September 15, 2007
TO SOME he is Eric the Evil, a corporate raider armed to the back teeth with weaponry designed to deliver fast-buck profits regardless of the collateral damage it may wreak. To others he is the Knight in shining armour, riding to the rescue of distressed shareholders caught in the clutches of mighty, lazy, corporations.
Eric Knight and his investment firm, Knight Vinke, is now preparing an assault on one of the biggest of stock market citadels: HSBC. It has a market value of £104 billion and vies with BP for the honour of being the largest FTSE 100 company. It is a global banking enterprise that likes to think it retains strong local links. Its roots are in Hong Kong and Shanghai and in Britain it owns the First Direct branchless operation and is heir to the Midland Bank franchise.
Knight Vinke may not be a household name, but it has impressive credentials for shareholder activism. It was one of the leading agitators for change at Shell when the oil giant hit the buffers three years ago. Knight Vinke suggested that Shell would find life, and its attempt to extricate itself from a nasty little debacle over accounting for oil reserves, easier if it simplified its outdated dual-board management structure.
Knight Vinke is now complaining that HSBC shares are woeful underperformers and the company is following an inadequate and muddled strategy. Knight Vinke thinks that HSBC’s attempt to become a global player has led it to spread itself too thinly and squander its powerful position in Asia, at the heart of the world’s most exciting growth markets. It also says that the company has adopted a scatty approach to acquisitions. Moreover, it complains that the board is paid too much and that Stephen Green, the chairman, should be pushed aside.
There is evidence supporting the contention that HSBC shareholders could have invested more profitably elsewhere. The stock has underperformed the FTSE all-share average by 14 per cent over the past 12 months. Over the past five years, even if you add the relatively good dividend income, the shares have fared 17 per cent less well than the UK stock market average.
Meanwhile, HSBC does have fingers in an awful lot of pies, and the £7.5 billion it spent in 2003 on Household, a US sub-prime lender, now looks rather foolish.
Stephen Green’s position as chairman and former chief executive also makes him an easy target. He cannot escape association with HSBC’s recent development.
Knight Vinke has struck with diabolical timing, however. The banking industry is experiencing the toughest conditions for at least 20 years and unless there is firm evidence that the management is completely incapable – and Mr Green et al are not that – it should be given the time and space to ride out the storm.
Agitation of the Knight Vinke variety is not unjustified but it is an unnecessary distraction right now. At the same time, the evidence for share price underperformance is not all one way. Over ten years the stock has run ahead of the FTSE average and over the past year it has performed in line with the UK banking sector.
Underperformance may be tolerated if it means that HSBC is a lower-risk investment. It is not as if the shares have lost ground over any significantly lengthy period. They are up in value by 50 per cent over five years and have nearly doubled since 1997.
There is a chance that Knight Vinke’s awful timing will give Mr Green and his team the wherewithal to swat aside the complaints. It may mean that genuine issues of concern are swept under the boardroom carpet. But it is more likely that the discontent will simmer until the issues are dealt with or proven imaginary.
Resolution could spark a share price rerating. Meanwhile, the 5.5 per cent dividend yield, although covered by earnings only 1.5 times, suggests the stock is cheap. Buy.