‘Parasites’ May Drain Health of U.S. Industries
What can we learn from the takeover drama at Borg-Warner, the Chicago-based company that recently accepted a $48.50-a-share buyout offer from Merrill Lynch Capital Partners instead of a $48-a-share offer from takeover artist Samuel Heyman’s GAF Corp.?
Plenty. First we can learn that U.S. industry is not sunk in a slough of despond but is still fully capable of technological excellence, enthusiastic hard work and success. In a word, it is healthy
But, unfortunately, that health is threatened by parasites, by people and institutions living at American industry’s expense. In Borg-Warner’s case, those parasites may include not only the takeover artist and the Wall Street investment bankers backing him, but the corporation’s own management and the investors financing the leveraged buyout. The worrisome possibility is that the disease may be systemic.
Debt Burden
Strong words, but consider the facts. Borg-Warner, a 59-year-old company that makes auto parts and plastics, will be burdened by more than $4 billion of debt no matter who wins control in the tussle now going on. The Merrill Lynch group’s $48.50 offer expires May 8 but the stock market, pricing Borg-Warner stock slightly above that, anticipates a renewed offer from Heyman.
Either way, it will be hard for Borg-Warner, which last year earned roughly $266 million before taxes, to pay interest of around $320 million a year without cutting back capital investment and research spending in its highly profitable plastics business. Plastics is the jewel attracting Heyman, the one-time Connecticut real estate man who maintains that his chief aim is to build a major chemical company at GAF. So far, though, GAF has made more money in the stock market than in chemicals--$200 million in 1986 from Heyman’s unsuccessful takeover attempt on Union Carbide.
Heyman has a good eye for value. Borg-Warner’s plastics division, building on technology learned in World War II when it made synthetic rubber insulation for radar wiring, has developed into a technological and industry leader. It dominates the market for ABS plastics (acrylonitrile-butadiene-styrene), the kind that make up your telephone or automobile bumper. It’s a highly profitable business. The division, which accounts for less than one-third of Borg-Warner’s $3.4 billion in revenue, last year contributed about 60% of the total profit.
But that’s only present profitability. What’s ahead could be even better because the division, headquartered in Parkersburg, W. Va., has successfully developed a low-cost plastic that is capable of withstanding extreme heat or cold and therefore is eligible to replace steel in large parts of automobile bodies. If successful in tests now going on in Detroit, the development could mean a big step forward for American plastics technology and for Borg-Warner.
Big Bills Lie Ahead
Such breakthroughs don’t come easily or cheaply. To get to the latest development, Borg-Warner started thinking about plastic cars in the 1960s, and built 10 prototypes. Years of expensive research chemistry stand behind the new product--Borg-Warner invested $91 million in the plastics business last year--and the big bills lie ahead. The company would spend $200 million on a new plant if the car-plastic test is successful.
The question, of course, is would it--could it--do as much if it needed every cent for interest payments? When the debt burden is so high, “you find ways to cut capital spending that are not immediately visible,” says analyst Dudley Heer of Chicago’s Duff & Phelps research firm. The penalty for undernourishment today shows up in an uncompetitive business five years from now.
Why should this be happening? Borg-Warner’s management might win no prizes for brilliance, having made relatively unsuccessful moves to diversify over the last decade. But corporate headquarters has never starved the operating divisions for capital.
Now, however, times have changed and the shareholders seem to be demanding that management wring a higher stock price out of operations immediately, or sell the company for whatever it can bring. The theory is that such a process redistributes capital to the benefit of our economy. But in this case, the redistribution is cockeyed.
Does the economy benefit if a healthy business is sold to build fine homes for Sam Heyman, or to generate fat fees for his adviser, Drexel Burnham Lambert, or his investment banker, Blackstone Group--where former Commerce Secretary Peter G. Peterson is a partner? Does technology and industry benefit if Borg-Warner management, led by Chairman James Bere and President Clarence Johnson, pays out fees to Merrill Lynch or collects two years salary in golden parachutes?
The analogy of parasites, which do not kill the healthy hunting dog immediately but weaken it over time, seems inescapable.
