The Stork strategic conflict and its relevant stakeholders.

Rijks Universiteit Groningen

Faculty of Economics

Advanced International Business

The Stork strategic conflict and its

relevant stakeholders.

A case study

Working paper

Erik Dopper

ID: S1271326

Group 9

Supervisors

Keywords: Corporate Governance, strategic shareholder intervention,

stakeholder theory, Business Systems, Stork N.V.

Preface

Abstract

Table of Content

Chapter 2. Literature Review……..….……….………...…9

2.1Agency Theory………...9

2.2 Strategic Shareholder intervention………...12

2.3 Clash of Institutional Background………...13

2.4 Stakeholder theory………...15

2.5 Conceptual Model………...19

Chapter 3. Methodology ... ………...20

3.1 Data Sources………21

3.2 Data Analysis………...23

Chapter 4. Stork N.V Background...24

Chapter 5. The Stork Conflict ………...33

Chapter 6. Relevant actors ...41

6.1 Actors in Favor of splitting up Stork………...41

6.2 Actors against splitting up Stork….………..………...43

6.3 Impartial Actors……….………..56

Chapter 7. Relative Strength...58

7.1 Stakeholders possessing three attributes...58

7.2 Stakeholders possessing two attributes………...59

7.3 Stakeholders possessing one attribute………...63

Chapter 8. Discussion...66

Chapter 9. Conclusion……….69

References………73

Appendices………...77

Appendix I, Net Result……….77

1.1 Introduction

Recent developments in the business arena have filled the newspapers the past year. Stork, ABN Amro, Ahold and many other firms have had shareholders trying to influence the strategic direction of the firm. These conflicts demonstrate that principals (shareholders) and agents (management) are increasingly fighting for the power and the direction of the firm. In this paper I will investigate this recent phenomenon in the struggle between principals and agents. I will refer to this phenomenon as strategic shareholder intervention. Historically shareholder intervention occurred via take-over bids, proxy fights or management buy-outs. Strategic shareholder intervention differs from the former tactics.

When the agents resist, the situation will be called a strategic conflict. The definition of conflict is “A conflict contains a disagreement between at least two sides, where their demands cannot be met by the same resources at the same time” (Wallensteen, 2002). The term strategic conflict refers to a possible process when shareholders and the management of a firm disagree on the strategic direction such as in the Stork case. This paper will focus on a single case in the midst of strategic conflict with its shareholders. Stork is one of the oldest industrial concerns in the Netherlands and has been in conflict with two major shareholders Centaurus and Paulson. Centaurus and Paulson are two large hedge funds. Part of their strategy is that they make investments in equity of companies which are undervalued and are undergoing major changes. In this sense these hedge funds have taken active stakes in Ahold, VendexKBB, and Corporate Express. Centaurus is especially active in Europe and Paulson mainly invests in small and emerging companies.

KPN, Ahold, Shell, VNU, ABN Amro are just some examples of hedge fund activity in the Netherlands. According to Kahan and Rock (2006) hedge funds have become critical players in both corporate governance and corporate control. The Netherlands has seen the introduction of corporate governance codes in the past decade (Peters report 1998, Tabaksblat code 2002) which in turn has provided more powers for all shareholders in the Netherlands. The recent trend for strategic shareholder intervention has not yet been a widely discussed topic in the academic literature although it is a hot topic in the newspapers. This new type of strategic intervention is therefore an interesting case to analyze.

The paper will be structured as follows: Firstly the problem statement and the aim of this research will be discussed in chapter1.2. In chapter 2 the relevant literature will be reviewed. In the last paragraph of this chapter I will present the conceptual model. In chapter three I will discuss the methodology used in the research. Chapter 4 and 5 will contain background information on the firm and will consequently list a thorough examination of the chronological happenings of the conflict. This part will pave the way for chapter 6, in which the relevant actors, and how they are positioned in the conflict, will be discussed. Chapter 7 will put forward a general table to show the relative strengths of the Stork actors. Chapter 8 and 9 will include a discussion and conclusion. In the discussion chapter recommendations will be made about future research. In the conclusion chapter propositions will be stated based on the gathered data.

1.2 Problem Statement

N., 1999). The Stork case is an example of the agent-principal conflict. Are the agents and principals the only players in this conflict? Although the principals and agents are the central actors in the conflict, newspapers and articles have stated the involvement of other groups. In the Stork case there are many stakeholders who have a say (stake) in this conflict. The newspapers have reported on many actors such as the employee representation, unions, the Enterprise Chamber and even the government who can directly or indirectly influence the case. According to Shankman (1999) the agency theory must include recognition of stakeholders. Any firm deals with stakeholders, thus it would be interesting to see which stakeholders are in play during the strategic conflict and how this happened. The Stork case will show that many stakeholders or actors are in play during a conflict for strategic direction. The focus of the paper is twofold; to understand the basics of this conflict between the principal and agent of Stork and to see how the stakeholders relate to this problem. From this case study we can learn the rationale of the different stakeholders. What are the different strategies the stakeholders can follow and which strategy are they following? The main research question this paper addresses is:

What are the strategies applied by the different actors and what determines the perceived strength of these actors in the Stork strategic conflict?

To come to an answer, the question needs to be divided in sub-questions. The first part will provide insight in the strategic conflict of Stork. What has happened and why? The second part will zoom in on the different stakeholders and their influences in the conflict process. The third part of the sub-questions will provide insight about the positions of these actors in the conflict and how this related to the formed coalitions. This part will additionally provide insight in the perceived strength of the different actors.

• Strategic conflict sub-questions

o What caused the strategic conflict?

o What are the main issues in the strategic conflict (content, tactics, and objectives)?

• Stakeholder sub-questions on how they can influence the conflict.

o Who are the main stakeholders in the strategic conflict?

o What are the objectives of the different stakeholders?

o What are the power and tools of the different stakeholders?

o What are the different strategies of the different stakeholders?

o What is the reason for the chosen strategy of the different stakeholders?

o What are important factors influencing the stakeholder perspectives?

• Position sub-questions

o What are the positions taken by stakeholders?

o What were the formed coalitions?

2. Literature review

2.1. Agency Theory

Ownership and management of firms have been separated so that the firms have become ongoing economic entities as long as they are economically viable. Conflicting interests between owners (i.e. principals) and management (i.e. agents) have been an important topic in corporate governance and is essential in understanding the modern firm (Berle and Means, 1937; Shleifer and Vishny, 1997). Corporate governance is a broad term and must be decomposed in order to discuss the literature. The topic of corporate governance has been widely researched in the past decades and thus appears to be a popular topic. A definition is provided by C. M. Daily, et al. (2003): “… we define governance as the

determination of the broad uses to which organizational resources will be deployed and the resolution of conflicts among the myriad participants in organizations ...” Another definition is provided by Shleifer and Vishny (1997) “corporate governance deals with

the ways in which suppliers of finance to corporation assure themselves of getting a return on their investment”. Both definitions are quite different. The definition by

Schleifer and Vishny has a rather financial perspective and centers around management remuneration. The first definition fits this research better as it relates to conflict resolution. In this research I will use the first definition.

occur in agency relationships. The first is the agency problem that arises when (a) the desires or goals of the principal and agent conflict and (b) it is difficult or expensive to actually verify what the agent is doing. A large part of the literature discusses the agency problem by providing agents adequate incentive through compensation. However, since the tools in place which should create appropriate incentives are far from perfect, shareholders also have to monitor management’s actions and decisions. Shareholders can decide to intervene when they believe that the management’s strategic decisions are not maximizing their value. Shareholder intervention generally occurs in three manners. First, the majority of active shareholder involvement occurs through takeover bids or proxy fights. A second important active shareholder involvement occurs when shareholders use their power to replace management. These two types of shareholder intervention are well documented and have received a fair bit of attention in both the popular press as in scientific debate (e.g. Mason et. al., 2003; Kahn and Winton, 1998; Bebchuk and Hart, 2001; Gillan and Starks, 2000). The third type of shareholder intervention occurs when shareholders solely wish to alter the strategic decisions made by the firm’s management. If shareholders perceive that other strategic choices serve their interests better then the ones made by the management, they might decide to get involved. The fact that agents not always act on behalf of the principals has often resulted in shareholder intervention. When the principals believe that the agent is not maximizing their value, they will try to influence the agent.

The central theme in the agency theory is the potential conflict of interest between principal and agent (Gillan and Starks, 2004). The conflicts of interest often referred to as agency problems, arise from two main sources.

1. Different participants have different goals and preferences.

2. The participants have imperfect information as to each other’s actions

In this sense incompatibility of positions is an important aspect. Centaurus and Paulson would like to see a single focus firm and management prefers a firm of a conglomerate nature. Thus the positions taken by the parties are incompatible. As mentioned before a “conflict contains a disagreement between at least two sides, where their demands cannot be met by the same resources at the same time” (Wallensteen, 2002). Stork is thus in a state of conflict. A conflict moves through various phases. According to Rummel (1981) a conflict moves through five phases:

1. Latent Conflict stage: The potential conflict exists due to differences in values, norms, beliefs.

2. The Initiation phase: In this phase interests may oppose, but their wills have yet to manifest these interests.

3. The balancing of power phase: This phase includes three sub phases: a. Status quo testing: The preliminary testing of another’s interest’s b. Manifestation of power: Actual engagement

c. Accommodation or Force

4. The balance of power phase: An equilibrium is crystallized between the opposing equations of power.

5. The disruption phase: When parties renew their contact a new balance of powers will occur

and, thus, the greater the opportunities for agents to distort optimal outcomes for the principal. This implies that more complex firms in more complex industries, what increases information asymmetry, will experience a greater distance between principal and agent. This will negatively influence the principal’s ability to influence the decision making because (1) it is harder to assess the benefit of the followed strategy, (2) it is harder to obtain sufficient information, (3) the information is more difficult to interpret, and (4) management has more power of information. On the other hand the agent does not have full information about the principal (C. Mason, et al., 2003). According to these authors both parties are in a state of uncertainty prior to a possible takeover. Their research takes a game theoretic view in which the actors, acquirer and target, act on information which is incomplete. This might impact the outcome of the process of takeover. If this could happen during a takeover period it might also happen in a state of strategic conflict. In this case the information asymmetry could have played a major part in how the conflict was handled.

2.2. Strategic shareholder intervention

From the review of agency theory it follows that a less common form of shareholder intervention is where the principal only tries to influence the strategic decisions made by the agent. This does not involve taking control of the majority of the firm, and thus, does not involve direct financial mechanisms of control. It involves the influence the shareholders can exert on the strategic decisions. Shareholders do not need to own a majority of the shares to influence management. “In public firms shareholders have the right to submit proposals at the general meeting on the condition that the particular shareholder(s) owns more than 1%”. (De Jong et al., 2004). The aim is to convince both other principals and the agents of the added value of the principal’s strategic propositions. The agent may for various reasons (e.g. better information, self-interest) disagree and resist cooperating with the strategic intervention; creating a strategic conflict as in the Stork case.

corporate governance (e.g., corporate control and standard shareholder intervention) can be transferred to the specific research topic of strategic shareholder intervention. This creates a research gap in the research area of corporate governance and corporate control.

Strategic shareholder intervention has not been dealt with in the literature? Popular press presents some issues which are interesting to further analyze. The Stork case is an illustration of the clash of two business systems. Firstly the Rhineland model which is represented by Stork N.V. and secondly the Anglo-Saxon model which is represented by the hedge funds Centaurus and Paulson. The following part will elaborate on this issue.

2.3. Clash of Institutional Background

Research on firms and markets in East Asia has shown the differences in distinctive forms of economic organization between countries as a result of different institutional environments (Hamilton and Biggart, 1988; Redding, 1990; Whitley 1991). These authors have illustrated the differences between Japan, South-Korea and China. According to Whitley (1994) it would be fruitful to extend this form of analysis to European Countries. Research has shown systematic differences between states in Europe and demonstrated a link to institutional environment (Iterson and Olie, 1992; Lane, 1992; Sorge, 1991). Whitley (1994) provides a framework for comparing and contrasting different ways of organizing economic organizations by focusing on key elements of market economies. The key elements are:

• The nature of firms as economic actors: the resources they control and their relations to property rights holders

• Market relations: the relations could be impersonal, ad hoc or short term

• Authorative Co-ordination and control systems: the formal organization structure and the degree of bureaucratization.

Whitley (1994) identifies five distinct types of business systems.

2. Partitioned: high level of institutional differentiation and pluralism which have much stronger impersonal mechanisms (e.g. arm’s lengths connections) for ordering economic organization (Anglo-Saxon societies).

3. Collaborative: Not coordinated centrally by state agencies but where banks and other institutional actors generate collaborative business systems in which firms develop cooperative relations and form part of relatively dense networks of collaboration (Continental Europe).

4. Coordinated: The state plays a more active developmental role. (South-Korea). 5. State- Dependent: Here political executives and the bureaucratic elite play the

leading role (Post 1961 Korea)

For this research the partitioned and the collaborative business systems, as identified by Whitley, are relevant.

The Dutch business system can be characterized as a collaborative business system. In the collaborative business system an important characteristic is the owner-manager relationship. In this system the market relations are stable and close (Edwards, 2004., Becht & Roell, 1999). An important part of the third key element is the employer-employee relationship. Firms such as Stork function in the context of firmly established relations with policy institutions, trade unions and employee representation (Wilts & Quittkat, 2003). The legal basis for the power of work councils is a check on the influence of shareholder value (Edwards 2004).

Thus, the ways that firms respond to the pressures to restructure their operations are influenced by a number of national-level factors (Edwards 2004). Frequently the Dutch business system has been referred to as the “polder model”. What is the polder model? The Polder Model is deeply rooted in the consensus-oriented Dutch culture and places a high emphasis on consultation between relevant parties. Typical elements are also the importance of solidarity and equality (Muysken, J., 2001).

Anglo-Saxon system there is a lesser amount of employer-employee interdependence as the employment policies are characterized by short term commitments and considerable inter-firm mobility (Whittaker, 1990). Over the past two decades the ideology of shareholder value has become entrenched as a principle of corporate governance among companies based in the United States and Britain (Lazonick, W., O’Sullivan, M., 2000). In general, firms in the UK and US, have an exclusive focus on shareholder value in comparison to the consultation practice of many different actors in the Dutch business system (stakeholder versus shareholder).

As mentioned above the main actors in the Stork (Netherlands) strategic conflict have been management and the hedge funds Centaurus (UK) and Paulson (US). The main actors thus represent different models of business systems. Could this difference in focus be an important issue in the conflict? Based on academic literature and articles the clash of systems could play a role in the conflict.

From the proposition it follows that the hedge funds could be at disadvantage trying to influence the strategic direction of the firm, as management weighs other interests as well. According to the business systems literature there are many other parties who are consulted in the Dutch business system. This fact is reinforced by newspapers and articles which have stated the active role of many different parties in the Stork case and furthermore the ABN Amro case. Running a business in the Netherlands thus involves weighing the interests of different actors who play a role in the firm or are related in some way. The next paragraph will elaborate on this part of the literature.

2.4. Stakeholder Theory

(Freeman & Reed, 1983). The Stork case has multiple stakeholders who are capable of influencing decisions. Generally speaking, primary stakeholders are considered to be investors, customers, employees and suppliers, while government and community are typically thought of as secondary stakeholders (Clarkson 1995; Waddock 2006). A broad definition is provided by Freeman (1984). “A stakeholder is any group or individual who can affect or is affected by the achievement of the organization’s objectives”. In stakeholder literature a distinction is made amid a wide and a narrow sense of stakeholders (Mitchell, et al., 1997; Freeman and Reed, 1983). This research will be based on the wide sense of stakeholders: Any identifiable group or individual that can affect the achievement of an organization’s objectives or who is affected by the achievement of an organization’s objectives (Freeman & Reed, 1983). According to stakeholder theory (e.g. Freeman, 1984; Donaldson and Preston, 1995; and Friedman and Miles, 2002) there are 4 main stakeholders in the modern corporate environment; (1) principals, (2) agents, (3) employees, and (4) suppliers and customers. The stakeholder theory also identifies other entities that are involved; e.g. public interest groups, protest groups, government agencies, trade associations, competitors, unions, as well as employees, customers segments and society as a whole. All these stakeholders are affected by the outcome of strategic conflicts and in turn could potentially affect the outcome of the strategic conflict. It thus follows that management of Dutch firms, such as Stork, weighs the different interests of different parties.

Scientific literature and popular press articles refer to actors (stakeholders) that could have an effect on the organization. In this case this means that actors could also have an effect on the strategic conflict process. A question arises related to the identification of stakeholders. Who are the main actors in this particular case and what is their influence on the conflict process? Theory provides the idea that some attributes can be used to identify different stakeholder classes. This research will follow the identification model as put forward in the research by Mitchell. et al. (1997). The comprehensive model shows that classes of stakeholders can be identified by the possession of the following attributes:

1. The stakeholder’s power to influence the firm

3. The urgency of the stakeholder claim

The identification of relevant stakeholders is important but one must not forget how management prioritizes the wishes of stakeholders. Management could decide to pay more or different attention to different stakeholders. It seems logical that a stakeholder possessing all three attributes would receive more attention than a stakeholder who possesses one attribute. Mitchell et al. (1997) provide an extensive discussion about stakeholder attributes to identify different classes of stakeholders. The three attributes have been discussed extensively in literature, particularly power and legitimacy, but I will mention them briefly.

Power as attribute has been discussed extensively in the literature. Power is defined as “the probability that one actor within a social relationship would be in a position to carry out his own will despite resistance” (Mitchell et al., 1997). A typology of power bases is presented by Etzioni (1964). According to this author three types of resources can be used to exert power

1. Coercive: Based on physical resources

2. Utilitarian: Based on material or financial resources 3. Normative: Based on symbolic resources

organizational theory but is implicit in each (Mitchell et al., 1997). A stakeholder is urgent as two conditions are met: (1) The relationship or claim is of time-sensitive nature, (2) the claim or relationship is critical.

Stakeholders could be ascribed different attributes at the same time. This would imply that management would respond differently and probably more intensively than a stakeholder possessing one attribute. The authors Mitchell et al. (1997) provide a framework for the typology of stakeholders which is presented below:

Figure 1

Source: Mitchell et al., 1997

2.5. Conceptual Model

The literature review thus far has shown several important issues in the strategic conflict. Several theories have been discussed and several determinants were extracted from the literature. The main theories from where conflict determinants are extracted are: (1) Agency Theory. An important aspect of the agency theory is the information asymmetry, which is also a conflict determinant (2) Institutional Theory, (3) Stakeholder theory. These theories serve as the input of the conflict which follows five stages. These stages are discussed in chapter five. The conflict outcome has not yet occurred. In of spite of this several possible future outcomes will be discussed. Therefore the following conceptual model is proposed:

Conflict determinants • Agency Theory • Information Asymmetry • Stakeholder Theory • Institutional Background Conflict Phase Conflict Outcome

• Latent Conflict stage

• The Initiation phase

• The balancing of power phase

• The balance of power phase

• The disruption phase

Agents Principals

3. Methodology

The research design is a single-case, inductive study involving Stork N.V. and its strategic conflict with some of its shareholders. This research will fall into the category of inductive research as, “the logical ordering of induction involves moving from the “plane” of observation of the empirical world to the construction of explanations and theories about what has been observed” (Gill & Johnson, 2002). Another reason for the choice of an inductive study is that the conflict is in “real time”, which is to say it is currently ongoing. The research uses an embedded design which includes different parties within the firm. “Although an embedded design is complex, it permits induction of richer, more reliable models” (Gill & Johnson, 2002). Since in the Stork case we deal with several different parties within the firm and its direct environment, an embedded design approach seems to be a logic choice.

Recent cases such as VNU, Ahold, ABN Amro, Corus, TNT and Stork have made the topic of strategic shareholder intervention very popular in newspapers and articles. As scientific literature is still lacking this research aims to provide a preliminary step for further research. “Theory building form case studies is one of the best bridges from rich qualitative evidence to mainstream deductive research” (K. Eisenhardt, 2007). The main rationale for opting for a single case is the character of the Stork case. More cases of strategic interventions have occurred in the Netherlands but the Stork case shows many ambiguities. The Stork case has had many active stakeholders and was therefore a complex conflict.

Association. These parties have supported the management from the start and the explicit support from these groups is quite exceptional.

The conflict started in December 2005. The conflict has not yet come to an end although it seems a solution will be found in the very near future. Due to this fact data was collected in real-time, which improves the depth of understanding how events evolve (Leonard-Barton, 1990).

3.1 Data Sources

Several data sources have been used such as: (1) qualitative data from semi-structured interviews with key players in the conflict process, (2) e-mails and phone calls to follow up the interviews and (3) archival data, including company Websites, business publications and materials provided by informants.

I have conducted eleven interviews. During the first phase surrounding actors were interviewed such as the unions and the last interview was held with the CFO of Stork N.V. The interviewees are collected in the scheme presented below.

Table 1

Description of informants

Name Profile

Mw. Gerti van Valkenburg Responsible for Stork at CNV, the second largest

union in the Netherlands

Dhr. Gerard van der Lit Responsible for Stork at De Unie, a union for

middle and higher management

Mw. Gena Winkels Responsible for Stork at VHP Metalektro, a union

for the metal and electro technical industry

Dhr. Henk Wijninga Responsible for Stork at FNV, the largest labour

union in the Netherlands. Additionally the spokesmen for for all four involved labour unions (CNV, De Unie, VHP Metalektro and FNV)

Dhr. Jan Plat Director for the Central Works Council of Stork

Dhr. Simon de Bree Former president of the Supervisory Board for

Dhr. Ad Timmermans Chairman of the Stork Foundation, an independent party. Additionally a former member of the Enterprise Chamber

Dhr. Ernst Heiden Global Legal Director for DSM N.V. with a wide

area of expertise on legal issues concerning governance and the Enterprise Chamber

Dhr. Maurits Duynstee Main advisor for Stork, active for ABN AMRO

N.V

Dhr. Carel v/d Driest Member of the Supervisory Board for Stork N.V

Dhr. Maarten Schonfeld Current Chief Financial Officer for Stork N.V

The choice for the informants was made based on analyzing newspapers and articles. The aim was to find as many parties, who were closely related to the conflict process. The table shows that no interview was held with the hedge funds. I have tried to reach the hedge funds via e-mail but they have not responded. Moreover I contacted the legal representation (Freshfields Bruckhaus Deringer) for the hedge funds in the Netherlands. Their lawyer, J.W van der Staay, informed me the hedge funds were committed to refrain from any comment to the press. In that position it would not be appropriate for the lawyer to speak with me. The informants have been in the center of the conflict process and are as such influential and knowledgeable. “Informants who are knowledgeable and influential are also the most reliable and are particularly so when remembering recent events” (Huber and Power, 1985; Kumar, Stern, and Anderson, 1993).

with questions how the informants viewed other parties in the conflict and how important they believed these parties were, by making the informants scale all the actors in the conflict including their own position.

The interviews were taped with a digital recorder and notes were made during the conversations for support if the recorder might fail. A second visit might not have been possible due to the overloaded agendas on the behalf of the informants.

3.2 Data Analysis

The audio files and notes which were collected have been entered into the computer. The interviews are not entered word for word but rather the important parts. Some interviews contained information that was not relevant for the research. According to Eisenhardt (2007) the synthesizing of interview transcripts is typical in inductive research. Interviews were triangulated by using secondary data. Jick (1979), states: “triangulation creates a richer, more reliable account”.

#2038-ASQ V49 N3-September 2004—file: 49302-graebne

Secondary data were useful in confirming or verifying events. An example of secondary data is the verdict of the Enterprise Chamber, this document contained detailed information about the conflict and the actors. An example of the use of secondary data is the verdict was provided by one of the informants. Other important sources were press releases by different parties which reflected their views rather precise. With the gathered data it will be possible to check the validity of the propositions.

4. Stork N.V. Background

To fully understand this strategic conflict one must analyze the firm and its business units. This chapter will provide an insight into the history and characteristics of Stork N.V. First the divisions will be analyzed separately, backed by figures and market developments. The second part will show general, firm wide information to provide a complete picture of the firm

Stork is an industrial production organization that is 180 years old. The firm is a traditional, Dutch based company. Stork delivers systems, components and services in the application of technology and production processes. Currently the firm is made up of four groups. The main products and markets the firm is active in are:

• Components and services for aviation and aerospace.

• Complete systems, components and services for meat processing, convenience food and (liquid) foods.

• Subsystems and technical services for production installations. • Prints (currently being sold)

As mentioned above management is in the process of selling the prints division. The majority of the shares of the prints division have recently been sold to a Belgian investment company, and thus this division will not be included in the report. The first division which will be discussed is the aerospace division as it was a central theme of the conflict.

Aerospace Division (Industries & Services)

innovative solutions at a competitive price through advanced technologies, process excellence and lean automated manufacturing” (Stork Annual report, 2006). The Aerospace division consists of the Aerospace Industries unit and the Aerospace Services unit. The Aerospace division achieved a turnover of 549€ million with 3,532 employees out of the total Stork turnover of € 2 billion. The EBIT in 2006 was 11€ million compared to 62€ million in 2005. The most important cause for this disappointing result was the delay in the delivery schedule for the airbus A380 and the NH90 defense helicopter. Aerospace Industries is autonomously gaining market share in all sub segments in the market: large commercial airplanes (both Boeing and Airbus), military and regional jets. The Aerospace Services unit is a leading player in the segment of component maintenance. The aerospace market can be primarily divided into two sectors: civil and defense. There are some market developments which need to be mentioned.

Figure 2

Source: Annual report, 2006

The figures illustrate the volatility of the Aerospace business. In 2006 the earnings (EBIT) fell from 62 million (2005) to 11 million. Although the orders received have increased the earnings have not grown. This is an illustration of the problems with major customers such Boeing, Airbus, NH-Industries and the Netherlands Ministry of Defense. Based on the information of the Aerospace division it is obvious that the last two years have been rather difficult for the Aerospace group. The figures also show a significant increase in earnings between 2003 and 2005. The division is also capable of generating money and when it does earnings go up significantly. This statement is based on the historical figures of Stork and there seems to be general agreement on this fact. Many informants stated that the aerospace division is a “high risk, high reward business”.

Food Systems

€ 2 billion. Compared to 2005 the turnover has risen by 35.8%. The EBIT in 2006 was €25 million compared to €22 million in 2005.

The market developments are quite positive for the Food Systems division. The market for primary and secondary meat processing is growing at a 1%-3% a year as a result of the population growth in Russia and Brazil (annual report, 2006). These countries are a large market for Stork Food Systems. Stork Food Systems is world leader in this market. One important issue for the future is the lack of presence in Asia. The Food Systems division is aiming to gain larger market coverage in Asia. The convenience group industry is growing at a rate of 6%-8%. The main driver for this growth rate is the trend to spend less time in food preparation at home (annual report, 2006). Food Systems is among the top three players in the convenience food industry. The following graph shows the performance for the Food systems division in the last five years:

Figure 3

Source: Annual report, 2006

Technical services (Services & Specialists)

Technical Services is a professional supplier of integrated technical services for installations and machines in the industrial market. Technical Services is a system integrator and partner in technical services. The group consists of the Industry Services and Industry Specialists units. “The basic principle is ensuring maximum availability of installations/machines at transparent (lowest possible) costs per unit of product through the entire lifecycle of the installation/ machine” (Stork Annual report, 2006).

The group has achieved a turnover of € 868 million in 2006 with 6,080 employees, out of the total Stork turnover of € 2 billion. The EBIT was €59 million in 2006 compared to €39 million in 2005. The turnover has increased by 30.7% compared to 2005. Both the strategic units have benefited from favorable market conditions.

Figure 4

Source: Annual report, 2006

The figures for this division show that Technical Services is the cash generator for Stork N.V. This fact has been confirmed by several informants such as the CFO of Stork and the main spokesmen for the labor unions connected to Stork. The earnings show a significant increase since 2002. In addition the figures show that the capital employed in the Technical Services division is quite low compared to the net turnover. Generally this implies a positive cash flow, although I have not been able to find cash flow statements for the divisions. Food Systems and Aerospace have a higher capital employed compared to the net turnover.

The divisions have been presented separately to provide a clear picture of the firm. The firm as a whole reached a net turnover in 2006 of €2009 million. The number of employees is around 13000 people.

During the interviews the topic of synergies were discussed, as the lack of synergies is one of the main reasons that Centaurus and Paulson want to split up the firm. According to Chatterjee (1986) there are three types of synergies.

According to primary and secondary (articles) sources there are financial synergies between the divisions; however there are no operational and collusive synergies between divisions. Many interviewees, such as the CFO and a Supervisory Board Member, have stated the non-existence of synergies between the different divisions. From several sources it appears that consensus exists on the lack of operational synergies, however, there are however financial synergies due to the way the divisions generate cash flows. The Aerospace division is a highly volatile division for several reasons. (1) High costs due to high R&D costs, (2) high risks due to industry structure where two main players, Boeing and Airbus, control the industry and where dependence on few customers is high, and (3) high returns, if there are no problems with customers and received orders increases. One of the informants (C vd Driest, Supervisory board member) called the Aerospace division a division that causes many problems and therefore not attractive enough to focus on. The Food systems division is a relatively stable division although it is rather cyclical. The Technical services division is a so called cash generator as it is a low cost, high return division. Due to the differences, the cash flows of the different divisions equalize each other according to informants. This description was provided by H. Wijninga (FNV) who has been closely involved with Stork for many years.

Figure 5

Source: Presentation Stork Management, General Shareholder’s Meeting, March 2006

The graph illustrates the rise of the share price since 2003 compared to the AMX. The AMX stands for the Amsterdam Midcap Index and is the share price index of medium firms traded on the Dutch stock exchange. The past four years the share price of Stork N.V. grew with 700% compared with an estimated average of 150% for the AMX.

This graph illustrates the fact that Stork N.V has created significant shareholder value during the past four years. Despite this fact the hedge funds were not satisfied enough. After analyzing the figures the question remains as to why Centaurus and Paulson believe in the focus on the aerospace division.

5. The Stork Conflict

The following events show the history of the differences of interest between management and shareholders in the Stork case. The history will be structured in a chronological order and according to the phases of a conflict. As mentioned in the literature review, Rummel (2002) argues that a conflict moves through five phases.

1. The latent conflict phase 2. The initiation phase

3. The balancing of powers phase 4. The balance of powers phase 5. The disruption phase

The following chapter describes how the Stork strategic conflict has moved through the different phases. A summarizing timeline is presented in appendix II.

Latent conflict phase

management planned on the activities of two or three divisions. The Stork management had announced the plans to bring back focus in the firm’s activities. At this time the hedge funds did not yet play an active role. Their differences in interests were not yet manifested.

Initiation phase

The initiation phase of the conflict started in December 2005. At this time Paulson had discussed with management and had sent a letter to the management. The letter stated that shareholder expectations were that the firm would complete its three year restructuring program by divesting at least two or more divisions. Another issue in the letter was that investors like to invest in single-industry firms and accordingly value conglomerates at a significant discount to the sum of their parts. This letter which initiated the conflict was a clear illustration of the manifestation of opposing interests. On the first of February 2006 the Stork management announced their strategic decisions to create value for the coming years. The essence of the strategic direction was the fact that management aimed at continuing the three pillar strategy. Stork would focus on the three divisions: Aerospace, Food Systems and Technical services. This announcement had a positive effect on the value of the shares and many analysts reacted positively to the announcement. Two major shareholders did not react positively. These shareholders were Centaurus and Paulson (C&P). On the 6th of February they bundled forces and provided the management with a second letter. According to them they collectively owned around 20% of the shares. The collective position of these hedge funds was the belief that Stork should proceed with more rigorous actions to restructure. The parties provided two alternatives for the management:

1. Stork sells all the divisions except the Aerospace division in order to create a bigger and more important player in the aerospace sector. All excess cash should be paid to shareholders.

In the letter the parties requested these alternatives to be put on the agenda for the next shareholder’s meeting of 10 March 2006. On February 10 management met with Centaurus and Paulson to discuss the alternatives provided by the hedge funds.

On February the 14th management announced it would look into the option of operating as private firm partly due to the discussions with the hedge funds. The management announced they would start the Public-To-Private Investigation (PtP investigation). During the Shareholder’s Meeting of March 10 S. Vollebregt explained this decision. In this meeting Centaurus acknowledged their support for this investigation.

convene an Extraordinary General Shareholders Meeting (EGSM) July 2006 to elucidate the conclusions.

The balancing of powers phase

As mentioned in chapter 2 this phase includes three sub phases: status quo testing, manifestation of power, and accommodation or force. The first sub phase, status quo testing, started in September 2006. This sub phase involves the circling and watching of the opposing party.

In September of 2006 the hedge funds provided another letter to the Stork management with their opinion of the strategic direction of the company. The Stork share price dropped 15% after the management had announced the conclusions of the PtP investigation. Centaurus & Paulson stated that the stock market had clearly conveyed the message of what it thought of the three pillar strategy. The hedge funds believed that the company should totally specialize in the Aerospace business and divest all the other business such as Prints, Food systems and Technical services.

The hedge funds view the Aerospace division as a potential Dutch champion and as a tier 1 supplier. According to the hedge funds the Aerospace industry is consolidating heavily, and the number of suppliers is increasing at a fast rate. Therefore the company should position itself for these trends quickly (EGSM presentation C&P, oct.2006). The net profits made out of the sale of the different businesses should partially be invested in the Aerospace business and partially returned to shareholders. Centaurus and Paulson believe that in this way the company would enhance shareholder value substantially. In addition to this the hedge funds announced that they had independently increased their stakes. At that time, Paulson owned 16.9% and Centaurus owned 14.5%. In total the hedge funds owned 31.4% of the shares. In September of 2006 the hedge funds announced that they had agreed to vote their shares as a single block. The hedge funds demanded a shareholder meeting to discuss and vote on this strategic option. The Managing Board adhered to the request but stated that any outcome of the vote would not be binding according to Corporate Governance rules in the Netherlands.

meeting. The meeting provided an opportunity to vote on this issue with all other shareholders. The outcome of the voting on the 12th of October 2006 was quite clear; 86.5% voted in favor of splitting up the company. These shareholders accounted for 42.5% of the total shares paid up. This outcome was not binding. Why was the outcome not binding? According to the articles of association of most Dutch companies, shareholders that own more than 1% of the shares can also submit proposals to vote on at the general meeting however, “certain proposals can only be adopted upon a proposal of the management or the supervisory board” (A de Jong, 2004). The high council has determined that the management is not obliged to follow concrete instructions presented at the general shareholder’s meeting. They came to this conclusion after a similar case which is referred to as the “Forumbank” arrest (De Bruin, 2006).

The management acknowledged the outcome of the voting and announced that this strategic direction would be looked into. The conclusion of the investigation was that the total focus on the Aerospace division was not a viable alternative to the current strategy. According to the managing and supervisory board the alternative would have a negative effect on the risk profile of the firm and that the return was highly insecure. Several reasons for this are the potential for Stork aerospace as a technology driven, specialist supplier in that market. Management also sees significant potential for all three divisions for further value creation. In addition to this, the alternative would entail a significant execution risk which would negatively affect shareholder value. According to the management the splitting up of the company is not a better strategic direction. “We agree with C&P that there is substantial value creation potential within Stork, yet after a thorough analysis we have concluded that this will not be realized by executing their proposal” (S. Vollebregt CEO Stork). The management states that it cannot accept the outcome of the vote at the shareholder’s meeting. The management is keen on fighting back as it does not agree with the plan by the hedge funds.

meeting concerning acquisition or disposals larger than €100 million. The Stork management believes that these proposals are harmful for shareholder value. However, in accordance with Stork's articles of association Stork will comply with C&P's request to convene the extraordinary shareholders meeting in January. Various stakeholders such as employees, suppliers, customers, partners and other shareholders have made clear during the former shareholder meetings that they have incentives to defend the strategic direction as proposed by the management. The request by Centaurus and Paulson sparked a reaction from the Stork Foundation. The Stork foundation was founded in 1977 by approval of the shareholder’s meeting, management and the supervisory board. The Stork Foundation has been granted a right to subscribe for a number of cumulative preference shares B equal to the number of issued cumulative preference shares A and ordinary shares minus one. This right has been granted to guarantee the continuity of Stork N.V. The decision to exercise that right rests solely with the executive committee of the Stork Foundation (annual report, 2006). On December the 19th the Stork Foundation exercised this right and accumulated just under 50% of the voting right. The Stork Foundation believed that, due to the request made by the hedge funds, the continuity of the firm was in danger. This action put the hedge funds out of the playing field and the hedge funds, thus decided to go to the enterprise Chamber.

management control. Additionally management would not be able to act quickly and responsively to market conditions. The Chamber has also decided that the firm has to pull back the preference shares from the foundation.

Another defense line issue the Stork management enacted was to request the District Court of Amsterdam to order a preliminary hearing of witnesses concerning the conduct of its large shareholders Centaurus and Paulson. The Stork management wishes to examine if the hedge funds have violated the Disclosure of Major Holdings in Listed Companies Act 1996 (WMZ). Stork has reason to suspect that the required WMZ notification was not made on time. The court has granted the request for hearing of witnesses Centaurus and Paulson.

The balance of power phase

The balance of power phase started after the decision made by the Enterprise Chamber. The Enterprise Chamber had made these decisions in January of 2007 and until June of 2007 no compromise has been found. During this period it was not possible to vote on the dismissal of the supervisory board and for the approval of acquisitions or divestments above €100 million. In addition the firm had to pull back the preference shares from the Foundation. During this phase the powers were in balance and the conflict was put on hold until the researchers or new supervisors would come up with new information.

The disruption phase

systems division since February 2006. At first Marel had supported the plans by the hedge funds. When Candover made public they supported the three pillar strategy, Marel decided not to agree with the offer. According to secondary literature Marel Hf has formed a consortium to come up with an own offer for Stork. The other two parties are institutional investors: Delta Lloyd and Columbia Wanger Asset Management. Together these three parties owned 26% of the shares. Currently these parties own an estimated 35% of the shares.

Candover stated that they need 80% of the shares for a successful acquisition. Candover has stated it is also willing to exercise its purchase offer with only 51% of the shares. In this case the Stork management has to agree to such a deal. These new developments have provided a possible solution to the initial conflict between management and the hedge funds but now have created a new potential conflict between new parties.

6 Relevant actors

This chapter will present the relevant actors in the Stork strategic conflict. For every relevant actor in the conflict the characteristics, their arguments and the followed strategies will be discussed. Chapter five has showed us that Centaurus and Paulson were up against all other relevant stakeholders. Therefore the stakeholders are differentiated. The actors can be divided in three groups:

• In favor of splitting up Stork • Against splitting up Stork • Impartial

6.1 Actors in Favor of splitting up Stork

Centaurus and Paulson

The first group is made out of Centaurus and Paulson. These main shareholders are two hedge funds, who own a combined 33% of the shares.

Arguments put forward by Centaurus and Paulson

rationale for this argument is the expectation that the Aerospace division, in its current position will not be able to compete with the larger suppliers. The third argument is the timing of the divestment of the other divisions. Food Systems and Technical services are performing very well and there are buyers who are interested, such as Marel. The last argument for the hedge funds is that shareholders are owners and have the right to influence the strategic direction of the firm. The rationale for this argument is the Anglo-Saxon background of both hedge funds. Literature has shown in chapter two, that the Anglo-Saxon business model is mostly shareholder value oriented and therefore management is more prone to give in to shareholder’s wishes in Anglo-Saxon countries.

The strategy applied by the hedge funds

The strategy followed by the hedge funds has been the voice strategy. On two occasions the hedge funds aimed at placing issues on the agenda for the general meeting. In Oct. 2006 the issue voted on was the possible split up the firm. In Dec. 2006 the two main issues which were placed on the agenda was the possible dismissal of the supervisors and a resolution to change the articles of association. This general meeting has never taken place due to the steps taken by the Stork Foundation. In general the strategy has been rather aggressive and fast moving. The exact reasons for following this strategy are speculative as no informants have been found to represent the hedge funds. Although speculative there is no doubt that timing and speed are crucial for Centaurus and Paulson. Stock markets are doing well but threats are on the horizon. Therefore the hedge funds believe that now is the time to sell the Food systems and Technical services division. Generally a shareholder has different options in case of unsatisfying returns.

• Exit strategy: selling shares

• Taking Control: Aiming to takeover the control of the firm

Marel Hf

The second shareholder party is Marel Hf. Marel owned 5% of the shares in the past. Marel has build up their position and currently owns around 35% of the shares. Marel is determined to acquire the Food systems division, as the division would make an excellent target to acquire. Thus far, Marel has been on the same side as Centaurus and Paulson. The rationale for this position is that a potential split up of Stork would mean the availability of the Food Systems division. In July of 2007 Marel was not willing to sell its shares to Candover for 47€. The rationale for this argument is that Candover supports the three pillar strategy. In addition this strategy might work to drive up the bid by Candover.

6.2 Actors against splitting up Stork

Management

The first essential actor who will be discussed is the management of the firm. The Management Board is composed of three members.

• S. Vollebregt: Chief Executive Officer since 2002 • M. Schonfeld: Chief Financial Officer since 2001 • H. Bouland: Chief Operational Officer since 1998

Arguments put forward by management

The position of the management in the conflict has been conveyed in the past years. Stork N.V. in the years before 2002 was a holding company for six divisions. As mentioned in chapter five the performance was below standard and as a result a new CEO and CFO were attracted. During 2002/2003 the management has stated regularly the plans for Stork. The aim was to divest certain divisions and to concentrate further on two or three divisions. This strategy has remained the same. There were several main arguments for the management to continue the three pillar strategy:

(1) The management believes that the three divisions have significant potential for further value creation. Despite the lack of operational synergies, the divisions can benefit from Stork’s overall size. The size of a firm can reduce the cost of capital and makes it easier to attract employees. Management believes that, given time, the separate divisions will grow significantly. Off course we must also realize that Stork has gone through several years of major restructuring and is now consolidating that position. The management does not want to change during this consolidating period.

(2) The management states the focus would significantly adversely affect the risk profile of the firm and it is yet unproven that this increased risk will be appropriately rewarded (letter to shareholders by management, Nov. 2006). The reason for these arguments is the amount of money and time the Stork management has spent, on thoroughly analyzing the firm and its assets.

The strategy applied by management

The management followed a compromising strategy. This strategy was followed for several reasons. Firstly the PtP investigation was held because management did not resist this possibility. Management believed in the three pillar strategy. In addition to this, it remains a fact that shares change hands regularly. On average, shares trade hands every 1.5 years. This fast turnover proofs that generally shareholders have a short term focus. If management follows the proposed strategies by every large shareholder it would most likely change strategic direction too often as different shareholders have different goals. Management would lose all credibility when always following proposals by large shareholders. Since the management believed in their strategy, they could have resisted the PtP investigation and save the costs of the investigation (€17 million). Despite this fact management did not resist the idea of following the same strategy as a private firm. Management had discussed this issue long before the conflict initiated and believed that operating as a private firm could provide a calm environment to build on the three pillar strategy. As mentioned before, no parties were found with a reasonable offer. Thus a reason to perform the PtP investigation was to approach the wishes of their biggest shareholders.

Supervisory Board

As is usual in the Dutch Business system a firm operates under the two-tier governance system. The two-tier system entails a board who supervises the management. Stork N.V. has a supervisory Board which composes of five members. The Supervisory Board has the statutory task of supervising the strategy and policy of the Board of Management and the general activities of the company and its related business. It advises the Board of Management. In the execution of their task, the members of the Supervisory Board are guided by the interests of the company and its related business (Annual report 2006). The specific tasks of the supervisors are the following:

1. Composition of the Board of Management, assessment of its functioning and determination of the remuneration of its members;

3. Assessment of and supervision of the continuity of the company;

4. Assessment of (the development of) the financial position of the company, as well as of the financing of the company and the risks to which it is exposed;

5. Assessment of the organization and the management of the company; 6. Assessment of the social policy of the company;

7. Monitoring of the image towards relevant external target groups.

The tasks clearly show that assessing and monitoring of the management and the strategic decisions are the essence of their role. According to law the supervisory board does not determine strategy but merely assesses it (to challenge and confirm).

After the verdict of the Enterprise Chambers three extra supervisors were added to the existing board. The three supervisors were well balanced: two rather experienced captains of industry and one former prime minister. One of the industrials was an Englishman, presumably to also have a representative for the Anglo-Saxon model. The objective of the new supervisors was to restart the dialogue between the management and Centaurus and Paulson. The new supervisors had to bring the parties together as they had reached an impasse; in addition to this their task was to find a compromise in the conflict.

Arguments put forward by the supervisory board

The supervisory board has played a central role in the conflict between management and the hedge funds. The fact that the hedge funds requested the dismissal of the supervisory board in a Shareholder’s meeting in January 2007 clearly shows that the role of the supervisory was crucial in the process.

fields of business. In addition to this the supervisors have independent advisors and lawyers. These reasons illustrate the capabilities of the supervisors to come to an independent opinion. According to C. van den Driest (supervisory board) the arguments were based on extensive research by the above mentioned parties.

The strategy applied by the supervisory board

The strategy followed by the supervisory board was the colliding strategy. The supervisory board chose this strategy as the other options did not seem viable. In addition one of the tasks of the supervisory board is: dealing with complaints about alleged irregularities in relation to the performance of members of the Board of Management. Therefore the supervisors had contact with C&P. Opinions are divided about the strategy followed by the Supervisory Board.

It seems the board of supervisors was not able to convince the hedge funds. Could the supervisors have prevented a full conflict between the hedge funds and management? According to Dhr van den Driest (Supervisory board) the supervisors could have responded earlier on the attempts of C&P to reach the supervisory board independently. This might have helped prior to the conflict. C&P shared the opinion that the supervisors had taken a rigid and inflexible position and had not taken a problem solving position.

According to C. van den Driest (Supervisory board) there were two other strategies in this particular conflict. The denying strategy was a possibility but was not chosen as it would have serious implications. The supervisory could also have submitted to the wishes of the hedge funds. This was not a viable option as the supervisors would lose credibility if they changed strategy which they have supported for several years.

Central Work Council

basis for employee representation. Works councils have the right to discuss and give advice on all major decisions, including investments and restructuring. In case the company does not follow this advice, the works council can challenge the decision in court. Thus, the central work council is a party who is important within the firm. Stork has a Central Work Council (COR). The COR met in five regular consultative meetings and three extra meetings during 2006.

The COR plays an important role in the conflict as a primary stakeholder, who represents the employees. The Central Works Council has two main goals which are important to them in this particular case:

1. The representation of employees of Stork 2. Looking after the value of the company

Arguments put forward by the works council

The position taken by the Central Works council was the support of the proposed management strategy. As mentioned above the COR had two main goals in the Stork strategic conflict. The COR did not believe in the proposal of the hedge funds for several reasons.

• The COR fears that the divestments of two main divisions of Stork will lead to mass lay-offs. This goes against their first objective

• It is a matter of principal. The COR has the opinion that management should set the strategy and not the shareholders

• Stork has gone through a long restructuring program during the past years. The works council has played an important role in that program as they had to lay off 1200 co-workers. The works council believes all this would be for nothing if the hedge funds get their way.

• Many parties supported the strategy of the management, which is a clear signal about the proposed strategy.

Thus the Central Works Council supported the strategy and wanted to be an active player in the conflict to make sure their objectives would be obtained.

The strategy applied by the works council

According to J. Plat (COR) the works council followed the only possible strategy: “playing the waiting game”. Until the appeal to the Enterprise Chambers the COR discussed with management, supervisors and the hedge funds. The passive strategy was not a viable option as it would endanger their objectives. The aggressive strategy was not followed as the conflict changed direction in July 2007. In July 2007 an offer was made for Stork which could mean a compromise. The works council had no problems with a public-to-private transaction as it does not go against their objectives. Although the strategy was a waiting game, the Central Works Council has used several tools to be included in the playing field.

• They made clear statements about their vision during the shareholder meetings. • The organization of a major demonstration with almost 3000 employees

• The act in which they collected a mere 5000 signatures. The act was provided to the management in the shareholder meeting of October 12. The act was a direct rejection of the C&P proposal.