Takeover Targets Show New Vigor Against Raiders : Varied Defenses Are Increasingly Effective, Some Analysts Contend

It has been tough to score the wrestling match between corporate managements and those who bid to take over their companies.

While many observers contend that raiders have had an edge in the contest for years, some analysts now see the advantage shifting toward management. Bylaw changes, “poison pill” defenses, and other devices such as limited partnerships are being exploited with new skill, they say, giving managements important new strength.

The many-faceted defenses of Unocal, Uniroyal and Crown Zellerbach are among the most recent examples cited. Crown Zellerbach last week turned back a takeover bid by Anglo-French financier Sir James Goldsmith. And even if the other two firms lose their independence or emerge heavily burdened with debt, their defenses have demonstrated a new vigor, these observers assert.

To be sure, other specialists contend that the advantage still lies with the bidder, particularly those with determination and deep pockets. But many contend that there has been a change.

“Managements may not be out of the woods, but they’re feeling more comfortable,” said G. Chris Anderson, a managing director of Drexel Burnham Lambert Inc., an investment banking house. “There’s no question, some of the techniques are slowing down the takeover process and causing some less aggressive (bidders) to leave the arena.”

Agrees John Olson, energy analyst with Drexel Burnham in Houston: “Managements have gone to school in the last year and taught themselves to put up much sturdier defenses.”

The most effective of the defense tactics may be the “poison pill.” In typical form, the “pill” is created when management gives shareholders the right to buy additional shares with the occurrence of a triggering event, such as the acquisition by an investor of a certain percentage of company shares. The shares are priced so as to make a takeover prohibitively expensive.

The legality of the device is at issue in a case before the Delaware Supreme Court, on an appeal from a trial court decision that upheld the right of Household International’s management to use the tactic. But some specialists already are saying that a decision to uphold the move’s legality would permanently shift the balance in management’s favor.

“That would certainly tilt the balance in favor of management,” said James Maher, a managing director of First Boston Corp., a major New York investment banking firm.

The poison pill has been the bulwark of Crown Zellerbach’s defense against Goldsmith, who controls 9.4% of the company’s shares and offered to purchase as much as 78.4% of the company’s stock.

Goldsmith was forced to condition his offer on the forest-products firm’s agreement to defuse the poison pill. And on Friday, he abandoned his bid for control, citing the company’s restructuring plan and “confusion” over an uncertain competing bid from Mead Corp.

Learning From Others

Indeed, some analysts say Crown Zellerbach’s strategy illustrates the way companies are learning from the unhappy experiences of their fellows.

Lawrence A. Ross, analyst with the Paine Webber brokerage, notes that forest-products company Diamond International Corp. was acquired by Goldsmith, while St. Regis Paper Co. paid the financier “greenmail” (a premium for his stock) to get rid of him. Crown has brought suit against Goldsmith and withheld its shareholder list, both in efforts to slow him down.

While Crown Zellerbach is likely to end up dramatically restructured, the company’s defenses gave its board greater bargaining leverage.

The company hired leading takeover lawyer Martin Lipton to prepare its defense “which they must have worked on for a year,” Ross said. Crown Zellerbach “definitely put up a better fight than lots of others.”

Unocal and its Chairman Fred L. Hartley have drawn comment for a ferocious defense that has seemed to evolve almost daily. The defense is remarkable for its creativity, analysts say, and for the fact that it comes from a major oil company fabled for its conservative style.

Faced with a two-step, $54-a-share tender offerfrom an investor group led by T. Boone Pickens Jr., Unocal offered a poison pill--it would buy 49% of its stock for senior notes worth $72 per share if Pickens ended up acquiring a majority interest. The $6.28-billion move would have wiped out Unocal’s equity and made the company an undesirable acquisition.

To appease shareholders, Unocal next proposed to spin off 45% of its domestic oil and gas reserves into a master limited partnership. Such partnerships have been used by such smaller companies as International Paper, Transco and Lear Petroleum to generate cash and arouse investor interest that translates to a higher stock price.

And on Tuesday, Unocal offered to buy about 29% of its shares for $72 apiece even if Pickens fails in his takeover attempt. (If Hartley has his way, Pickens won’t be eligible for the offer--causing one Wall Street investment banker to dub the offer “reverse greenmail.”)

Hartley is quick to admit that piling on the debt with such an offer runs against the grain of a businessman who prided himself on keeping Unocal’s debt burden the lowest in the oil industry, but it may help him preserve the company’s independence.

No matter how the battle goes, Unocal’s defense will be long remembered.

Analysts say the oil firm’s example is likely to spur other natural resource firms to establish limited partnerships. And some contend, too, that Unocal’s defense demonstrates that the lesson of earlier oil-company takeover efforts were not lost on Hartley and his advisers.

M. Craig Schwerdt, analyst with the brokerage of Morgan, Olmstead, Kennedy & Gardner in Los Angeles, said Unocal may have fashioned a defense of “intentional confusion.”

“When you reveal your hand early, you give away your options and the advantage goes to the raider,” he said. “You ought to keep your big artillery out of sight until the very last minute.”

Kept in the Dark

In the current fight, analysts and shareholders have been in the dark until the last possible minute. Unocal also waited to disclose a vote of directors that changed company bylaws so that items could only be added to the agenda of the annual meeting well in advance of the session.

The bylaw change was not disclosed until Pickens began his bid, forcing him to go to court to seek annulment of the change that would have barred him from proposing a separate slate of directors. The court has declined to rule on that specific point.

The Unocal defense will also be remembered for the company’s suit against Security Pacific National Bank, alleging that the bank improperly helped Pickens round up financing while also working for Unocal. The move is seen as a sign that banks are feeling mounting pressure to refrain from lending for hostile takeovers. Unocal’s management is not alone in its experiments in anti-takeover tactics. Last year, Houston Natural Gas Corp. found itself confronted with a bid from Coastal Corp. The company had none of the usual protective charter amendments, such as staggered terms for the board of directors, or the “fair price” amendments that bar a bidder from offering different terms to different shareholders.

But Houston Natural Gas found an effective strategy. “They made an appeal directly to the state’s political Establishment,” said Drexel analyst Olson in Houston. “When the attorney general threatened to cancel Coastal’s state (utility) charter, that’s when Coastal blinked.”

Houston Natural Gas preserved its independence, although it spent $120 million to buy back Coastal’s stock, Olson noted.

Courted Shareholders

Only this month, Uniroyal used a straightforward approach to preserving its independence. Faced with a hostile takeover bid from New York investor Carl Icahn, the chemical and rubber-products firm mounted an all-out investor relations campaign to convince shareholders that the company’s stock would be worth more if the company remained in its stewardship.

“They put a full-court press on the shareholders--phone calls, telegrams, you name it--and they prevailed,” said Jim Alexandre, analyst with Donaldson, Lufkin and Jenrette. Preliminary results of the shareholders vote, announced last week, indicate that management rolled up 68% of the total, only a hair more than the required two-thirds plurality needed for two anti-takeover measures.

“Frankly, we were surprised,” said Alexandre, noting that much of the company’s stock is in the hands of the institutional investors that often decide in favor of a short-term gain.

As they experiment with such strategies, managements continue to adopt anti-takeover charter amendments that they hope will win them additional time and bargaining leverage, if not keep them independent.

Researchers at the nonprofit Investor Responsibility Research Center in Washington say that about 195 of the Standard & Poor’s 500 companies had such amendments as of last October; about half that number had adopted them in 1983 and 1984.

This year’s fad, they say, are “super-majority lock-in” amendments that require an 80% shareholder vote to change company bylaws related to staggered boards, director nominations or the introduction of agenda items.

Tactic Is Spreading

So far this year, researchers have noted the adoption of 47 such amendments among 750 public companies they follow, compared with only a “handful” for the same period in 1984, said center analyst Ron Schrager.

The center has also found evidence to indicate that anti-takeover amendments may help firms resist takeovers. The group sampled 36 firms with with anti-takeover amendments that faced bids between 1974 and 1979, and a sample of 32 without such amendments that were also faced with takeover bids.

None of the firms without such amendments survived a takeover bid, while 39% of those with such amendments remained independent, the group found.

Both managements’ anti-takeover tactics and the strategies of raiders have drawn criticism, including in the halls of Congress. Hearings are scheduled throughout the spring to consider legislation to deal with purported excesses of raiders and incumbent managements.

But legislators, while noting growing concern in Congress and elsewhere, are cautious in predicting the likelihood of new statutes.

“When you talk about reform, you’ve got to talk about imposing new rules on both sides, management and bidders,” said Rep. Al Swift, a Washington Democrat who is a member of a House subcommittee dealing with the subject. “A lot of us don’t like a lot of things we see going on, but we’re finding how difficult it is to come up with legislation that’s fair to all sides.”