Penta founder Jaroslav Haščák knows that not everybody is going to be happy with what his firm does, unless, he says, Penta "buys a bakery and starts baking buns".
"Penta was founded in order to make money. For another thing, we do everything that the law does not forbid us. And as far as ethics or morals go, these are questions that require more time and space to answer."
Back then, The Slovak Spectator had its offices at Penta's current Križková Street 9 address in Bratislava. The dust was thick and the walls thin; the elevator was a cramped, doorless affair. Now that same elevator is a gleaming machine rising silently through the immaculate floors; everywhere, glass and scrubbed stone speak of massive investment.
So is has also gone with Penta, which since its 1997 takeover of VÚB Kupón, the largest investment fund in the country, has never looked back, using stakes in Slovak blue chips such as steelmaker VSŽ, insurer Slovenská poisťovňa and the IRB and VÚB banks to do what its owners founded the company to do - make money.
For Jaroslav Haščák, a member of the board of directors and one of Penta's founders, the enmity of at times the state, the business community and the wider public is an inevitable part of Penta's financial arbitrage business - buying up undervalued assets and shares and selling them on to the highest bidder.
The Slovak Spectator returned to its old stomping grounds July 25 to ask Haščák what many business professionals seek to know - who is Penta, and what does it want?
Laws protecting minority investors still leave them open to 'tunnelling', or asset-stripping by majority owners.
photo: Vladimír Hák
Jaroslav Haščák (JH): My father was a secondary school teacher, and my mother taught at an elementary school.
TSS: How did you acquire schooling or training in finance during the communist era?
JH: The four of us who own Penta Holding were classmates. Two of us, Martin Kúšik and I, attended high school in Banská Štiavnica together. I then went in 1987 to study in Moscow at the Institute of International Relations where I met Jozef Oravkin and Marek Dospiva.
TSS: You and Dospiva studied Chinese, while Oravkin learned Persian, and Dospiva now sits on the Slovak-Israeli chamber of commerce. Did such a broad base shape your later business dealings?
JH: I spent five years in Moscow, and then my last year of study in China at Beijing University. I was trained to be a career diplomat, but didn't end up pursuing this branch. While I was in China I met a classmate who worked at the Slovak embassy in Beijing, and from what I saw and what he told me I decided I didn't want to be a diplomat.
While I was in China with Dospiva, we started a company in the Czech Republic in the clothing business, buying Chinese clothes and exporting them to the Czech Republic and selling them. We started to put together our first capital, and when we returned to Slovakia we started trading in shares and options. We were joined by Martin Kúšik and started a firm trading in stock market shares. Oravkin joined us in 1998.
TSS: At 28, in July 1997, you found yourself at the centre of what was then called 'the deal of the decade' - the sale of shares in the VÚB Kupón investment fund, which at the time controlled about seven billion crowns in assets, and the fund's takeover by Penta. How did this come to pass?
JH: One of the main parts of Penta's business is financial arbitrage. Thousands of companies do it in the West, and we try to practice it in Slovakia. This means we look for imbalances in the market, and then use them to make money.
This is closely related to the VÚB Kupón deal. The fund's NAV [net asset value - ed. note] was about 1,300 crowns, but shares were being traded for about 500 crowns - a bigger discount than is normal for such funds. We knew its portfolio pretty well, and there were quite a few blue chips there. We managed to convince an English investor named Regent Pacific to begin buying shares together on the market. The aim was very simple - to buy as many shares as possible and then to come to a deal with the majority shareholder, VÚB. They bought about 17% of the fund; VÚB began to worry that they would lose control, and began negotiating with us. A sort of quiet cooperation grew up between VÚB and Regent; Regent's aim was to buy them out at a good price, at a discount well below NAV. In the end they didn't come to an agreement, and we managed to convince Regent to sell the shares to us. We didn't have the necessary funds to buy them, so we agreed on long-term financing and a six-month payment calendar. We thus became the second largest shareholder after VÚB, and managed to convince them to sell us their stake, which gave us about 60% altogether.
Then, after getting VÚB Kupón, we split it up into two companies - Istrofin and Intermark - and divided the assets on a 45:55 ration between them. We were 100% owners of Intermark; we liquidated the firm, achieved NAV, and used it to pay off the loan we had taken.
TSS: You were criticised at the time for having taken over VÚB Kupón and, in turning it into a joint stock company, managing to avoid Finance Ministry supervision and the stricter laws governing investment funds...
JH: What we did with VÚB Kupón and the financing of the deal was an absolutely normal transaction, and legally clean. As far as the ethical or moral aspects go, that's a longer story, but I think it was ethically alright as well.
In turning the VÚB Kupón investment fund into a normal joint stock company, and removing it from the supervision of the Finance Ministry, our goal was to resolve a weakness in the investment fund law of the time, which prevented the people administering the funds from obtaining the highest yields possible. With this aim we did everything the law permitted, and no more.
The law said the fund could accumulate a maximum of a 10% stake in any company in its portfolio. To this day, the protection the law offers to minority shareholders is miserable. The culture of relations with minority shareholders is even more miserable - whoever has 51% of shares in a company is the king, and the rest have their property stolen from them and 'n' other things. With our 10%, all we could do was to watch how most of the majority shareholders in companies we owned stakes in stripped the assets. That's one of the key reasons we elected to carry out this fusion and accumulation of stakes.
TSS: What happened then to Istrofin? That firm still had 160,000 small shareholders, but after Penta sold its stake in Istrofin, these shareholders complained that they had no idea what was being done with their assets. Weren't they the real victims in this takeover?
JH: While we were involved in Istrofin and with these 160,000 shareholders, I personally attended all general assemblies and presented detailed information in our yearly reports. We went far beyond what the law required. But in 1998 we sold the firm Kvinta which had a share in Istrofin. The manner in which the new Kvinta owners then acted towards these small shareholders is their business.
Let me explain our philosophical approach, which may answer some of the questions you are about to put. Penta was founded in order to make money. For another thing, we do everything that the law does not forbid us. And as far as ethics or morals go, these are questions that require more time and space to answer. But it's very relative, deciding what is moral or ethical. It's possible that we have different ideas in this area than do media representatives or members of wider society.
TSS: After you took over VÚB Kupón, in later years we saw Penta involved in minority shareholder battles in the same firms that VÚB Kupón had owned stakes in - chemicals maker Chemolak and wire firm Drôtovňa in 1998, electro-equipment maker Elektrovod and tile manufacturer Novoker in 1999. Was this part of the original business plan?
JH: We did an analysis of whether it would be better to keep or sell these stakes, and almost all of us were in favour of sale. Wherever we faced a private majority investor, we decided to sell. We started talking with these shareholders as far back as 1997, offering them three possibilities: sell to us at a reasonable price, buy from us at a reasonable price, or let's administer the company jointly, with control on our side. But we kept getting the answers 'no, no, no', so we used the power we had under the law.
TSS: You frequently used the tactic of getting a court injunction from a judge preventing the majority owners from exercising their shareholder rights, and then moving in and creating such legal problems for the majority owner that he was forced to negotiate with you on your terms. On the other hand, Finance Minister Brigita Schmögnerová recently complained that the courts had not honoured a single ministry request to have a bankruptcy trustee changed on a bankruptcy case. How do you explain the different results you and she seem to have had with the courts?
JH: We were successful in putting legal pressure on majority shareholders to act as they were supposed to act. There are a number of reasons that explain our different experiences. The first is our professional legal approach. The lawyers who work for the Finance Ministry cannot compare to the lawyers who work for us. There is a huge difference in the quality of people. They have bad lawyers, and the steps they take as a result miss their aim.
Another question is management approach. At the ministry, they still take this 'American approach' you used to see in movies whereby a client has a lawyer and can take a holiday, safe in the knowledge that when he returns the matter will be taken care of. We don't believe lawyers can solve anything without our managers studying the case and getting involved. Lawyers are, after all, only advisors. With us, if you call at 11 at night and need something, I'm still here and I'll get it for you. At the ministry, nobody is in the office. I put so much time into my work because I enjoy it, but at the ministries it is completely the opposite. In my opinion, state employees exhibit a kind of alibi-seeking behaviour - they have to act in a way that they can avoid making mistakes. Their main pre-occupation is to keep their jobs, and they feel it's better to do nothing than to act, because that way they can't make mistakes. On the other hand, I can afford to be aggressive, in the good sense of the word.
Take the case of [state-owned insurance company] Slovenská poisťovňa [where Penta currently owns about a 7.2% stake - ed. note], where I had an interview with Minister Schmögnerová. Her main argument was "you bribe judges - why should I deal with you people when you are corrupt, and this is the source of your know-how?". She refused to deal with the main legal differences that separated us.
TSS: Was she right?
TSS: Have you encountered corruption in the legal sphere?
JH: I'll tell you openly that in my position I have never seen someone take a package of money to a judge. But 'n' times I have run across inexplicable decisions by judges which defy logic and beg questions of the reasons the judge had for making such a ruling.
In our kind of business, we are involved in dozens of court cases; we get to know the work of individual judges and can therefore predict what their legal opinion is likely to be.
TSS: Much has been said of the holes that Slovak legislation contains as well...
JH: It's full of holes, and some laws can't be followed at all. I'm surprised that we're even able to function on this market. Look at the tax law - every second paragraph is difficult to interpret. The ministry interprets it one way, the tax office another, taxpayers still another. It's terribly difficult to work with a great number of laws. Many have two possible meanings; there is great conflict over whether the glass is half full or half empty.
TSS: You've said you do all the law doesn't forbid. Have such poor laws allowed you to do more than you otherwise might have been able to?
JH: They have actually really complicated our lives. We are a company which functions best in a standard legal environment. What makes us competitive is our legal expertise and our approach; the more standard the laws the better.
TSS: You have used legal challenges to slow the privatisations of Slovenská poisťovňa and state banks IRB and VÚB, as well as to make over 200 million crowns buying up shares in steelmaker VSŽ that the state suddenly needed last year to make sure its deal with US Steel went down smoothly. In all of this you have frequently made the state look a bit foolish. How has the state responded to your activity?
TSS: But you still have to work together on many deals, such as the upcoming privatisation of Slovenská poisťovňa...
JH: Our relationship with the state is frequently schizophrenic, as in some transactions we are with the state and in some against. Many times their feelings have an irrational basis, such as wounded vanity or envy.
TSS: Privatisation Minister Mária Machová said last year she was afraid that if the state didn't settle with you over VSŽ, the whole deal could go down the tubes. Is there some fear as well in the state's attitude towards you?
JH: I think there is. We are corporate raiders, in the same way that in the United States someone buys a major stake in a company and then bangs on the door of the company saying 'I'm here, and I want to see how you are handling my property'. Take the case of VSŽ or VÚB or any number of state firms - some political nominee is sitting there who often has no inkling of what the company is about, and he's looking after our money. I have to watch while he fritters away my investment. It's logical that I bang on his door not only to find out how he is using my money, but also to find a way to have some say in it. Of course he's not happy - he has his warm little post, and has someone there to tell him what to do.
TSS: What does the average citizen think of you, especially when a lot of your success at the expense of the state has to be paid for by the taxpayer?
JH: Well, of course we live in this country and have families and neighbors. But it's a problem that is objectively connected with what we do. Speculators are not loved anywhere in the world, especially in Slovakia. As long as we continue doing what we're doing, and don't buy a bakery and start baking buns, this is something we won't overcome. The average Slovak citizen is not fond of the wealthier corporate elite. But it's a tax on what we do - we are financial speculators who make money from market imbalances. When these imbalances involve the state, it's the tax payer who foots the bill. Citizens don't like us, and in my opinion will not like us in the foreseeable future.
TSS: Schmögnerová in 1999 spoke of the "huge tax" that political sponsors have exacted from political parties in the post-1998 period for the financial gifts they gave before the last elections. To what extent, in your opinion, are economic groups still connected to political parties?
JH: I think it's still pretty connected.
TSS: Penta itself gave the non-parliamentary Smer party of Robert Fico a million crowns in 2000. Why Smer?
JH: It wasn't to Smer, but to a foundation they started. It was on the day of remembrance for the Holocaust, and we felt the need to participate.
TSS: Do you sponsor any other parties, or their foundations, in any way?
TSS: Harvard Group vice-president Pavol Hollý told the daily Pravda in 1998 that he thought Penta was closely connected to the Vladimír Mečiar government because of its relations with Karol Melocík, a former member of parliament for Mečiar's HZDS party and former head of VÚB Invest Holding. Penta's Jozef Oravkin still sits on the board of directors of the Lanvin company with Melocík. Can you comment?
JH: We bought an 80% stake in VÚB Invest Holding from VÚB, where Mr. Melocík sat in their statutory organs. To a certain extent it may appear that a connection existed. But we were doing business while the HZDS coalition [the basis of the 1994-1998 government of Prime Minister Mečiar - ed. note] was here, and we've continued doing business afterwards as well. In economic matters it's not possible to avoid contact with politicians. We are apolitical, in that we will talk to any party, but in political philosophy we are closer to the right wing. Mr. [Deputy Prime Minister for Economy Ivan] Mikloš is perhaps the best-known representative of this group.
TSS: Penta has recently become engaged in purchasing some of the 100 billion crowns in receivables from hospital bank Slovenská Konsolidačná that were cut out of state banks prior to their privatisation. Has the fact that some Penta members used to hold high positions in VÚB...
JH: Only one.
TSS: Well, besides Oravkin, who used to be the head of VÚB Invest, there is Ľuboš Ševčík, who was the head of mortgage banking at VÚB, and who is still associated with Oravkin in Lanvin. Did these people help you to identify which receivables were more easily recoverable than others?
JH: Ševčík belongs to the same category as Melocík - he was only a member of these same organs simply because he held a position in VÚB. But we didn't work with him in any other way. In any case, these people didn't have anything to do with bad loans, because they didn't work with them.
So the answer to your question is no, they didn't provide any help at all. With such receivables there is a normal process of due diligence that all investors go through. The only advantage Penta has in comparison with foreign institutions bidding for these receivables is that we are a local player and know the market well. But the fact is that we don't have any competition when it comes to reclaiming receivables in Slovakia; we have receivables in the value of 16 billion crowns. We may have competition from foreign firms, but they are usually interested in larger packages than are on offer here.
TSS: Through the Dunajservis firm you bid for, and won, an 87% stake in the shipping firm SPaP in June. The tender was then cancelled amid claims the FNM privatisation agency had sold the company for too low a price - 311 million crowns - and two parties recalled their FNM appointees. Why was there such a big fuss?
JH: The FNM set the conditions of the tender as follows: 40% of points awarded for payment conditions, 50% for the price bid, and 10% for each bidder's business plan for SPaP. Dunajservis according to the first two categories, which can be measured objectively, submitted the best bid. With regards to business plans and intentions, this is a subjective category in which the tender commission says one intention is good and another bad. But 90% of the decision was just mathematics, and this is why Dunajservis won.
As far as purchase price goes, none of the politicians who made public statements on the matter has any idea of what SPaP is all about. For example, they used completely nonsensical arguments such as equating the firm's basic capital with its worth. That's sick. It's a matter of basic education. And to talk of the value of the land that Dunajservis acquired - the land belongs to the state, not SPaP, so Dunajservis didn't buy it at all.
The cancellation of the tender was brought about by several factors. Our competition played maybe a 40% role, specifically the firm Konzorcium, which is connected to the Hungarians and the SDKÚ [party of Prime Minister Mikuláš Dzurinda - ed. note]; 20% was caused by the fact that it was we, Penta, who had won; the other 40% was a complex of reasons, among them political, such as the desire of [fired Deputy PM Pavol] Hamžík to throw something back in Dzurinda's face.
TSS: You recently increased your stake in SP to over 7%, and have said you will do further at an August capital increase. The memorandum of agreement you signed with the Finance Ministry last April says you can sell your stake with the government's if the investor wants a larger share than is on offer. Do you have signs that such interest exists?
TSS: What signs?
JH: We know all the players on the market, and we know their opinions towards this privatisation. Foreign investors will try to buy as large a stake as is possible to buy.
TSS: As a corporate raider, do you have any real competition in Slovakia?
TSS: Do you ever use personal bodyguards?
JH: Because I think we have many enemies.
30. Jul 2001 at 0:00 | Tom Nicholson