Secret Negotiations Began in March : Behind the Scenes of the Allied-Signal Merger
At first, the three executives from Allied Corp. and Signal Cos. discussing a possible merger over a clandestine dinner “just shriveled up” when they were spotted by Eastern Airlines President Frank Borman in a Phoenix hotel restaurant.
“Hey, Ed!” shouted Borman across the room to Edward L. Hennessy Jr., chairman of Allied Corp. A shocked Hennessy managed to return the greeting.
He and his dinner partners--Signal Cos. Chairman Forrest N. Shumway and President Michael Dingman--thought at the time that their secret meeting had been found out.
They had gone to great lengths to keep the gathering under wraps: Hennessy and Dingman had booked reservations at the Marriott’s Camelback Inn under the name of Dingman’s secretary, and they referred to their respective companies only in code--Allied was “East” and Signal was “West.”
But to the executives’ relief, Borman didn’t recognize Shumway or Dingman, and the meeting continued that night and the next day.
What had started as a tentative discussion about a joint Signal-Allied bid to buy Hughes Aircraft had matured into a discussion about merging Signal and Allied. And by the time Hennessy, Shumway and Dingman left for their respective coasts March 6, they had concluded that a joint bid for Hughes made little sense but that a Signal-Allied marriage would be a “tremendous fit.”
On Thursday in New York, the three executives met separately with the media and securities analysts to explain quite without secrecy how their new firm, to be called Allied Signal, would become “one of the world’s most advanced high-technology and engineering companies.”
They also said it would have been “foolhardy” for the new firm to bid on Hughes Aircraft. “We have enough on our plate without taking on an additional opportunity,” said Hennessy.
The companies said Allied would begin today its cash tender offer for 22 million, or 20%, of Signal’s shares at $45 per share, or $990 million. Each of Signal’s remaining shares will be exchanged for one share of the new Allied Signal, while each Allied share will become one share of the new company.
If the $45-per-share figure were to be applied to all of Signal’s 110 million shares outstanding, the deal would be worth nearly $5 billion, analysts said.
La Jolla-based Signal and Morris Township, N.J.-based Allied are each Fortune 500 companies with complementary operations in the aerospace, automotive and oil and gas industries. Only 15 U.S. industrial companies generated more revenue last year than the two companies’ combined $16.7 billion, although Hennessy on Thursday tried to downplay that aspect of the merger.
“I don’t care where we are on the Fortune 500 list,” he told reporters in New York. “I want to be associated with a company that (manufactures) good products, is growing and makes a decent return for its shareholders.”
Indeed, combined revenue could be trimmed slightly in 1985, officials said, because Allied is now selling 50% of its Union Texas Petroleum subsidiary for $1.4 billion in cash and $300 million in Union Texas preferred stock. In addition, Shumway said Thursday that Signal wants to sell its remaining 10% interest in Mack Trucks. It sold 90% of its interest in 1983.
What remains are the problems inherent when the nation’s 26th-largest company joins forces with the 61st largest. In addition to an upcoming shareholders vote on the merger, the new Allied Signal will face the scrutiny of both the Federal Trade Commission and the Justice Department, which will comb the merger in the next 30 days for possible antitrust violations.
Although there may be some minor overlap between Signal’s Garrett Corp. and Allied’s Bendix Corp., Hennessy said that any potential antitrust problems are “solvable.”
The real stumbling blocks may be organizational and logistical.
Allied and Signal said they have each appointed one representative to a joint task force that will in the next few months fashion a new corporate structure for the merged Allied Signal.
Because Signal employs fewer than 250 corporate headquarters employees, Hennessy said he foresees none of the problems faced in 1983, when Bendix’s 800 headquarter workers were folded into Allied.
Others are not as sure.
“There’s going to be quite a shakeout,” said Alan M. Johnson, principal of Sibson & Co., a Princeton, N.J.-based executive compensation firm. “You only need one chief financial officer, one chairman of the board, one chief executive and one chief legal counsel.”
Personalities could also collide at the very top.
“It’s not going to be easy,” Shumway said. “You don’t put two companies of this size together, with relatively strong personalities at the top of each, in a minute.”
The three executives are hardly strangers. Hennessy has known Shumway for about 15 years; both served on the Grace Commission, a private-sector consortium that studied, at President Reagan’s request, inefficiencies in the federal government. Hennessy has known Dingman for two decades and served with him two years ago on a Securities and Exchange Commission panel that studied merger-and-takeover regulations.
Hennessy will become chairman of Allied Signal, which will be based in Morris Township. Dingman will become president and will move from La Jolla to New Jersey, where he will be groomed as Hennessy’s heir apparent. And Shumway will become vice chairman and chairman of the executive committee of the new company, remaining in La Jolla.
Shumway and Dingman likely will receive raises to match Hennessy’s annual salary, Hennessy said in an interview Thursday. Last year, he was paid $1.1 million in salary and bonus; Shumway and Dingman each made $927,000.
Determining how the organizational pieces would fit into a merged company was at the heart of the “on-again, off-again” negotiations between the two companies, Hennessy said. After the secret meeting in Arizona, Hennessy went abroad for about three weeks but stayed in touch with Shumway and Dingman by phone.
Meanwhile, both companies’ financial advisers were brought in--Lazard Freres & Co. for Signal and First Boston Corp. for Allied. It was First Boston, which also does some consulting work for Hughes Aircraft, that first urged Hennessy to consider a Signal merger.
Following Signal’s annual meeting in late April, at which he denied that a merger with Allied was pending, Shumway left for a two-week business trip to China. Before he departed, he “blessed the documents” that formed the basis of the merger agreement, Hennessy said.
Negotiations continued between Dingman and Hennessy, but rumors of a pending merger began spreading on Wall Street.
Signal’s stock climbed $6 per share between May 8 and May 14, while Allied’s stock dropped $1.25 per share during that time.
By last Friday, nearly three dozen people were brought into the discussions, as teams of lawyers and accountants pored over the fine points of the merger agreement. That word did not leak out weeks before “was pretty damn impressive for a deal this size,” observed one executive who was involved in the negotiations.
During the 48 hours leading up to the merger’s announcement, “we had monopolized half the available limousines in New York,” as Signal and Allied management shuttled between airports and offices, according to the executive.
The announcement was originally scheduled for Thursday, but New York Stock Exchange officials on Wednesday morning halted trading of both Signal and Allied stock and gave the firms only three hours to make an announcement before trading was resumed.
Bill Ritter reported from San Diego and Robert E. Dallos from New York. Times staff writer Greg Johnson also contributed to this story.
