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May 21

Corporate Raiders and Proxy Fights

Arab News

Wednesday 21 May 2008

 by Manuel L. Quezon III

 

Over the past weeks, the public’s been either entertained or infuriated by the he-said, she-said arguments between the owners of the Manila Electric and Rail Company (Meralco), and the government. Unless something happens, the media battle will soon come to a head: on May 27, it’s widely expected that the “mother of all proxy fights” will take place at Meralco.

The Soriano family had management control over the San Miguel Corporation for two generations, even though they never had more than a minority share of the company. They did so by means of the support of substantial shareholders. Then, after his bid to assume control of the corporation failed, the late tycoon Enrique Zobel sold his shares to Eduardo Cojuangco, and with the aid of government support, Cojuangco assumed control of San Miguel.

Cojuangco lost control of San Miguel with the Edsa Revolution but during the Estrada administration, again with government support by means of the voting rights of shares it had sequestered in 1986, Cojuangco eased out the third generation Sorianos and reassumed control of the country’s biggest corporation.

Now this collision between Meralco’s two biggest shareholders, has a third player — and that’s the government. Since Ferdinand Marcos seized Meralco in 1972 and ushered in crony capitalism, businessmen and the public have been paranoid over presidential battles with big business.

And since we take everything personally in this country, the moment the president weighed in, what might have been a proxy fight only interesting to shareholders became a national issue. She weighed in in favor of the Government Service Insurance System, headed by Winston Garcia. The GSIS’s Kinabukasan Mutual Fund, cleverly managed by Garcia — it had returns of 40 percent in 2006, and returns of 23 percent in 2007 — and according to Newsbreak Magazine, bulging with cash since it sold its holdings in San Miguel Corporation, the Philippine Long Distance Corporation and the Ayala Corporation in 2007, is at the heart of the confrontation between Meralco and the government. The fund has to keep sniffing around for opportunities, because it has to keep giving its investors a healthy return on their investments. And the GSIS senses a gigantic opportunity in Meralco. The essentials behind the looming proxy fight are discussed in an online article by Newsbreak.

It goes like this. In 2006, the Lopezes bought out the shares owned by the Meralco Pension Fund. That represented a 6.6 percent chunk in the company. Last year, Meralco’s Spanish investor, Union Fenosa Internacional SA, sold its holdings, which amounted to 22.7 percent of Meralco. These consolidations resulted in the Lopezes owning 33.4 percent of the company.

But someone else was also gobbling up shares, and that man was Winston Garcia. Up to last year, our government owned 20 percent of Meralco. The GSIS, which at that point owned around 8 percent of Meralco on its own, bought half of the government’s shares. That boosted the GSIS’s holdings to 18 percent. It then started buying shares in the stock market, so that today, it owns 23 percent of Meralco.

Now remember, the government only sold half of its 20 percent holdings in Meralco to raise cash. To be precise, Philhealth, Landbank, Social Security System, and Pag-Ibig Fund all have shares which, added together, totals ten percent of Meralco. Add their ten percent to GSIS’s 23 percent and presto, you have 33 percent of Meralco owned by government corporations. That means the Lopezes only have a .4 percent advantage over the government group.

Newsbreak says that Winston Garcia is basically a genius at engineering proxy fights to get the most bang for his shares. One example Newsbreak gave of Winston’s genius was how Garcia got involved in the battle for control of Equitable-PCI Bank. The Sys of Shoemart fame wanted to buy the bank. The Go family which controlled the bank, didn’t want to sell. So Garcia helped convince Martin Romualdez, a minority shareholder in the bank, to throw his support behind the Sys. This gave the Sys votes they needed.

But then, the Sys discovered that an obstacle to their assuming full control by merging Equitable-PCI with their own bank, Banco de Oro. The GSIS had a big chunk of shares, and it wouldn’t sell. The Sys made an offer, and Winston Garcia refused, because, he claimed, there was a buyer offering much, much more for the GSIS’s 12 percent holdings in the bank. The Sys couldn’t wait for ever — so they had to fork over twice what they’d originally offered, just to get the GSIS out of the way.

Business, someone once said to me, is about creating value. It’s not about being good or bad. But what happens when a business vitally affects the public, as Meralco does, and when businesses owe their existence to the government, as the GSIS does? Government is supposed to exist for the public good. Can businesses with shareholders who have a right to demand profits, be required to adhere to the public good? There are shareholders in Meralco; a powerful family and a government institution among them.

And yet anyone who’s paid dues to the GSIS is, in a sense, a shareholder of that institution, too. It just so happens that the reason that the institution exists is because of government policy dating back to the Commonwealth.

If the GSIS mobilized its holdings only to increase the value of its investments, and if GSIS were a purely private investment fund, there might be no questions to raise. But it’s mounting a bid for control of Meralco not only to boost its hedge fund’s profits, but also in part, to assist the government’s stated goal to lower your and my electric bill.

And so, we need to take a look at how public monies are used for public purposes. What’s presented by either side as a public-interest fight, can always end up being purely about private gain.

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