Business

The tempest at Altamira

A takeover battle rocks the fund company

ROSS LAVER,JOHN SCHOFIELD February 10 1997
Business

The tempest at Altamira

A takeover battle rocks the fund company

ROSS LAVER,JOHN SCHOFIELD February 10 1997

The tempest at Altamira

Business

A takeover battle rocks the fund company

ROSS LAVER

JOHN SCHOFIELD

Frank Mersch is fed up with all the rumors. “It’s innuendoes and lies,” he says between calls on his 70-line phone at the head of a cluttered, nine-metre-long trading desk in midtown Toronto. The “lies” are the stories circulating through the investment industry that Mersch, Canada’s best-known and probably richest mutual fund manager, has somehow misplaced his Midas touch. For months, he and the rest of the trading team at Altamira Management Ltd. have been enmeshed in an angry, take-no-prisoners takeover battle for the company—a feud that has destroyed longstanding friendships and threatens the reputation not only of Altamira but of its principal suitor, Manufacturers Life Insurance Co. Ltd., Canada’s largest insurance firm. As luck would have it, Mersch has just come off his worst year since joining Altamira nine years ago: his flagship Altamira Equity fund chalked up a 17-per-cent return in 1996, a year when the benchmark Toronto Stock Exchange 300 index was up 28.4 per cent.

Little wonder, then, that investors and large institutional clients are asking questions. Is Mersch so distracted by the takeover battle that he has temporarily lost his legendary focus? Mersch bristles at the suggestion. “We’re trading as much as we always have,” he says. Be sides, “I never thought I’d have to apologize for a 17-per-cent rate of return. Yes, we underperformed the index, but it’s still 17 per cent and it’s the first time that we’ve underperformed the index. We’re not God. We make mistakes.”

But whether Mersch likes it or not, the star fund manager is very much a player in the struggle for control of Altamira. Last October, Toronto-based Manulife, which already owns 30.5 per cent of the company, offered to buy the rest for $32 a share, a bid that values Altamira at $660 million. Hoping to seal the purchase, Manulife had already obtained the written support not only of Mersch— who personally owns six per cent of the company, worth at least $38.4 million—but of 39 other fund managers, who collectively own 22 per cent.

What Manulife failed to secure, however, was the endorsement of Altamira’s founder and chairman, Ron Meade, who represents a group of investors whose interest in the company totals 11 per cent. Nor was Manulife’s offer warmly received by Almiria Capital Corp. of Montreal, which owns 30.5 per cent. Ever since, Meade and Almiria have been waging a legal battle to overturn the Manulife bid on the grounds that it vastly undervalues Altamira. They point out

that last summer, Toronto-Dominion Bank made an informal cash and stock offer worth $765 million—although TD later withdrew the bid. And in November, a Boston-based venture capital firm, TA Associates Inc., proposed a leverage buyout at $38 a share, or $784 million. Manulife insists that its offer is fair and is higher than Almiria’s own internal evaluation of Altamira.

This week, the warring parties return to the courtroom to debate the legal merits of an Altamira shareholders’ agreement that Meade contends prohibited the fund managers from entering into a secret pact with Manulife. Meade and Almiria president Eric Baker have asked Ontario Court Justice Donald Cameron to open the bidding to auction—a move that would almost certainly drive the price higher. “Our company is being held to blackmail and we will not give in to blackmail,” Manulife chief executive Dominic D’Alessandro told Maclean’s last week. He added that he resents suggestions that he tried to seize control of Altamira by lowballing minority shareholders. “Should I say, Wow, gee whiz, these people are saying nasty things about me—maybe I ought to give them a few bucks to make them stop?’ „ Look, I’m 50 years old. I’ve worked very hard § building my reputation. I can afford myself the ¿ luxury of having principles.”

\ Publicly, D’Alessandro is holding firm to his fc earlier offer, while allowing that “anything can I happen.” In fact, sources close to the dispute ÿ say that the insurance giant will likely soon in! crease its bid in an effort to avoid further con'J' troversy that could harm the company. ‘What Manulife needs to do is head off the slow death, the court dates and the hearings,” said one senior insurance industry official. “The impact of this fight on the company has been very bad. A company like Manulife has to be perceived as purer than the driven snow, and having all this stuff in the headlines is hurting the insurance field people. Manulife has lost the propaganda war and that’s a pity because they didn’t deserve it. But that’s life in the big city.”

If anything, the takeover battle risks doing even more damage to Altamira itself. Last fall, Meade told D’Alessandro that he would prefer to “lay waste” to the fund company rather than permit control to pass to Manulife. Meade later sent a letter to a shareholder stating that he made the remark “in the heat of the moment,” and that

6We're not God. We make mistakes. ,

-Mutual-fund manager Frank Merscli

it was not meant seriously. “I think Ronnie regrets a few things he’s said,” says R Andrews McLane, a managing director of TA Associates. Still, McLane’s own view is that the acrimony and uncertainty over Altamira’s future is undermining investor confidence in the firm. ‘You have to be concerned if it goes on too long,” he said. “I think the mutual fund holders and the institutional clients can only take so much. Pretty soon they’re going to say, ‘Let’s go find some quieter, friendlier place to have our money managed, because we don’t like this squabbling.’ ”

No one disputes that Altamira, the country’s largest no-load mutual fund company, has stumbled recently. The total amount invested in Altamira mutual funds increased by 17 per cent during 1996, a period when the industry’s average growth rate was 45 per cent. To some extent, those numbers reflect investor dissatisfaction with the relatively weak performance of some Altamira products, including • the flagship Altamira Equity fund, the Asia Pacific fund and the Special Growth fund. But industry insiders point to a recent drop in Altamira sales as evidence that the takeover battle is hurting mutual fund operations and eroding the company’s value. In December, industry figures show, the total amount that investors withdrew from Altamira funds exceeded new sales by $100 million. “Whenever you have any uncertainty around a company, it will have an effect,” acknowledges Altamira president of investment Philip Armstrong, who owns three per cent of the company and supports Manulife’s bid. “But these things go in cycles. We’re happy with where we are.” What concerns Altamira executives more than the current state of its fund operations is the reaction of big institutional clients. Of the company’s $17.5 billion in assets, about $8 billion belongs to

large pension funds, such as the retirement plans for Ontario Hydro, the city of Saskatoon, Westcoast Energy of Vancouver and Interprovincial Pipeline of Edmonton. In addition, 29 financial institutions are investor shareholders in Almiria, including the pension funds for Air Canada, Canadian National Railway, Bell Canada, McGill University, Crown Life and Molson. As well as having an indirect stake in Altamira, a number of those funds have money invested with the company.

Last week, sources told Maclean’s that several large institutional investors, which are being advised by the consulting firm Towers Perrin, have warned Altamira that they may pull their money out of the company unless Manulife moves quickly to resolve the ownership dispute. “People just can’t believe that it’s the best practice to keep a money manager who’s constantly in the news,” said one pension industry official. “Who needs it? There’s a hundred other people they can go to.” D’Alessandro, the official added, is under “tremendous pressure” to sweeten his offer. “There is no other quick resolution. If he hangs on, the case will go on through the courts for another year or two. He’s got pressure on him internally to do something, and he’s got external pressure because the firm [Altamira] is going down in value.”

Frank Mersch is feeling the pressure, too. In Edmonton late last month, Mersch told a private audience of financial services executives that he missed out on the big jump in bank stocks last fall—a major reason for his fund’s underperformance—because he was spending too much time with lawyers. The remark was intended, Mersch says, as a joke. “Sometimes I make offhand comments that I think will play well. But, look, my job is to manage money. I don’t spend any time with lawyers. I don’t understand their mumbo jumbo half the time anyway. All this hereto, therefore stuff—it’s like a Shakespearean play.” The Tempest, perhaps. □