On March 22 Deutsche Börse announced an ongoing capital structure management program with significant distributions of funds to shareholders.
LETTER FROM WERNER SEIFERT TO CHRISTOPHER HOHN
Re: Deutsche Börse’s Shareholder Value Enhancement Program
Dear Mr. Hohn,
Commencing with the detailed public announcement of the Company’s proposal to acquire the London Stock Exchange in late-January and culminating with our meeting today with you, Lord Jacob Rothschild, and your legal advisor, we have been engaged in an extensive and private dialogue with a broad group of our shareholders regarding matters of importance to them. By and large, this exchange has been constructive and we appreciate the very open dialogue, along with the support and encouragement that we have received from shareholders in connection with ongoing efforts to ensure the continued success of Deutsche Börse AG.
Throughout this process, we have undertaken an intensive effort to ascertain what is desired by our shareholders. At all times during this process, we have given serious consideration to the views that have been expressed to us by the Company’s owners. As you would expect, we have submitted unfiltered reports on these discussions periodically to our Supervisory Board members. Finally, we have taken deliberate steps to ensure that our actions will be consistent with the expressed will of our shareholders.
The most difficult task before the Company today is the melding of a very broad range of shareholder opinions into a cohesive strategy. At the outset of our efforts to acquire the LSE, some of the Company’s owners expressed concern over the proposal, although the nature of the concerns varied dramatically from one investor to the next. For example, only a handful of our 28,000 shareholders shared your concern that the LSE should not be acquired at any premium. I recall your statement to me and my team that you would "only support a deal that started with a 2," referring to the price per LSE share that you would find acceptable. Others thought our proposal made sense, but only at prices below what we offered. Most believed a deal at or about our offer price was attractive. Finally, a significant portion of our owners opined to us that the deal was so strategic that we should be willing to pay more than what we had offered and, in some cases, more than what we deemed appropriate. As you can see, it is indeed difficult to develop a strategy that will appeal to all shareholders, while ensuring our continued success as a public company.
In February, a significant change occurred in our shareholder base with the addition of many new investors from the hedge fund community. Over time, some large shareholders spoke with a loud voice in expressing their displeasure with our proposal to acquire the LSE. Some of these investors had been shareholders of Deutsche Börse for quite some time, while others, like TCI, had purchased the bulk of their shares after our proposal to acquire the LSE was announced. Among other things, growing shareholder dissatisfaction with the offer ultimately led us to withdraw the proposed pre-conditional offer and reconsider existing plans to pursue a share buy back.
The shareholders we have met with are uniformly of the opinion that, in the absence of a transaction, the company is overcapitalized. Management and the Supervisory Board agree. In fact, we have made this point clear throughout 2004 in every Executive and Supervisory Board meeting and in our November 2004 earnings call with analysts and shareholders.
Interestingly, as was the case with the LSE acquisition proposal, the views of shareholders with respect to the funds that can and should be distributed, as well as their preferences on timing and mechanics, vary widely. Indeed, your own views on this subject seem to have evolved quite a bit from what we were once told by your discussion partners, who claim to have been told by you that € 2 billion was achievable. If we understood you correctly during our meeting in your office on March 24, your expectations have moderated in the wake of a more complete study of the constraints faced by the Company in this area. However, other shareholders who have expressed views similar to yours in the past on this subject do not seem to have moderated their outlook to date. For example, Atticus Capital has called for the distribution of € 2 billion to shareholders. Public comments like these were immediately greeted with a downgrade of our subsidiary, Clearstream, by Fitch. Also, in our opinion, this kind of speculation played a significant role in S&P’s decision to downgrade the parent company after announcement of our share buy back initiative.
On March 31, TCI demanded that we immediately remove and replace a majority of our Supervisory Board members with TCI’s hand-picked nominees. More recently you demanded the removal and replacement of "only" a majority of the shareholder representatives on the Supervisory Board. Yet, despite the dramatic scope of the Board changes that you have demanded of us, you have told me on several occasions that you have "no specific strategy" for the Company. In addition, you have indicated to me that you would not advocate any material change from the strategic plans which have been adopted unanimously by the Company’s Executive and Supervisory Boards.
In fact, the only specific and persistent criticism of incumbent Board member actions that you have voiced to me is the false assertion that Dr. Breuer neglected to advise Supervisory Board members of your views in connection with the Company’s proposal to acquire the LSE. As you know, Dr. Breuer gave a full report to the Strategy Committee of the Supervisory Board on the views expressed to him by you and others exactly one day after your conversation with him. He also wrote to all members of the Supervisory Board to report on your views and the developing reactions of other shareholders to the proposal within eleven days of your conversation with him. Continued misrepresentations regarding Dr. Breuer’s fulfillment of his Board responsibilities are a disservice to all shareholders and, in my opinion, reflect a social, rather than a business, agenda.
All in all, your plan for immediate and wholesale change in the composition of our Supervisory Board sounds to us like change for the sake of change itself rather than change to achieve a specific goal. That may not be all bad. However, we should recognize it for what it is. We have a different plan - a plan for constructive change.
After consideration of numerous alternatives, we have developed a comprehensive shareholder value enhancement program. Our plan precludes only the most extreme actions. It will consist of two principal elements; an alteration of the Company’s capital structure with significant distributions to shareholders; and, improvements to our corporate governance processes and bodies. Later this month, after we have completed our review of all available options to optimize the Company’s capital structure, our program will be presented to the Supervisory Board, and it will be announced publicly thereafter without delay.
Our shareholder value enhancement program addresses the views expressed to us by all shareholders. I think our program also addresses all of the concerns that you have expressed to me and I believe it is more constructive than the specific actions that you have demanded of us. Finally, I am convinced that, over time, our program will be more productive for everyone, including TCI. For these reasons, I ask that you consider the program we have proposed and join with us in supporting the continued success of our business, while avoiding the disruption, cost and distraction of a public spectacle.
Shareholder Value Enhancement Program
Our shareholder value enhancement program will consist principally of improved capital structure management and strengthened corporate governance, complemented by the ongoing success of our business. Each is addressed briefly below.
Capital Management Program
Our capital management program is comprised of three components. The first is the distribution of available funds in the short term - up to 12 months. Under this plan, shares will be purchased in the open market in April and May of this year under our current share buy back authority, up to a maximum of current retained earnings of €448 million. Shareholders will be asked to renew the authority to repurchase shares at the May 2005 AGM. With such approval, we can continue to buy back shares in 2005 out of 2004 profits, which are not distributed in the form of dividends (~€150 million). Additionally, we expect to increase the pay-out ratio significantly in 2006 through a higher dividend and/or further share buy-backs.
In the second part of this program, as we have publicly announced, we are exploring possibilities to free additional funds for distribution to shareholders. As you know, we are conducting required legal and financial reviews of all options to optimize our capital structure. We expect to present our findings, conclusions and recommendations to the Supervisory Board later this month. Shortly thereafter, we will unveil to shareholders our plan for restructuring the Company’s balance sheet, including our intentions regarding long-term capital management.
In the meantime, we need to complete our review of all relevant considerations, including the potential impact of our plans on regulatory relationships, credit ratings and customer business. In addition, we are working to identify and overcome all challenges presented, including "financial holding group" regulatory capital requirements, legal and timing impediments and other business and regulatory constraints. I can assure you that we are dedicated to the creation and prompt implementation of a responsible long-term capital management plan to address the goals of our shareholders, while reflecting the realities of our business.
The third component of our capital management program is the use of future cash flow generated by the company. We have already announced that we plan to increase the Company’s dividend payout ratio, and to continue the share buy-back program, depending on the Company’s future investment needs and share price developments. Corporate Governance Program
Our corporate governance program is intended to build on the Company’s existing strengths in this area through: (a) a continuation of our commitment to ongoing changes in the composition of our Supervisory Board; and, (b) the formation of a Shareholder Committee that would have meaningful input to the Executive and Supervisory Boards.
(a) Supervisory Board
As indicated by our past behavior, we believe that continuous change in Supervisory Board membership is, in itself, a good idea. Among other values, this kind of change can add valuable expertise and contacts to complement what is contributed by existing Board members. It also can contribute fresh ideas and added vigor to the Board’s deliberations. This is not a new perspective at Deutsche Börse. At our last regularly scheduled opportunity to do so, we added six new members to our Supervisory Board upon the retirement of several longstanding and highly valued Supervisory Board members. In all, more than half of our fourteen shareholder-elected Supervisory Board members have been added within the last two years. During this process, we have made a conscious effort to increase the depth and breadth of the Board’s expertise and to broaden the Board’s perspective by actively seeking more international Board members. In fact, with the addition of five international members, more than a third of our shareholder-elected representatives are from outside Germany - one of the highest proportions of international representation on the Supervisory Board of any DAX Company.
As in the past, we would like to work constructively with our shareholders in this area and we intend to seek their input with respect to the scope of the change that may be appropriate, as well as suggestions for new Board members. It should be said that this, too, is not a new perspective for us. When we made changes to the Supervisory Board in 2003, we contacted several of your partners, who were shareholders at that time, to ask them if they would like to recommend any candidates for the Supervisory Board. However, all declined our offer.
We are convinced that the best interests of our shareholders will be served by making changes in the Supervisory Board election scheduled for 2006. A rushed and wholesale change in the composition of our Supervisory Board is not in anyone’s best interest. No one - not you, not other shareholders, not the Company, its customers or employees - would benefit from this kind of a change. The continuation of this process is already undermining our relations with customers and the regulatory bodies in Wiesbaden and the Börsenrat. In short, we think the time has come for an end to this drama and we hope TCI will agree to join with us in doing what is best for the Company, its owners, customers and employees.
(b) New Shareholder Committee
In the meantime, we want to strengthen our communications channels with shareholders. Given our historic difficulty in persuading long-term shareholders to accept seats on the Supervisory Board, we wish to create a more direct link to the Executive and Supervisory Boards for shareholders.
To ensure that shareholder views regarding the Company are communicated frequently, understood fully and considered carefully by the Company’s Executive and Supervisory Boards - today and in the future - we are proposing the formation of a new Shareholder Committee. Although we have certain views as to how the Committee can operate, in our opinion, it should be designed for the benefit of, and in conjunction with, our shareholders. Between now and the upcoming AGM, we would like to discuss this concept with our shareholders and agree on appropriate procedures for selecting Committee members. By way of illustration, we would suggest the following guidelines.
A membership of approximately 10 would seem appropriate to us. However, regardless of size, the constitution of the Committee should be a reflection of our shareholder base. A Committee with one-third of its seats allocated to UK, US and German / Continental-European institutional investors, respectively, would seem appropriate to us, ideally with representation of various investment styles and disciplines. We also would suggest dedicating at least one seat on the Committee to the representation of retail shareholders.
The Shareholder Committee will serve as a forum for shareholders to communicate directly with the Company’s Executive and Supervisory Boards with respect to matters of importance to all shareholders, including the scale of proposed changes to Supervisory Board membership, the selection of new Supervisory Board members and extraordinary corporate transactions and events. It is not intended (indeed, it would be illegal) for non-public information to be shared with members of the Committee and we do not want Committee membership to impose any limitations on the institutions that employ Committee members. However, we would expect the Committee to submit meaningful recommendations for Executive and Supervisory Board consideration, thereby providing shareholders with a more immediate and influential voice in our corporate affairs.
We believe that ordinary meetings of the newly created Shareholder Committee should be held approximately one week in advance of all regularly scheduled Supervisory Board meetings. Upon its inception, we look forward to working with Committee members to determine a logical framework for calling extraordinary meetings of the Committee.
We think it would be important for two Supervisory Board members to be present at all Committee meetings. We would rotate Supervisory Board members through the Committee meetings to ensure the greatest exposure possible. Committee meeting discussion points and recommendations would be reported to the Supervisory Board at its own regularly scheduled meetings to be held only days later. We also would invite two members of the Shareholder Committee (perhaps, also, on a rotating basis) to report directly to the Supervisory Board meeting and to respond to questions from the Supervisory Board.
We believe the Shareholder Committee should be chaired by someone who is both impartial and committed to the best interests of our shareholders. Of course, we would look to our shareholders - and to the Committee itself - to nominate a chairperson.
In our opinion, the Committee should be fixed in its membership. However, it should not take on the tone of a secretive body. Therefore, we would propose to have an open telephone line for shareholders who wish to hear the Committee’s deliberations. We also would propose to place either the minutes of the Committee’s meeting or perhaps a transcript on our website.
Finally, if the company decides to pursue an extraordinary corporate transaction at some future date, we would call for an extraordinary Shareholder Committee meeting within ten days of such an announcement to consult with the Committee on the transaction and to report to the Supervisory Board immediately thereafter.
Conclusion
Our Executive and Supervisory Boards are committed to serving the best interests of our shareholders. For this reason, among others, our program reflects the views that have been expressed to us by all shareholders. It distributes significant funds to shareholders and creates a forum for frequent and direct shareholder input to the Executive and Supervisory Board decision-making process, including input with respect to the scale of proposed changes to Supervisory Board membership, the selection of new Supervisory Board members and extraordinary corporate transactions and events. It will enhance share value and improve communications between and among shareholders, Supervisory Board members and management, while allowing significant Supervisory Board membership changes to occur consistent with "best practices." In short, our program will maximize value for all concerned parties.
We are confident that, when implemented, our plan will serve as an effective model for good governance, and a value driver for shareholders. We also believe that, upon reflection, you will agree that our proposal provides all shareholders with increased accountability, while ensuring the continued success of our business. We ask that you join with us in supporting our Shareholder Value Enhancement Program and in avoiding the disruption, cost and distraction of a public spectacle.
