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Lagardère fracas highlights perils of activist investors

Arnaud Lagardère (pictured) is anxious to shake off his playboy image, writes Darrell Delamaide. The 49-year-old second-generation head of Lagardère SCA, which has extensive media interests as well as an important investment in defence and aerospace, was reportedly one of the bidders in the running to acquire Playboy magazine when it was being jobbed around last year.

However, he may now be able to establish his reputation as a serious CEO in the face of significant competition. Last month France-based Lagardère was forced to fend off a challenge from the French-American activist investor Guy Wyser-Pratte when shareholders rejected proposals to put Wyser-Pratte on the board and to change the company's structure from a limited partnership to a corporation (Continue reading here)

The fracas showed once again the challenge faced by a family-owned company to find the right balance between family control and openness to outside investors.

Wyser-Pratte's effort was quixotic in the sense that Lagardère's corporate structure as a SCA, or limited partnership with shares, gives the general partner – in this case Arnaud Lagardère – veto power over key decisions, even though the family owns just less that 10% of the shares.

"He was on a fool's errand," says Tom Davidow, a consultant on family-owned companies. "There was no way they were going to change that structure."

It's usually futile for an outsider to challenge family control, says Davidow, even when there is no dual share structure to protect the family interest. He cited Carly Fiorina's attempt as chief executive of Hewlett-Packard to sideline the family and proceed with a merger with Compaq over their objections. Fiorina was subsequently forced to resign.

Instead, a more productive and potentially successful way for activist investors to instigate change in a family business is to work with the family. "You have to find a way to communicate with the family," says Davidow.

Wyser-Pratte, whose New York-based firm specialises in investing in undervalued European firms, tried a typical corporate raider approach that has met with some success in other firms, such as Taittinger in France and Rheinmetall in Germany. He acquired a small 0.5% stake and pushed forward his proposals at the annual shareholder meeting.

On the face of it, Lagardère was a good target. The French media company's stock has declined nearly 50% over the last five years – compared to a gain of more than 60% at UK competitor Pearson. The core media business trades at about seven times estimated 2010 earnings, compared with 15 times at Pearson. Wyser-Pratte says Lagardère's market cap of about €3.5 billion compares with the €6 billion value it should have as the sum of its parts.

Analysts blame both the partnership structure and the legacy conglomerate structure of Lagardère for the disparity. Arnaud Lagardère, who took over from his father Jean-Luc Lagardère somewhat unexpectedly seven years ago, has pledged to sell the company's 7.5% share in European Aeronautic Defence and Space Co, the majority shareholder in Airbus, to break with its past in defence and become a purer media play, but he has not yet done so.

In fact, the EADS holding has been a source of controversy for the younger Lagardère. He came under suspicion of insider trading in 2007 when he sold a block of EADS shares for considerable gain just before the company announced a significant delay in development of the Airbus A380 super-jumbo airliner and the stock plunged.

French authorities investigated, but, in spite of what French press reports said was concrete evidence that Lagardère had knowledge of the A380 delays before he sold his shares, no charges were ever brought. Lagardère is extremely well connected and counts French president Nicolas Sarkozy among his friends, so few were surprised at this result.

There are two things that can help inspire confidence in outside investors and unlock value even in a dual shareholding structure, consultant Davidow says. One is to have a credible succession plan. Even in the case of a relatively young manager like Arnaud Lagardère, there is always the proverbial hit-by-a-truck scenario that poses a risk.

A second measure is to have outside directors. "They can provide an expertise and skill sets that may not be found in the family," says Davidow.

This was one of Wyser-Pratte's arguments in seeking a board seat. He argued that some of the Lagardère company's current board members had no qualifications and should be replaced.

Wyser-Pratte may well have been tilting at windmills. He has certainly upped the stakes at Lagardère and put the second-generation family manager in a position where he had to defend his family's reputation. It may also finally be the making of Arnaud Lagardère as a leader worthy of the family business.

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