UNITED KINGDOM

By David Domes

Among the EGMs covered by ISS in the 4th Quarter, there was one merger (described below), 10 acquisitions, and three shareholder-requisitioned meetings with agenda items requesting the removal of existing directors: PNC Tele.com PLC, Ellen Group PLC, and Lupus Capital PLC (see the analysis below).

A fundamental revision of British company law by the UK Government, following an independent three-year review, continues to attract attention in the business circles. The Government published its response to the review's recommendations and set out its core proposals for reform in a White Paper published last summer. A number of other initiatives aimed at promoting improved corporate governance are also on the Government's agenda, including an independent review of the role and effectiveness of non-executive directors led by Derek Higgs, and a review of the way the audit and accountancy professions are regulated in the UK.

Proposed New European Legislation Threatens UK Investor Protection Rules

In the context of the European Commissions' Financial Services Action Plan, an initiative to create an integrated European securities market by 2003, the Commission has recently proposed a number of legislative changes, including the Prospectus Directive, the Transparency Obligations Directive, the Investment Services Directive, and the Market Abuse Directive. The common purpose of the directives is to harmonize investment rules, as well as listing and disclosure requirements among EU member-states.

The draft directive on prospectuses sparked particular criticism among UK investors who argue that the directive takes the lowest common denominator approach and thus endangers current UK disclosure and corporate governance requirements. A prospectus serves as a disclosure document to investors in the context of an initial public offering or when issuers want to raise capital. EU-wide legislation on prospectuses would introduce a so-called “single passport for issuers” that would be valid throughout the EU once the prospectus has been accepted by the respective authority of the issuer's home member-state. Such a procedure should increase efficiency by reducing transaction costs and by making the EU more competitive on the international level.

The UK Listing Rules implement requirements set by the EU directives, thus any changes to the existing EU directives will also effect the Listing Rules. Currently, issuers in the UK are subject to several ‘super-equivalent' provisions that allow UK authorities to inflict tougher disclosure requirements. The proposed Prospectus Directive, however, would act as a maximum harmonization directive and thus keep individual member-states from imposing additional listing requirements over and above those contained in the directive. As a result, the super equivalent provisions that expand prospectus-content requirements for issuers raising capital in the UK would not be permissible under the new directive.

In light of the 2003 deadline for a common market in financial services decided at the EU summit in Barcelona earlier this year, time is running short. This could possibly force interested parties in the UK to find another way to enforce its disclosure and corporate governance requirements. For example, the government has already passed regulations that will require all listed companies with financial years ending on or after 31st December, 2002, to publish a board-approved report on directors' remuneration as part of their annual reporting cycle and put annual reports on directors' remuneration to shareholder vote. The investor protections diluted by the directives could therefore be replaced through changes in UK law.

Merger of Logica PLC and CMG PLC

Logica's board proposed to its shareholders to merge the company with CMG PLC to create LogicaCMG, which would become the second-largest European quoted information technology (IT) services company, and a strengthened global provider of wireless messaging and payments software. Upon completion of the merger, Logica shareholders will hold 60 percent and CMG shareholders will hold 40 percent of the issued ordinary share capital of LogicaCMG, which will continue to be listed on the London Stock Exchange and will also seek a listing on Euronext Amsterdam. The terms of the merger are based on the relative market capitalization of the two companies over the six-month period immediately preceding the announcement of the merger, and the contributions of each Logica and CMG to the profitability and prospects of LogicaCMG.

Based on CMG's share price of GBP 0.77 ($1.19) on Nov. 4, 2002, which was the last day prior to the formal announcement of the deal, the shareholder circular stated that the offer valued each CMG share at GBP 0.74 ($1.15), representing a discount of approximately 3.6 percent, and the entire issued share capital of CMG at approximately GBP 460.6 million ($714 million). However, an alternate valuation provided by Bloomberg News analysis sets the CMG share's implicit value under the transaction's terms at GBP 0.825 ($1.28), which would represent a premium of about 7.2 percent above the closing share price on Nov. 4.

Background and Strategic Rationale
Logica is a leading global IT solutions provider, focusing on the energy and utilities, telecoms, financial services, industry, distribution and transport, and public sector markets. With over 30 years of experience, Logica offers system integration, software development, strategic consultancy, and business process outsourcing services. CMG is a global information and communications technology company providing mobile business security services, business process outsourcing, and advanced payroll solutions to customers across many industries as well as government agencies. The company has also established an international position in wireless messaging and mobile Internet over the last decade.

The merger represents an opportunity to create a company with an enhanced presence in key industry sectors and important geographic markets, along with an improved breadth of offerings. A significant opportunity for enhanced future growth and realizations of synergies stems from Logica's and CMG's strong geographic fit and complementary geographical coverage, customers and key competencies with a similar industry focus. Financial benefits of the merger include expected annualized operational cost savings of approximately GBP 60 million ($93 million), with one half to be realized in the financial year ending Dec. 31, 2003. These cost savings will result from a reduction of the enlarged group's headcount by approximately six percent, optimization of returns from R&D expenditure, elimination of duplicate overhead, and the alignment of the enlarged group's product and service offering. Including annualized cost savings, the merger is expected to be substantially earnings enhancing for both CMG and Logica shareholders in the first full year after the completion.

Corporate Governance and Future Dividend Policy
LogicaCMG's company board will initially comprise five executive directors and six non-executive directors. The non-executive directors will be drawn from the boards of both companies. Logica's CEO Martin Read and Finance Director Seamus Keating will become the CEO and finance director of LogicaCMG, respectively. CMG Chairman Cor Stutterheim will be the non-executive chairman of the merged group.

The expected first dividend to which LogicaCMG shareholders will be entitled will be an estimated three pence ($0.05) per LogicaCMG share in respect of the six-month period ending Dec. 31, 2002, which is expected to be paid in April 2003. The board also expects that LogicaCMG will adopt an ongoing dividend policy in line with the existing policy of Logica, which delivered a total dividend of 5.4 pence ($0.08) in 2002, and intends to maintain the dividend value in real terms for 2003, with an interim and final dividend split roughly 40/60.

Conclusion
Following announcement of the deal, Logica's share price fell by 2.8 percent but has rebounded to its pre-announcement levels since then, while CMG's rose by two percent.

ISS saw no objections to this merger and recommended that shareholders vote in its support at the company's EGM on Dec. 6, 2002. We believed the deal was priced appropriately, especially when considering the benefits expected from the transaction. In sum, the merger will establish the enlarged company as Europe's third-largest computer services provider, thus enabling it to better compete against rivals such as Cap Gemini SA and Electronic Data Systems Corp. in a flat but stabilizing market. It will also result in cost savings, particularly from consolidating administrative and support service activities.

Lupus Capital PLC

Lupus Capital's EGM on Nov. 28, 2002 was requisitioned by shareholders representing approximately 13 percent of the issued share capital of the company. The shareholders sought to replace four of the existing board members with three of their own nominees, who would then constitute a majority of the board.

Shareholder Proposals
The proposal stated that the company had significantly under-performed, with its share price dropping by 58.3 percent since the purchase of Gall Thomson Environmental PLC in December 1999 to a discount of 41.7 percent to the net asset value in June 2002. Additionally the proposal stated that the company's original purpose had become irrelevant and it should return cash to shareholders. They also proposed to appoint new investment managers to implement the revised strategy within up to two years and reduce the company's central costs.

Board's Argument
The board's statement argued for rejection of the requisitioned proposals, pointing out that Lupus' performance improved strongly (turnover up 23 percent for the six months to June 30, 2002, profits before taxes up 45 percent), fueled by the success of Gall Thomson, its largest investment. The board further stated that it has delivered an increase in dividends of 33 percent since 1999 and is focused on realizing the best possible value for shareholders from the sale of Gall Thomson at a price which would represent a premium to the consolidated net asset value of the whole group. While conceding that Lupus had been trading at a deep discount to the net asset value, the company's share price had suffered, to a large extent, from the depressed market conditions; in the generally falling market that saw the FTSE Small Cap Index lose nearly 40 percent since Jan. 1, 2000. Lastly, since the proposed new manager's incentive fees were based on the extremely low current share price which represented a substantial discount to net asset value, the board argued that the proposals were structured so as to enable the managers to earn themselves incentive fees over the next two years.

In their response to the board's statement, the shareholders expressed their concern with Lupus's central costs of GBP 1.4 million ($2.2 million) per annum, which they deemed excessive given the size of the company. They also raised doubts over the board's stated efforts to seriously negotiate the Gall Thomson sale, pointing to the lack of concrete proposals until as recently as Oct. 21, 2002, when the directors most lately purchased Lupus shares.

Conclusion
While ISS agreed that the board had not sufficiently addressed some of the issues raised by the by the shareholders, most notably the justification, if any, behind the excessive management costs, ISS nevertheless considered the proposed management fee structure to be a poor alternative, offering no better (or worse) solution than the existing arrangements from the shareholder perspective.

ISS also believed that Lupus's strategy continues to be relevant and that the current board's pursuit of negotiations to sell Gall Thomson at an appropriate price relative to the company's net asset value, rather than a quick realization by a fire sale of the business which the proposals advocate, is in the best interest of all shareholders. Accordingly, ISS recommended that shareholders oppose the proposed resolutions.