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Skip Navigation LinksHome :: Back Issues :: Unilever's bitter tug of war

November 2001

Unilever's bitter tug of war


Unilever is breaking new ground by taking its former fund manager, Mercury, to court in a bid to recover alleged lost earnings. The fund management world is closely watching events as the outcome of the case could have a profound effect on the way that the business operates in the future.
No-one really believed it would ever get this far. But in the High Court in London at 10.30am on October 15, the court usher declared: "Silence in court, all rise" and Mr Justice Colman took his seat to preside over the battle between a fund manager and a very aggrieved client.
The received wisdom was that Merrill Lynch Investment Managers would not want its business with Unilever discussed in public - and it was obvious from the first day, with reporters having to sit on the floor because there were not enough chairs to go around, that this would be very public indeed. A court case set to last between six and eight weeks was bound to prompt unwelcome headlines during that time. Surely the two would settle?
However the distance between what Unilever was asking for and what Merrill Lynch was prepared to hand over was just too wide to be bridged.
In disputes between financial institutions it is not uncommon for the parties to play hardball right up to the last minute before finally reaching a deal on the steps of the court house. This time however, Merrill has not budged and so Unilever has gone ahead with its claim for £130 million in damages.
"I just can't believe that it actually went to court," says a fund manager at a rival London house. "I can't believe they were prepared to air all the arguments in the open like this."
Certainly the opening days of the case did not disappoint those looking for revelations about the collapse of the once very good relationship between Anglo-Dutch household products group Unilever and what was, before its November 1997 purchase by Merrill Lynch, Mercury Asset Management.
At the very heart of this lies a falling out between two forceful characters. In the blue corner: Carol Galley, Mercury's co-head and variously described during her career as "the most powerful woman in the City" and "the Ice Maiden". In the red: Wendy Mayall, chief investment officer of the Unilever Superannuation Fund.
As Unilever's QC, Jonathan Sumption, set it out in court, Galley and Mayall's relationship, prompted by Mercury's performance, deteriorated to such an extent that the two had a "disagreeable" conversation in early 1998.
As the threat of legal action loomed, Galley went over Mayall's head to Niall Fitzgerald, Unilever's chief executive. She also met Hans Eggerstedt, the Unilever group finance director, but both men backed up Mayall. Galley was told that without movement from Mercury and substantial financial compensation, the fund would fight a legal battle "to the bitter end".
Good, bad or negligent?
To an outsider, at first glimpse there would seem to be little to get worked up over. During 1997 Mercury, which had been a long-standing manager for Unilever, produced returns of £200 million on a £1 billion account.
However taking a closer look - and this is what Unilever argues - if Mercury had done what the fund says it asked it to do, it could have produced a further £110 million.
Mercury was being asked to achieve 1% outperformance of its benchmark, with a downside tolerance of 3%. While the markets boomed in 1997, Mercury's tracking error went to 10.5%.
These numbers are not in dispute. What is argued by Merrill Lynch in its defence, however, is that Unilever was fully aware of how its fund manager operated and should therefore accept some of the responsibility.
Sumption portrayed the fund manager in charge of Unilever's account, Alistair Lennard, as a "wild card" who was taking much larger positions in industrial stocks and against UK banks than his colleagues on the Select team, Mercury's star UK equity fund managers. If those bets had come off he would have produced much greater returns.
Unfortunately they didn't and Lennard was taken off the account in mid-1997 to be replaced by Paul Harwood who was given responsibility for recovering some of Lennard's positions and putting the portfolio back on track. Unfortunately, things got worse and eventually, in March 1998, Unilever pulled the plug and took its business elsewhere.
Three years of negotiations later and the matter is still to be resolved. Now Galley and Mayall are enduring stands in the witness box, along with Lennard, his former boss John Richards and possibly expert witnesses in the form of leading industry figures Tony Dye and Dugald Eadie (see below).
Mr Justice Colman has a tough decision ahead of him, and a lot of people will be keeping a very close eye on how he finally resolves the dispute. Not least of these will be the fund of supermarket group J Sainsbury, which withdrew its own £300 million account from Merrill Lynch shortly after Unilever. A win in court for the pension fund would almost certainly prompt other funds to examine closely their own contracts with their fund managers.
"There are a lot of other people keeping an eye on this and if they lose it could cost [Merrill Lynch] a lot more than what they're talking about at the moment," says one London fund manager.
Arrogant Mercury
Is there more than just a hint of Schadenfreude in the City of London over all of this? Certainly while Mercury was rising to the top of the UK fund management tree, through the 1970s, '80s and '90s, it didn't go out of its way to make friends with the competition. Now that it is being asked searching questions, people can't resist having a dig.
What annoys its rivals is the way that Mercury, during its ascent to such prominence, seemed to have no room for self-doubt (see box).
"They're not just supremely confident, they're arrogant," says a former consultant, since turned fund manager, who dealt with them in selection line-ups in the 1990s. "I remember on at least one occasion when they didn't win a beauty parade, the fund manager rang me up to say there must have made a mistake because they had not been picked."
If the purchase by Merrill Lynch, the departure of some high-profile managers and a slump in performance has done anything to dent that self-confidence, then it's no bad thing, say competitors.
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