn has taken a big stake in KT&G and is agitating to break up the company to unlock value for shareholders.
His effort is one of many recently by hedge funds and other activist investors, who are flush with cash and hungry for profits. Some have launched well-publicized campaigns, such as one that persuaded Royal Dutch/Shell Group to merge its two boards and another that aims to force Germany's stock exchange to merge with other markets in Europe. Others campaigns have been waged more quietly, from Hong Kong to Germany, Japan and France.
As Mr. Icahn's interest in KT&G shows, the rise of raiders and other advocates of change is roiling many markets around the world. Hedge funds and even traditional fund-management firms such as Fidelity Investments and Templeton Global Advisors Ltd. have become more aggressive shareholders in places farther afield.
Even when they fail to get their way — as happened when one investment firm tried to unseat the head of South Korea's biggest oil refiner last year — the raiders often can cash out with hefty gains because their efforts frequently boost the target's share price.
Money managed by global-minded hedge funds, all looking for any advantage in returns, has more than doubled from just two years ago to an estimated $1.26 trillion, according to Eurekahedge Pte. Ltd. Global private-equity assets have risen more than 150% in the same period to $246 billion, according to Thomson Venture Economics.
In Korea, Mr. Icahn and an investor group including hedge fund Steel Partners II LP stepped up the pressure this week, saying Tuesday they might make a tender offer to shareholders of KT&G. The group, which owns 6.72% of KT&G, approached the company's board last week with a $10 billion takeover proposal. The board rejected the overture, and both sides are girding for a proxy fight.
Aggressive investors can stir nationalist sentiments in long-isolated markets — as in the early 1990s, when Texas oil man T. Boone Pickens took a stake in Japan's Koito Manufacturing Co. and tried, but failed, to gain a board seat. They also can focus attention on issues of corporate governance in countries where such questions have rarely been raised.
“There's no one standing up for shareholders,” says Eric Knight, whose Knight Vinke Asset Management, of New York, has been involved in some of Europe's highest-profile displays of shareholder activism. “Many of the world's largest public companies are managed by individuals who nominate each other to the boards, determine their own remuneration and manage corporate assets as they alone see fit.” The 46-year-old Mr. Knight was among the most vocal supporters of merging the two boards of Anglo-Dutch oil giant Royal Dutch/Shell Group, a move the group had opposed for years. The merger took place in 2004, creating Royal Dutch Shell PLC.
Last year, Mr. Knight, whose fund's big investors include the California Public Employees' Retirement System, the largest U.S. pension fund, encouraged Suez SA of France to acquire the 50% of Belgian power company Electrabel that it didn't already own. To lobby for the move, Mr. Knight organized two town-hall meetings and invited 600 Belgian mayors and aldermen to hear how a deal would benefit them. Backing from local governments was integral to Mr. Knight's campaign to force Suez to buy the Electrabel stake for $14 billion.
“The high-profile position taken by Eric, I would say, caused Suez to move,” says Glen Suarez, an executive at financial adviser Soditic Ltd. in London.
Mr. Knight now is pressuring Suez again, after the company several days ago announced a merger with Gaz de France SA that he says isn't fair to Suez shareholders. Mr. Knight says he wants Suez to spin off its water and waste-management divisions, which he estimates are valued at €15 billion ($17.77 billion) and then merge the remaining energy division with Gaz de France.
In another battle, Mr. Knight is urging Dutch media giant VNU NV to break itself into three companies rather than accept an $8.6 billion buyout from a group of private-equity firms. The company was put up for sale after Mr. Knight, along with Fidelity and Templeton, forced VNU to abandon an $8 billion acquisition its board agreed to last year.
Mr. Knight says he picks these fights because he sees companies pursuing strategies that aren't in shareholders' best interests. In some cases, he says, companies have told him they must instead focus on employees, suppliers and the community.
Meanwhile, Children's Investment Fund Management (U.K.) Ltd. of London has shaken up the Continent's publicly traded stock exchanges. The fund is trying to force Euronext NV, a Dutch company that runs many European exchanges, to merge with Germany's Deutsche Börse AG. TCI, as the fund is known, also owns shares of Deutsche Börse and last year prevented the German exchange from bidding for London Stock Exchange PLC. When Deutsche Börse Chief Executive Werner Siefert wouldn't capitulate to its demands, TCI forced him to resign.
Late last year, TCI disclosed that it had accumulated 18% of Hong Kong's Link REIT, a real-estate investment trust. It also has bought large minority stakes in several Hong Kong-listed property companies. TCI declined to comment on its plans in Asia.
As shareholder activism increases, fear of raiders may motivate more companies “to look to the interests of controlling shareholders,” says Robert Zulkoski, chief executive of Pangaea Capital Management in Singapore, which operates a joint venture with U.S. hedge fund Pequot Capital Management.
In Korea, Mr. Icahn and his partners began pushing for change at KT&G a few weeks ago after they had accumulated a stake of more than 6%. They proposed spinning off the company's ginseng operation, the “G” in KT&G, and unloading laggard real-estate holdings. KT&G rejected those proposals, arguing that it would prefer to come up with strategies to enhance the value of its ginseng business and its real estate.
The investor group came back to the board with a takeover offer, which KT&G declined on Monday. Mr. Icahn and Warren Lichtenstein, who runs Steel Partners, say they are willing to commit as much as $2 billion of their personal funds to acquire the company.
A former state-owned enterprise, KT&G is a national icon. It sells more than 30 brands of cigarettes in a country where one in four people smokes. The first foreign-led hostile takeover attempt in Korea has created a furor, dominating headlines and prompting the country's finance minister to tell the National Assembly that the government won't interfere, despite popular sentiment that foreigners should stay out of Korean businesses.
KT&G shares have risen more than 22% since mid-January. Whether or not Mr. Icahn succeeds with a tender offer, he still may wind up with a handsome profit.
That is what happened when Sovereign Global Investment, an investment vehicle based in Dubai for New Zealand's Chandler family, waged a two-year battle to unseat the chairman of Korean oil refiner SK Corp. In 2003, SK's Chey Tae Won, a descendent of the parent company's founders, was convicted of an accounting fraud involving a trading affiliate. As SK's shares plummeted, Sovereign acquired a 14.99% stake.
The fund quickly called for big changes in SK's corporate governance, including the election of independent directors, electronic proxy voting and, most radically, the ousting of Mr. Chey. When SK seemed determined to back Mr. Chey, Sovereign took its case public in news conferences, seeking to drum up support.
That only unified Korean opposition, which characterized Sovereign as a vulture fund out to plunder one of Korea's national treasures. Other Korean chaebols, or conglomerates, stepped in as white knights. At last year's annual meeting, shareholders voted to keep Mr. Chey.
Still, Sovereign earned about $850 million on its SK investment. Though Sovereign's campaign failed, it did make a dent. The company has added several outside directors and has created special transparency committees. Lee Seung Hoon, head of investor relations, says SK wants to move beyond its troubled past. Sovereign reaped substantial financial gains from its effort, Mr. Lee says, and SK shares have continued to rise since the fund's exit.
Write to Laura Santini at [email protected] and Jason Singer at [email protected]

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