The headaches at Banco Vizcaya Argentaria (BBVA) began last November 29, when Sacyr Vallehermoso (SyV), a real estate and construction company, announced its intention to take control of the bank’s capital and management. Although SyV bought only 3.1% of BBVA’s shares, its ultimate goal was to influence management and dislodge the president of BBVA, Francisco González. Like other executives installed during the rule of the previous government, the conservative Popular Party, González does not enjoy much sympathy from the current Spanish government, run by the PSOE, Spain’s labor party.
The next chapter of this business soap opera will be revealed on February 26, when the general meeting of shareholders takes place. That meeting has emerged as an unofficial referendum on the bank’s current management team. One of the proposals that will be put to a vote by the owners of the bank involves reinstating González as president for an additional five years. This would guarantee him his job until 2010. Who will vote and how will they vote? “Shareholders do not function like a modern political democracy, but like a nineteenth-century democracy, in which rich people had more voting rights,” says José Luis Álvarez, assistant dean of the Instituto de Empresa.
The move by Sacyr Vallehermoso and some shareholders who originally came from the old Bilbao Vizcaya bank (which became BBVA after merging with publicly held Argentaria) awakened countermoves by BBVA’s managerial team to capture shareholder support for González. “Above all, you have to look for some consistency in your institution’s business plan, getting all the shareholders behind the same business plan,” says José Manuel Campa, a professor at IESE who specializes in corporate governance. “The plan must be credible so that the president can effectively communicate that his team can execute it,”
A Question of Size
The numbers speak for themselves. The BBVA group’s current market capitalization exceeds €43 billion, making it one of Europe’s biggest banks, and the second-largest bank in Spain. BBVA has a broad presence in Latin America, especially in Mexico. Acquiring a significant stake in BBVA would be quite costly, so it is something outside the reach of most investors. “Above all, institutional investors have a goal, which is the profitability of their investment in the company,” says Campa. “So they must value the ability of current management to carry out the best business plan for the company. If they are not convinced of that, they have two options: They can either sell their shares, or they can try to influence current management through a change of leadership. Usually, they choose the first option.”
Each one percent of BBVA has a market value of about €430 million. That means, Sacyr’s plan to take over 3.1% of BBVA involves laying out more than €1.2 billion, or more than 30% of Sacyr’s value on the stock exchange. BBVA was blunt in its initial statements, alleging that the construction firm had neither the scale nor size required to acquire a significant position in BBVA.
A Relationship with Investors
How could BBVA convince shareholders to back management? “Presidents must always maintain an activist position with respect to their shareholders,” notes Álvarez. “But they must adjust their approach to the background of shareholders; depending on whether they are general shareholders, institutional shareholders, or minority holders. They have to use a different strategy for each group. Not all shareholders are equal, once you create differences in political rights, or in terms of representation on the board.”
Institutional investors, such as investment funds, comprise the ownership of the majority of BBVA’s capital. There is also a broad base of minority holders and, finally, the management board itself, whose members directly control more than one percent of BBVA shares. “With institutional investors, the custom is to hold meetings every three months,” said Álvarez. “With general shareholders, the forum for debate is the management board. However, with shareholders who are dispersed, you have to look for channels of mass communication, such as the press or Internet.”
Currently, BBVA has 1.15 million shareholders, and 55.2% of its capital belongs to shareholders who live in Spain. The remaining 44.8% is controlled by foreign investors. “Communicating with minority owners is very important work, because you have to get across a sense that you can guarantee the accuracy of the information you provide. A good executive must master several means of communication, to maintain good relationships with different types of shareholders. If BBVA has been active doing these things, it must make the markets aware of its efforts to bolster current leadership,” adds Álvarez.
Political Overtones: From Sacyr to FG Investments
The key question that people keep asking is simple: What is the significance of Sacyr’s arrival at BBVA? The unwritten answer: Sacyr’s goal is to force a change of leadership at BBVA. Francisco González is currently president of BBVA because he was the chief executive of Argentaria, a publicly owned institution that was later privatized. Gonzalez’s closeness to the previous leader of the Popular Party — like other managers of former public companies such as Repsol and Telefónica – is another explanation for the move by Sacyr.
Sacyr’s investment in BBVA involved options for purchasing shares (which may or may not be executed). The move was led by Luis del Rivero, president of Sacyr, and Juan Abelló, another shareholder who once had a seat on the board of directors of Santander Central Hispano (SCH), BBVA’s main rival in almost every business sector. Abelló’s participation made it clear from the outset that this was a hostile move, despite the fact Abelló resigned from the SCH board shortly thereafter. In recent weeks, it has become less likely that this attack will succeed, and the offer could be withdrawn before the next general meeting of shareholders.
Throughout this period, the Bank of Spain, which regulates the banking sector, has steadfastly avoided making any statements about the move by Sacyr. A 3.1% ownership stake was not large enough to be considered significant. The National Commission on the Stock Market (CNMV) arrived on the scene a bit later, revealing a case of possible accounting irregularities in the sale of FG Investments (in which Francisco González was the largest shareholder) to Merrill Lynch in 1996. “With the earnings that BBVA is racking up, I don’t think that they can act against FG, unless there is some initial sign of bankruptcy, accounting scandal, and so forth,” notes Álvarez.
What institutions must play a role in this affair in order to bring back stability to BBVA? “First, an independent supervisor; he does not yet exist, but Manuel Conthe, president of the CNMV, has given a good example in recent accounts,” says Arturo Bris, associate professor of corporate finance at Yale School of Management. Bris is referring to the fact that the CNMV did nothing about the FG Investments case, which was not announced by the courts but was revealed through media outlets closest to [senior Spanish officials at] Moncloa (prime minister headquarters). “Second, the courts, if Spain had the sort of proceedings in which minority shareholders could suit the company (or Sacyr) at no cost (known as a “class action suit” in the U.S.),” Bris adds.
Finally, Bris recommends modifying the presumption of innocence. “I have spent years defending this reform in Spain. In the U.S., executives are guilty (of insider trading, expropriation, etc.) if you cannot demonstrate the contrary. The presumption of innocence has no meaning in the business world. Some interesting examples are the cases of Villalonga in Telefónica, and Alierta in Tabacalera. In both cases, the (supposedly) damaged parties were shareholders. However, the only possibility was for the CNMV to act in its official capacity. It is controlled by the government, and when it was time to act, the government named both of them. Minority shareholders are, in fact, defenseless,” concludes Bris.
Other Defensive Strategies
In the Sacyr-BBVA case, there was no takeover bid for BBVA, nor is this a simple acquisition of ownership. It appears to go beyond that. The fact that a group of private investors is ready to place its bets on a move of this sort is another argument that can be used by the current management team. In principle, this demonstrates that shares of the bank still have room to rise higher, and that would facilitate any defensive operation on the part of the current management. Bris mentions some of the defense mechanisms used in the U.S. against hostile takeovers. “First, there are the poison pills, which are provisions in the corporate charter that go into effect when there is a hostile takeover. For example, shareholders have the right to buy shares in the company at a big discount,” which would make the hostile takeover extremely expensive for the company that makes the acquisition.
Controlling 6% of BBVA would not be enough, at first, to change the president of that institution. The bank’s board of directors has 16 members. Based on the percentage of ownership, this would mean giving the new owners the right to one board member. “When the ‘supermajority rules,’ you need 67%, for example, to take control. And with ‘leveraged recapitalization,’ the company adds a significant amount of indebtedness in order to pay an extraordinary dividend. This increases the risk of the move, and provides a disincentive for the purchaser,” adds Bris.
Nevertheless, from the very first moment, shareholders at Sacyr demanded representation on the board equivalent to that held by other institutional investors. Bris says that preventive measures can be taken against such demands. “The most effective defense against hostile takeover bids in the U.S. today is called ‘staggered boards,’ and practically every company has them. This means that every year, you can only replace, for example, 10% of the members of the board. This means that a competitor can only acquire effective control after five years have passed,” concludes Bris.
An Alliancewith the Funds
BBVA has launched its campaign for soliciting votes for the board. Clearly, its goal is to acquire the greatest possible support for the González management team against any hostile attempt by Sacyr to acquire ownership. It also wants to head off any attempt to launch a campaign about possible irregularities in the sale of FG Investments to Merrill Lynch. “Institutional investors have different goals than minority investors. For example, they are exempt from taxes, so they prefer a constant flow of dividends. Also, if they are pension funds, they manage long-term investments. So the goal of institutional investors is generally to grow and to create value. Therefore, minority investors have an interest in assuring that majority investors are around, so that there is no favoritism on the part of the CEO. BBVA’s earnings provide sufficient arguments for maintaining Francisco González as president,” says Bris.
Is there a fund somewhere available to finance the deal? A key factor when it comes time to planning an investment is the credibility of the team that manages the bank. “In principle, both Francisco González and José Ignacio Goirigolzarri would provide greater guarantees to high-level institutional investors because they are the ones who are leading the business. And, at the moment, they have not made any mistakes,” notes Álvarez. Last year, BBVA announced record revenues. Its earnings grew by 25%, and it decided to raise its dividend by 15%. Investment funds have done nothing but applaud their return from shares of BBVA.
“If [earnings] are good, it is very hard to forge alliances that try to topple senior management. On the board of directors, the game is more political, and less transparent to public opinion. The most important thing that a president needs to do is prevent shareholders from creating alliances that try to bring him down. [Good] earnings are the most important way to prevent that,” says Álvarez. On February 26, when BBVA shareholders get together and vote, it will be clear whether any such alliances have been put together. Finally, it will be known if Francisco González will keep his post as president of BBVA or be forced to step down.