After years as a sleeping giant, Phillips & Drew Fund Management – portfolio value £60bn, fourth-largest investor in the construction sector – has lost patience with underperforming executives. It is forcing some of the biggest names in the industry to shake up their operations and make its investments pay dividends.
As a major shareholder in Tarmac – it holds about 20% – PDFM is thought to have been one of the driving forces behind the company's decision to split in two. But it was in the struggle for control of £124m-turnover Tay Homes that PDFM showed its hand most openly. The fund manager made it known that it was backing rival housebuilder Sunley's bid to oust Tay's board of directors. The bloody battle that followed saw the Tay team counter by accusing PDFM and Sunley of trying to pull off a back-door takeover on the cheap.
PDFM also publicly backed a cheeky takeover attempt of materials firm Marley by a smaller rival. Mansfield, half Marley's size, planned to bring in new management to turn around the firm. Although the bid failed after Belgian firm Etex bought out Marley and opted to keep the management, PDFM still sold its holding at a profit.
A banker who has monitored these battles says PDFM is increasingly prepared to stand up for its interests. "PDFM hasn't been an aggressive house but is becoming more so. They did it with Marley and it worked very well. Who's to say they couldn't do it another two or three times?" A second City source believes PDFM's peers are about to follow suit: "There are clear signs that where PDFM leads, Schroder, Mercury Asset Management and Gartmore are willing to follow," he says.
Fund managers are traditionally publicity-shy and Building's requests to interview PDFM's construction team were turned down. No construction firm would talk about the firm, either.
But Gerry Brown, finance director at Mowlem, in which PDFM holds a stake of just over 20%, says, in general, major shareholders are likely to speak out if they do not like what they see. "If they don't like what is going on, they say so; but if they do like it, they say so as well. You are unwise not to listen to them." He says Mowlem briefs all shareholders with a stake of more than 3% after its preliminary results. It also makes sure they are onside if something big comes up. "We would sound them out before we take any major decision. You have to have their support if any big deal is in the offing." Michael Chapman, finance director at Bryant Group, Britain's seventh-biggest housebuilder, is not surprised that some shareholders are becoming more vocal after years of stock market underperformance. "They've got to be realistic about it. If you don't produce the results, you have to expect your shareholders to have a say on it. In a way, it keeps management on its toes." He adds that firms should meet institutional investors at least once a year, and not just when they have good news to report.
Tarmac chairman Sir John Banham, who is also a non-executive director of US fund manager Amvescap, can see both sides of the story. He is not surprised that the institutions are becoming more proactive as they come under increasing pressure from their clients to deliver results. And as smaller plcs have failed to perform as well as the rest of the share market, it is inevitable that this pressure is transferred to their managements.
Banham says this is no bad thing. "I think they should be more aggressive," he says. "Any investor that has serious reservations about the management has an obligation to draw it to the attention of the chairman concerned. Companies are not there just for the benefit of the management. They are there to create value for shareholders in the longer term." But Banham would not say whether he expects UK fund managers to get tougher in 1999. "What I can predict is that the pressures on fund managers aren't going to get any less." Mike Betts, construction analyst at investment banker JP Morgan, says the lead for this new trend has come from across the Atlantic. "I don't think it's any coincidence that the stock market in the US has performed so strongly while institutions over there have been aggressive towards poorly performing management. I think the UK market is simply reflecting what has gone on there." Betts expects 1999 to be a hard year as fund managers run out of patience with construction, and UK businesses that are undervalued relative to their European rivals are targeted for acquisition. He points to last year's takeovers of Ibstock, Marley and English China Clays by European companies and warns: "If you are an underperforming executive, you need to look over both shoulders – not just one."