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A REVIEW OF FINANCIAL ACTIVISM BY GENEVA PARTNERS April 3 rd ,2013 T OP A CTIVIST S TORIES N°8 Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) is poised to become one of Goldman Sachs Group Inc. (GS)’s largest shareholders without paying anything after the companies agreed on a plan to settle warrants granted at the height of the 2008 financial crisis. 1 GENEVA PARTNERS – 33 Quai Wilson – 1201 Geneva – Switzerland – Tel. : +41/22 906 95 95 – [email protected] – www.geneva-partners.com Swedish business is being cast as a model for long-term stability and growth. Finnish engineering company Metso Oyj is studying the possible spin-off of its pulp, paper and power (PPP) unit, saying the divestment could boost growth and sending its shares sharply higher. Nelson Peltz, one of America’s most popular corporate raiders could lead a $170 billion (£112 billion) merger between PepsiCo, Inc. (NYSE:PEP) and Cadbury-owner Mondelez International Inc (NASDAQ:MDLZ) after passively buying major stakes in the two consumer giants. It has been a bad few weeks for the cult of the Supreme Leader. Scandinavia : Model management Berkshire to Pay Nothing to Be Among Top Goldman Sachs Holders Boards and CEOs : no one’s indispensable Finland's Metso bows to activist investor with spinoff plan Nelson Peltz May Be Planning $170B Merger Between Pepsi & Cadbury

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Page 1: Top activist stories   8

A REVIEW OF FINANCIAL ACTIVISM BY GENEVA PARTNERS April 3rd,2013

TO P AC T I V I S T STO R I E S N°8

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) is poised to become one of Goldman Sachs Group Inc. (GS)’s largest shareholders without paying anything after the companies agreed on a plan to settle warrants granted at the height of the 2008 financial crisis.

1 GENEVA PARTNERS – 33 Quai Wilson – 1201 Geneva – Switzerland – Tel. : +41/22 906 95 95 – [email protected] – www.geneva-partners.com

Swedish business is being cast as a model for long-term stability and growth.

Finnish engineering company Metso Oyj is studying the possible spin-off of its pulp, paper and power (PPP) unit, saying the divestment could boost growth and sending its shares sharply higher.

Nelson Peltz, one of America’s most popular corporate raiders could lead a $170 billion (£112 billion) merger between PepsiCo, Inc. (NYSE:PEP) and Cadbury-owner Mondelez International Inc (NASDAQ:MDLZ) after passively buying major stakes in the two consumer giants.

It has been a bad few weeks for the cult of the Supreme Leader.

Scandinavia : Model management

Berkshire to Pay Nothing to Be Among Top Goldman Sachs Holders

Boards and CEOs : no one’s indispensable

Finland's Metso bows to activist investor with spinoff plan

Nelson Peltz May Be Planning $170B Merger Between Pepsi & Cadbury

Page 2: Top activist stories   8

A REVIEW OF FINANCIAL ACTIVISM BY GENEVA PARTNERS April 3rd,2013

TO P AC T I V I S T STO R I E S N°8

2 GENEVA PARTNERS – 33 Quai Wilson – 1201 Geneva – Switzerland – Tel. : +41/22 906 95 95 – [email protected] – www.geneva-partners.com

Scandinavia : Model management

By Richard Milne March 20th, 2013 Swedish business is being cast as a model for long-term stability and growth. The two men joke, finish each other’s sentences and defend the other from attack. “You start!” jokes one when the subject turns sensitive. But behind this veneer of camaraderie, the two are rivals: Börje Ekholm and Anders Nyrén are two of Sweden’s most important businessmen, heading the holding companies that together control more than half of Stockholm’s stock exchange. For the first time in the 69 years that their two companies – Mr Ekholm’s Investor and Mr Nyrén’s Industrivärden – have existed side by side their chief executives have agreed to give a joint interview. The subject that has brought them together is the Swedish model of active ownership of companies – the distinctive way Sweden has placed corporate power not with management but with shareholders who are obliged to elect board directors and be involved in big strategic decisions. With a structure that promotes long-term thinking, the Swedish model is attracting interest worldwide from regulators and governments looking to head off financial crashes. Some think that adapting the model’s tenets could reduce the short-term thinking that can damage companies, while also boosting local industry. Both chief executives say the success of a country of just 10m people, home to world-beating companies such as Volvo, Electrolux, Ericsson, Handelsbanken and Atlas Copco (all

Investor or Industrivärden holdings), owes much to the stability that comes from instilling so much power in the owners. “The key thing, if you look philosophically at developing a business, is the long-term proposition,” says Mr Ekholm. “You want to look at building a company not in a quarter or six months or even a year; it’s a longer process. I think what Industrivärden and Investor can provide is the stability for the company to focus on the long-term and instead maybe become unpopular in the short term.” After being overshadowed by the US-UK practice of corporate governance, where control is vested with management, the Swedish model is now being studied for the way it empowers shareholders. Even features such as dual-class structures – the infamous A and B shares that give extra voting rights to certain investors – are being revisited. Some governance experts are endorsing the idea of giving long-term shareholders bigger dividends. Mr Nyrén says: “You see a total change in the opinion. Why? Because we’ve had this crash and everyone is trying to find the mechanism whereby you’re encouraging long-term active ownership. A and B shares calls for exactly that.” The interest in Sweden’s approach comes as the debate over ownership and shareholder rights is reigniting across the western world before the latest season of annual general meetings. The Kay Review in the UK looked at how to encourage long-term investment, while many countries, led by Switzerland, are trying to give investors a stronger say on pay.

Even Norway’s national oil fund is considering taking a more active approach to ownership, starting with its Swedish holdings. Despite the focus on Sweden, a big question remains: is its approach to ownership exportable or is it intrinsically, uniquely Swedish? There is little doubt of the importance of the impact of long-term ownership on Sweden. For some it underpins not only the country’s successful export sectors, but also the Nordic model itself by allying financial performance to the long-term interests of society. Anders Borg, Sweden’s finance minister, says the country took the role of owners for granted several decades ago, prompting some entrepreneurs such as Ingvar Kamprad of Ikea and Hans Rausing of Tetra Pak to leave the country. These days the appreciation of strong owners has returned. “You don’t need an anonymous mutual fund or investment fund, you need strong owners with a name, with a responsibility and a clear role ... to be there in times of crisis and to provide new management if that is necessary. So I think we have seriously undervalued the role of ownership in general in our western society,” says Mr Borg. Between them, Investor, the holding company for the powerful Wallenberg family, Industrivärden and a smaller Wallenberg foundation have stakes in companies that have a combined annual turnover of SKr2,200bn ($341bn) and employ 1m workers. It is not just about size. Industrivärden and Investor point to the performance on a one-, five-, 10- and 20-year basis, with both companies delivering a return that is better than either the Stockholm stock ….

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3 GENEVA PARTNERS – 33 Quai Wilson – 1201 Geneva – Switzerland – Tel. : +41/22 906 95 95 – [email protected] – www.geneva-partners.com

exchange or a broader European index. Mr Ekholm stresses that while Investor always has a long-term objective, “we’ll be terriers in the short term on how you run the business”. He adds: “I often get asked the question: ‘Isn’t this long-term focus just a way to hide? You don’t have to perform because you say it’s five to 10 years out.’ But I disagree fundamentally. It’s about where the objective is. Then there is a path you’re going to execute to reach that objective. That you can evaluate every day.” The two exercise their power through nomination committees, in which the largest shareholders propose board members and set general pay policy for the annual meeting of investors to vote on. Investor or Industrivärden will often therefore receive the chairmanship of the board. This stands in contrast to the Anglo-American model where dispersed ownership among thousands of investors means shareholders usually have little power, with votes at annual meetings often resembling Soviet-era elections. Instead, both management and the board are subject to far less oversight than in Sweden. Some are seeking to change that UK-US approach. Cevian Capital, Europe’s largest activist investor (which happens to be based in Stockholm), sent a submission to the Kay Review arguing that the ability of the board to challenge management has become “increasingly ineffectual”. Cevian pointed out that from 2006 to 2010 not a single director proposed by a FTSE 350 company was voted down. Christer Gardell, the co-founder of Cevian, says active ownership is a crucial element in making the Swedish economy successful. “Shareholders take responsibility for the company. The accountability between the board and shareholders is also very clear,” he says. He argues that involving shareholders actively in the nomination process for UK boards would be hugely beneficial. One consequence is that the power of

management has more checks on it. Ronnie Leten, chief executive of Atlas Copco, the industrial group that is Investor’s largest single holding, says strategy is always discussed jointly with the board. “You have to share your power. You have to justify yourself in your own way. What Investor brings is the continuity. We agree on a strategy and then: ‘Let’s do it’.” . . . Both Industrivärden and Investor operate discretely, preferring to deal with issues within nomination committees and the boardroom rather than in public. They use their long heritage and broad industrial knowledge to offer support to directors. Mr Nyrén says his company is there as a sounding board for both management and the board all the time. “That’s where you find the true influence is based on trust, not on corporate governance or anything. And you earn your trust,” he adds. A decade ago, in an example of how Industrivärden makes tough decisions behind closed doors, it helped Ericsson change the management and board, and support a rights issue. But the chief executives agree that the Swedish model may be difficult to implement abroad. Mr Nyrén underlines how Sweden’s approach grew out of a history of concentrated ownership, first from banks and now holding companies. Mr Ekholm says requiring shareholders who have investments in hundreds or thousands of companies to vote on all their holdings could be counter-productive. Often those investors rely on the advice of proxy advisory companies to tell them how to vote, a situation Mr Ekholm compares to that of credit rating agencies. “Has that made the shareholder base more long-term, business friendly and sure to drive the development of the companies? No.” Both men argue that the limited time horizons of the typical UK or US investor mean it would be difficult to emulate the Swedish approach. “That’s why you can’t copycat the

Swedish system and put it in London,” says Mr Ekholm. Mr Nyrén adds: “And you cannot copycat London and put it here.” . . . Under proposals being floated by Brussels, long-term shareholders in EU companies could be given enhanced voting rights and higher dividends. But the proposals are controversial in countries such as the UK and Germany with Hermes, the London-based activist investor, warning in a previous consultation: “A too cosy relationship between the company and its long-term shareholders often translates into a too close relationship between the company and its dominant shareholders, to the detriment of the interests of smaller ones.” Equally, both CEOs are aware of how fashion waxes and wanes with the Swedish model, which was highly unpopular before enjoying its moment of fame. Its time in the spotlight does not mean the system is perfect. Mr Gardell, for all his praise, is vehement in his criticism of A shares, which can give holding companies up to 100 times more voting rights per share than a B stockholder. “The advantage could be that they could develop these companies long-term. The disadvantage is that, philosophically and fundamentally, control should be protected by competence not by preference voting rights. You should always be able to challenge incompetence,” he says. One example he points to is SCA, an Industrivärden holding with separate forestry and personal care businesses. “They should have undertaken the restructuring and separation of the paper business from the hygiene business 10 years ago. They were able to postpone it because people weren’t able to challenge it,” he argues. Mr Nyrén is having none of it. “I was visited a lot in the early 2000s by a number of hedge funds in London that told me that we were so stupid not breaking SCA apart. The same guys are sitting in the office now saying: ‘Thank you for being so …..

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4 GENEVA PARTNERS – 33 Quai Wilson – 1201 Geneva – Switzerland – Tel. : +41/22 906 95 95 – [email protected] – www.geneva-partners.com

smart’.”. Critics also point to the discount the holding companies trade at – typically 10-40 per cent lower than the value of their stakes – as evidence that their approach is far from ideal. But Mr Ekholm says the discount is less important over long periods of time

as it tends to be fairly stable. They both argue that the Swedish model allows them and their companies to emphasise the long-term rather than pushing for short-term measures such as a break-up or a special dividend. Mr Ekholm says: “If you’re going to

build a strong company, it’s about focusing on what are the right long-term decisions, and actually the Swedish model gives you that ability.”

Berkshire to Pay Nothing to Be Among Top Goldman Sachs Holders

By Noah Buhayar and Christine Harper March 26th, 2013 Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) is poised to become one of Goldman Sachs Group Inc. (GS)’s largest shareholders without paying anything after the companies agreed on a plan to settle warrants granted at the height of the 2008 financial crisis. Berkshire had the right to buy 43.5 million Goldman Sachs common shares for $115 apiece until Oct. 1. Under a deal announced by the companies today, Buffett’s firm will get Goldman Sachs stock equal to the difference between the average closing price during the 10 trading days before Oct. 1 and the exercise price, multiplied by 43.5 million. The new deal reduces some of the risk for Berkshire, which would have had to spend about $5 billion to exercise the warrants and then sell the shares -- about 9 percent of the bank’s outstanding stock -- to cement a profit. For Goldman Sachs, the fifth-biggest U.S. bank by assets, the plan seals Berkshire’s participation as a shareholder in the company and reduces the dilution for other investors. “To buy the 43 million and sell them to reap the profit would have substantial transactional cost,” said Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama, which oversees Berkshire shares. “Goldman has avoided the dilution.”

Restored Confidence

The new agreement also means Berkshire is depending on Goldman

Sachs stock remaining above $115 in the final 10 trading days of September. The shares last fell below that level in November. Goldman Sachs gained 43 cents, or 0.3 percent, to $146.54 at 4 p.m. in New York. The bank has advanced 15 percent this year and rose 41 percent in 2012. Goldman Sachs turned to Buffett, a cult figure in the investing world, to shore up its capital and restore market confidence after the firm’s stock tumbled and borrowing costs spiked following the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc. News of Berkshire’s investment also helped Goldman Sachs raise $5.75 billion from a stock offering in two days. Buffett, 82, invested $5 billion for preferred stock with a 10 percent dividend in 2008 and received the five-year warrants. Goldman Sachs paid Omaha, Nebraska-based Berkshire a 10 percent premium when it redeemed the preferred shares in 2011. “We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs,” Lloyd C. Blankfein, 58, the New York-based bank’s chairman and chief executive officer, said in the statement.

‘Better Place’

If the warrant agreement announced today were struck based on the average stock price of the 10 trading days through yesterday -- $150.16 -- Berkshire would receive $1.53 billion of stock. That would be equal to about 10.4 million shares, based on today’s closing price. Buffett is “putting up less capital than

he otherwise would have,” Cook said in a phone interview. “Buffett must feel like he has a better place to deploy the capital” than in Goldman Sachs stock. Buffett didn’t immediately respond to a request for comment sent to an assistant. Berkshire’s cash hoard was about $47 billion at the end of December. Since then, he has committed about $12 billion toward a deal with Jorge Paulo Lemann’s 3G Capital to take ketchup maker HJ Heinz Co. (HNZ) private. Goldman Sachs’s partners, the most senior employees at the firm, owned about 57.8 million shares, or about 11.6 percent of the stock, as of Feb. 1, according to a regulatory filing.

Stress Test

The warrant deal adds Goldman Sachs to Berkshire’s common- stock investments in U.S. banks including more than $16 billion of Wells Fargo & Co. (WFC) and $2.1 billion of U.S. Bancorp. (STL) Berkshire also has a preferred stake and warrants in Bank of America Corp., the second-largest U.S. lender. An annual evaluation by the Federal Reserve completed earlier this month found that Goldman Sachs’s Tier 1 common equity could fall to 5.8 percent of its risk-weighted assets in a severe economic downturn, just above the 5 percent minimum. The Fed also ordered Goldman Sachs and JPMorgan Chase & Co., the world’s two biggest trading firms, to resubmit their plans for managing capital by the end of September to address weaknesses in their planning processes. The so-called stress tests may have played a part in Buffett’s …..

Source : The Financial Times

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5 GENEVA PARTNERS – 33 Quai Wilson – 1201 Geneva – Switzerland – Tel. : +41/22 906 95 95 – [email protected] – www.geneva-partners.com

Boards and CEOs : no one’s indispensable

March 15, 2013 It has been a bad few weeks for the cult of the Supreme Leader. Pope Benedict quit in the Vatican. Kim Jong-eun ranted and raved in North Korea (in between basketball games with Dennis Rodman). And Tom Ward looks to be on his way out at SandRidge Energy after an activist shareholder targeting governance and exorbitant pay secured four seats this week on the company’s board. This is not only evidence that investors can sometimes bestir themselves; it is a blow against the notion of the indispensable chief executive. Mr Ward has appeared to run SandRidge on his own terms during the past few years with a yes-man board behind him. Activist investor TPG-Axon, which built a 7 per cent

stake in the Oklahoma City-based explorer, took aim at his $150m pay over the past five years, as well as a cost base considered far too high for a company capitalised at just $2.8bn. He is not the only boss to have his wings clipped. Nabors Industries, a supplier of drilling rigs, has caved in to pressure from Calpers and other pension funds to reduce the pay of chief executive Anthony Petrello. The backlash against oil and gas industry chief executives, whether over pay or performance, began last year at Chesapeake Energy, where founder and chief executive Aubrey McClendon is quitting after 24 years. But the habit of indulging chief executives is not confined to the oil and gas exploration business. Drugs group Novartis wanted to give its departing chairman Daniel Vasella

$78m in a “golden goodbye” contract until angry shareholders nixed it. And the less said about bankers the better, as investors might say. Still, the habit may be particularly prevalent in exploration, which tends to attract outsized personalities. A fortune built on oil and gas is the very stuff of American achievement. But it is a board’s job to distinguish a chief executive’s legitimate worth from what his ego thinks he ought to be paid or how he should act. A board in thrall to its chief executive is in nobody’s interests, especially when it comes with chronic share price underperformance. SandRidge’s shares are down 90 per cent since 2008. That is an indictment of the board as much as of Mr Ward.

decision to take a smaller stake in Goldman Sachs than he was entitled to, said Jeff Matthews, a Berkshire shareholder and author of books about the investor.

“Maybe owning that big a stake in Goldman was a position he didn’t need to be in,” Matthews said. “It’s different than owning Wells Fargo or U.S. Bancorp. It’s just a different

animal.”

Source : The Financial Times

Source : Bloomberg

Finland's Metso bows to activist investor with spinoff plan

March 25, 2013 By Jussi Rosendahl Finnish engineering company Metso Oyj is studying the possible spin-off of its pulp, paper and power (PPP) unit, saying the divestment could boost growth and sending its shares sharply higher. The move marks the success of an eight-year campaign for change at Metso by activist investment fund Cevian Capital, which first bought a 4 percent stake in 2005 and increased its holding to 8.3 percent three months ago. Shares in Metso were up 10.5 percent at 34.03 euros by 1458 GMT, likely giving Cevian a substantial profit on its stake, though it was not immediately clear what average price it had paid. The stock rose as high as

34.93 euros, its highest since April 2012. The PPP unit, whose products include paper machines and power plants, generated about 40 percent of Metso's net sales of 7.5 billion euros ($9.8 billion) last year. But its performance has been dogged by a downturn in paper demand. Metso, which last month posted a 3 percent drop in underlying core earnings to 196 million euros, said the demerger would help accelerate growth in both the new company and the remaining units, Mining and Construction and Automation. "Clearer business structures would increase the focus and ambition of the two companies with distinct growth strategies," said board chairman Jukka Viinanen in a statement.

The paper machine business, which makes about half of its sales of the unit being spun off, has been hit by a decline in magazines and newspapers as consumers switch to digital devices. Last year Metso slashed some 500 jobs from its Finnish paper units, while the PPP unit overall ended last year with an operating margin of 4.9 percent, compared with about 11 percent at Metso's two other units. Analysts were positive on the demerger. "It is a good move. The PPP business is of a size that would operate well as an independent company," said Juha Kinnunen, head of research at Inderes Equity Research. "It is true that the outlook for the paper machine business is weak in the long term, but the unit is nevertheless in a pretty …..

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6 GENEVA PARTNERS – 33 Quai Wilson – 1201 Geneva – Switzerland – Tel. : +41/22 906 95 95 – [email protected] – www.geneva-partners.com

Nelson Peltz May Be Planning $170B Merger Between Pepsi & Cadbury

By Aman Jain March 22, 2013 Nelson Peltz, one of America’s most popular corporate raiders could lead a $170 billion (£112 billion) merger between PepsiCo, Inc. (NYSE:PEP) and Cadbury-owner Mondelez International Inc (NASDAQ:MDLZ) after passively buying major stakes in the two consumer giants. Nelson Peltz has been buying shares of both PepsiCo, Inc. (NYSE:PEP) and Mondelez International Inc (NASDAQ:MDLZ), previously known as Kraft Foods Group Inc (NASDAQ:KRFT), through his hedge fund, Trian Fund Management, according to the sources. There is no confirmation over the exact size of the stakes in both the U.S.-listed companies; however, according to an article in the Telegraph so far Peltz has paid $2 billion for the stakes. Peltz is a famous figure from Brooklyn who has an estimated worth of $1.1 billion, according to Forbes. He is well known in the investment community as a daring and risk-taking investor

who likes strategic change and take on company boards. One of Peltz’s most talked about investment was in the British Company, Cadbury Schweppes in late 2006. His Trian Fund Management acquired approximately 3 percent shareholding of Cadbury in 2007 after which the company announced that it would split in to two businesses – one focused on drinks, such as Snapple and Dr Pepper, the other on confectionery, including Dairy Milk. Another highly regarded investment was in Heinz, where Peltz had a proxy contest with Heinz to put five independent directors on the ketchup maker’s board. Trian succeeded at putting two directors on the board one of them was Mr. Peltz itself. His appearance on the shareholder register at Pepsi and Mondelez International Inc (NASDAQ:MDLZ), is likely to send tremor through both companies. Both the stocks have been in the news lately; Mondelez and Pepsi performed well last year, but traders are estimating that as a strategy Peltz will push for the merger

of both the business. Mondelez International Inc (NASDAQ:MDLZ)’s brands include Toblerone, Cadbury chocolate and Carte Noire coffee. The business was established after Kraft’s directors announced two years ago a shocking decision to divide the company, which divided Mondelez as a global snacks company and a North American grocery company, still called Kraft. Irene Rosenfeld, famous for her aggressive £12bn takeover of Cadbury in 2010 runs Mondelez. PepsiCo, Inc. (NYSE:PEP)’s brands include Walkers crisps, Doritos and Tropicana juice and of course Pepsi. The talks have been going around that Peltz may ask Pepsi to pursue a merger with Mondelez International Inc (NASDAQ:MDLZ), but the other possibility may be Peltz can also advice PepsiCo, Inc. (NYSE:PEP) to demerge like Kraft food. Mr. Peltz will hold the shares of both the companies as a passive shareholder following his trend.

Source : ValueWalk

good shape." The new company would be listed on the Helsinki bourse before the end of this year after a spinoff which has already won the support of Metso's main owners, Finnish state investment arm Solidium and Finnish pension funds as well as Cevian. Cevian managing partner and Metso board member Christer Gardell had first proposed a split in 2005, soon after the fund acquired a 4 percent stake in the company, but the group's other owners had rejected the idea. Investors had recently been speculating of a conflict between Cevian and the state owners who are more accommodating of perceived longer-term national agendas. Some private investors were unhappy with Metso's decision in September to cancel an extra dividend following job cuts, which was seen as a politically-driven move to appease

criticism from union leaders and government officials. Cevian declined to comment on Monday. Solidium, the biggest owner in Metso with a stake of 11.1 percent, said the spin-off did not make sense when it was first proposed. "Now, the businesses have matured. The company looks pretty different than in 2006," Solidium managing director Kari Jarvinen told Reuters. Metso shares have been trading on a multiple of 6.2 times in terms of enterprise value against core earnings, pricing it at a 31 percent discount to peers on an average multiple of 8.9 times, according to Thomson Reuters StarMine. Morgan Stanley said in a note to clients that the market may have been too pessimistic on the paper business. "Although graphic paper demand is falling in Europe and North

America, tissue and containerboard keeps growing," its analysts wrote. Under the demerger plan, Metso's owners will receive shares in the new company in proportion to their stakes in the group. The move would be sealed at a shareholder meeting during the second half of this year. Cevian, which recently raised its stake in Denmark's Danske Bank, is also a shareholder in companies including truck maker Volvo. Cevian says on its website it has more than 6 billion euros under management and describes its strategy as to invest in companies where there is a "meaningful opportunity to enhance ... long-term value by improving corporate governance, operational performance, corporate strategy and structure." Source : Reuters

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Franck Berlamont Jean-François Bassignot