In ‘20s, It Was Investor Pools; Now Takeovers

<i> John F. Lawrence is The Times' economic affairs editor</i>

In the Roaring ‘20s, a group of investors got together secretly, pooled their resources and laid a plan to run up the price of RCA. Their plan worked, boosting the stock more than 60 points in four days and helping to fan the speculative fever of the time.

Why recall such history now? Because it may help us understand a phenomenon in today’s stock market, the corporate raid.

On the surface, there’s little similarity between the manipulative pools of the 1920s and the raids of today. The pools had no intention of taking over the company, just cornering the market. Moreover, the operation was conspiratorial.


In many of today’s raids, it is ostensibly an individual or his company that begins the action alone. The first official announcement, made after a major block of stock has been amassed, is that the purchases are for investment only.

Because this individual has a reputation for going after companies rather than just investing in them, speculators begin buying the stock in anticipation of the battle. As a result, he has an almost immediate paper profit. He also has a change of heart and announces that he is calling upon others--commercial lenders, other raiders and other investors--to form a group capable of bidding for control. It’s now a group, but it’s also all very open.

Has Secret Plan

Suppose, however, it were determined that the true intent of the raider, from the beginning, was to launch a takeover bid, a move that either could succeed or force the target to buy the raider out? In that case, he has had a secret plan that will drive the price of the stock up and only he has had a chance to get in at the bottom.

A U.S. District Court, ruling in one of the many Unocal-T. Boone Pickens Jr. lawsuits, raised just such a possibility. It found Pickens’ initial “for investment only” statements less than convincing. As part of its reasoning, the court said that Pickens’ self-described practice of shredding notes and other documents “strongly suggests a studied effort by Mesa (Pickens’ company) to conceal its true intent.”

What of some of the other well-known players? Is the public getting an accurate picture of their true intent?

It’s not possible to read minds, but a document that is part of a court record unsealed at the request of American Lawyer magazine is interesting. It is, the publication says, a memo written in 1980 by Carl Icahn, another central figure in takeover battles, to help recruit partners. The memo, as reprinted in the American Lawyer, reads:


“It is our opinion that the elements in today’s economic environment have combined in a unique way to create large profit-making opportunities with relatively little risk. . . . It is our contention that sizable profits can be earned by taking large positions in ‘undervalued’ stocks and then attempting to control the destinies of the companies in question by:

a) trying to convince management to liquidate or sell the company to a ‘white knight’;

b) waging a proxy contest, or;

c) making a tender offer and/or;

d) selling back our position to the company.”

Such may not be the logic of all raids. Indeed, Pickens makes it plain that he’d like to run Unocal and believes that he can run it better. But the Icahn memo does lend credence to the view that some of the takeover surge is little more than a sophisticated stock market play, which is what the pools were in the ‘20s.

Possible Insider Trading

To be more like a pool, of course, it would have to be shown that a raider made those first stock purchases not on his own but with other backers in on the plan. That might involve insider trading.

But it may be easier to arrange some of the recent takeover consortiums than even the old pools where investors had to put real money on the line. Investors and lenders who back a raid ultimately may never have to cough up any money; yet they get fees for committing funds to a takeover attempt, win or lose.

If raiders were deprived of the profit they can make on their initial block of stock, they’d have a tougher time handling the financial risks of a takeover attempt. It might leave the field to those who really want to run a company.