Signal’s Stock-Option Plan Stalled by Judge

Within hours after shareholders of the Signal Cos. and Allied Corp. Wednesday approved a merger that would form the nation’s 16th largest industrial company, dissident Signal stockholders won a temporary restraining order that prohibits their company’s executives from receiving more than $8 million in executive compensation payable before Feb. 1 of next year.

The order, by Superior Court Judge Jack Levitt, was issued pending an Oct. 2 preliminary-injunction hearing requested by attorneys for Signal shareholders, who last month filed a class-action lawsuit against the company.

The lawsuit alleged that La Jolla-based Signal and its executives would receive a “gigantic corporate windfall of almost $100 million” because of accelerated stock-option plans and so-called “golden parachute” clauses in the event of an unfriendly takeover of the merged company in the future.

A Signal spokesman described the court action as “a preliminary skirmish, but we still maintain that the suit is without merit.”

The court action came after shareholders overwhelmingly gave their consent to a $5-billion merger that would create a New Jersey-based company to be called Allied-Signal Inc. If results of Signal had been consolidated last year with Morristown, N.J.-based Allied, the new company would have earned nearly $800 million on $17 billion in sales. Assets would have totaled $13.5 billion, of which $1.4 billion would have been cash.

The merger was supported by 86% of Signal’s shareholders and 83% of Allied’s shareholders.

At special shareholders’ meetings Wednesday, both Allied Chairman Edward L. Hennessy Jr. and Signal Chairman Forrest N. Shumway defended their executive compensation packages.

Shumway said the stock-option plan being attacked in the shareholders’ suit was adopted two years ago to reassure “key employees” who had grown “very nervous” about possible takeover attempts.

The dissident shareholders who brought the suit are “assuming a lot of negatives, not positives,” said Signal President Michael Dingman. “I call (the package) prudent judgment because you have to ensure that the proper people are protected.”

The packages have “generated an emotional response among some people,” said Hennessy, who added that Allied’s stock-benefits package was needed to bring company executives in line with Signal’s compensation package.

Attorney William Lerach, representing the dissident shareholders, argued in court Wednesday that anti-takeover arguments “don’t apply” to Signal, because “no one is suffering, no one is threatened and no one is losing their job.”

Attorney Peter Benzian, representing Signal, countered that because Allied officials will actually control the merged entity, “Signal employees are facing uncertainty and they could . . . be induced to go to some other company.”

The merger will bring some “realignment and readjustment,” said Dingman, who will become president of Allied-Signal. “That’s to be expected when you create the nation’s 16th largest industrial company.”

That readjustment will begin after Oct. 15, when the new company receives a pair of reports being prepared by Allied’s and Signal’s top managers and two outside consulting firms. McKinsey & Co. is studying the new company’s staffing, while Booz, Allen & Hamilton is reviewing the company’s operations, an Allied spokeswoman said.

Allied and Signal will initially operate as separate units under the holding company. Officials acknowledged, however, that they will eventually reshape the company to fit an operations base that generates nearly 40% of its revenues from aerospace and high-technology products.

Sales Reduction Possible

“Restructuring is certainly the name of the game,” said Katherine M. Stults, analyst at Dean Witter Reynolds in New York. She cautioned that Allied-Signal’s “bottom line won’t mean too much in the short term” because of write-offs and non-recurring expenses as Allied-Signal restructures.

Renovation could eventually reduce Allied-Signal’s annual sales by as much as $3 billion, according to Laurence Lytton, a vice president with Drexel Burnham Lambert in New York. Allied-Signal will readily absorb one-time charges and lower revenues because “sustained earnings power is the important thing,” Lytton said.

Although Allied and Signal both have business segments that are likely candidates for unloading, neither company will undertake needlessly quick sales, according to Irving Katz, a financial analyst with San Diego Securities, who added: “You strike when the iron is hot, and the market is not hot.”

“There’s no reason to force things,” Lytton agreed. “This is a cash-surplus company that has an enormous amount of (unused) debt capacity. They’re not anxious to rush in and break up operations that are running smoothly.” Allied has generally dropped its acquired minority investments in other companies, said Katz, who added that Signal’s minority investments “just won’t fit.”

Signal has already said that it will dispose of its remaining 10.3% common stock interest in Mack Trucks “as market conditions permit.”

Allied “has historically lumped its ‘other operations’ into what it calls the industrial and technology group, and that will continue to be the focus of its divestitures,” Lytton said.

Times staff writer Paul Richter contributed to this article from Morristown, N.J.