VideoOf all the deals in 2006, the one that touched on many of the current issues in corporate finance and governance was the pitched battle for the Dutch media group VNU. Running for over a year from the summer of 2005, the VNU saga pitted "activist" shareholders against the company's supervisory and executive boards—first, over the company's attempt to do a transformational acquisition, then over its recommendation of a leveraged buyout (LBO) by a private equity consortium, which ultimately became the biggest LBO of 2006, at just over €9 billion. To top it all, management also faced a bondholders' revolt in August, when it was forced to improve terms on the refinancing after the private equity sale.
Many commentators have interpreted VNU's turbulence as marking a kind of watershed for European companies, whereby equity investors showed that they were prepared to say "no" to management, especially over potentially value-destroying mergers and acquisitions. Some also felt that VNU's turmoil underlined the fact that institutional investors were no longer prepared to hand value far too cheaply to the all-consuming private equity groups. Events at VNU also fed into the debate in the Netherlands and elsewhere in Europe about the effectiveness of recently updated governance codes and the proper role of shareholder activism.
VNU may indeed signify a new level of shareholder engagement, though the talk of a turn in the private equity surge may prove to be overblown as the liquidity and leveraged lending that has driven it continues apace.
For Rob Ruijter, who came from KLM Royal Dutch Airlines to join VNU as CFO in early 2005—unaware of the maelstrom that awaited him—the long-running battle highlighted some basic errors that the company had made, but also flaws in the system that, he believes, allow opportunistic investors to skirt the rules. But asked what is the main message he takes from the episode, Ruijter has no hesitation: "The investor relations lesson was very much the first one—listen to your investors."
By the time he had joined, however, and certainly by the time VNU launched a €6 billion takeover bid for US-based healthcare data provider IMS Health a few months later, in July 2005—an acquisition that would've nearly doubled the size of the company—that lesson had been forgotten.
Doing Battle
In the previous five years, VNU's CEO, Rob van den Bergh, had grown the company through acquisitions, transforming it from a traditional European magazine publisher to a US-focused market data provider, principally with the purchases of market researcher AC Nielsen, Nielsen Media Research and a majority stake in NetRatings, an internet traffic measuring service. Having been with VNU since 1980, rising to the top job in 2000, van den Bergh was clear about his vision for the company and had no patience for analysts and investors who might differ. "Rob—and this is a personality issue—never had a great relationship with his investors," Ruijter recounts. "He had little sympathy for young people with these laptops doing their models, and that showed. For you not to like it is one thing; for you to show it is another."
Apart from his unconcealed disdain for investment analysts, van den Bergh had also been prone to promise too much, something that shareholders tend to punish. For example, the company had acquired AC Nielsen in 2001 when it was making a net margin of about 8%, improving that to 12% by 2004. That was a pretty respectable performance; the problem was that VNU had promised to get that margin up to 15%.
Also, after selling its World Directories business to private equity groups Apax Partners and Cinven Group in September 2004, for just over €2 billion, van den Bergh promised to use half the funds to reduce debt and half for acquisitions. But if no appropriate targets could be found, he'd said, the money would be returned to shareholders. As Ruijter says, "From that moment on, it appeared that a number of shareholders put on blinkers and were only focused on the return of money, as opposed to the company doing any major acquisition."
Coming Distractions
One reason for the blinkers, perhaps, was disappointment with past acquisitions. Indeed, Ruijter had been brought into VNU to sort out the underperformance of some of those. As he puts it, "Rob had a philosophy of looking at individual acquisitions and trying to drive the margin on those. I was brought in by the supervisory board, and by Rob as well, to take a somewhat more operational role and start to look at what integration opportunities there were." Failure to integrate had held back topline growth and efficiency savings. There were also some obvious cross-selling opportunities that had gone begging—for example, linking media data with consumer behaviour data for both TV and the internet.
"That is something that we had talked about but hadn't delivered on, and really hadn't started working on too much either," Ruijter says. "Rob had brought together a fantastic portfolio of assets, one that we can continue to build on. What I hadn't realised, though, was the limited amount of, or even lack of, integration there. That became very relevant later on, because I think that was one of the issues that investors had with VNU; ie, that some of the promises hadn't been brought to the bottom line. "The idea had been to use the takeover of IMS as "a concluding acquisition," and the arrival of Ruijter as a new operations-focused CFO, to kick-start a programme of integration and rationalisation. Indeed, Ruijter outlined this plan a month after announcing the IMS bid at his first half-yearly results presentation in August 2005, calling it "Project Forward." This plan essentially is what is now expected to deliver value to the new private equity owners.
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