Raiders Sour Workplace, Lower Competitiveness : It’s In Our Interest to See Congress Write Tough Anti-Takeover Legislation

During the present session of Congress, it is likely that legislation will be passed that provides more regulation of hostile takeovers. Consequently, it is important for American voters to become informed about what is at stake and to communicate their views to members of Congress.

Essentially, what is at stake is American competitiveness, and along with it, a large number of American jobs, especially better-paying jobs. Yet most of the press coverage of hostile takeovers dwells mainly on how they increase profits for shareholders and shake loose entrenched management.

This is a short-range view of the effects of hostile takeovers. It is also partially erroneous due to a misconception that, in a hostile takeover, competent management replaces incompetent management. This is a myth created by raiders and others to justify the huge profits they reap from hostile takeovers. Raiders rarely attack poorly run companies, because it would be much more difficult to raise the money to buy them. Share prices of companies involved in hostile takeover maneuvers do increase, often dramatically. But the run-up in price is due to the process, not because of any value added; ultimately, share prices are determined by how well companies compete in world markets.

Competitiveness is the bottom line. A company that isn’t competitive can’t do much for shareholders, employees or anyone else. However, hostile takeover mania undermines competitiveness. Hostile takeovers, as well as the threat of takeovers, detract from competitiveness because of the adverse effects on innovation--the process of getting new and improved products into the market place. They cause dissipation of the most important part of the innovation resources--skilled personnel--and undermine teamwork.

Experience demonstrates that a high percentage of senior executives leave after a takeover. However, increased turnover is not confined to members of senior management. Employees at all levels fear losing a job, or getting sidetracked from a chosen career path.

For many employees, these concerns are replaced by the reality of layoffs or firings due to new plans, job overlaps, or budget cutbacks required to help pay for the cost of the takeover.

For employees who have the choice of continuing to work for the acquired company, there is a widespread feeling of disgust and resentment over being victimized by a raider who displays little concern for them. Consequently, many who can find other jobs leave. Many of those who stay are disillusioned and have less commitment and loyalty to their companies. For example, a recent survey by Industry Week magazine showed that nearly 60% of employees are less loyal to their employers than five years ago, and the major cause cited is takeover mania.

Lack of commitment and loyalty, along with distrust, creates a sour climate for teamwork, which is essential for timely and efficient innovation. Teamwork is not only required among managers and technologists to create the best designs for products, but teamwork on the factory floor is necessary for achieving the lowest cost and highest quality in manufacturing them.

In Japan, hostile takeover attempts rarely occur. Companies are looked upon more as permanent institutions, and a strong consensus prevails that one company does not have the unilateral right to buy another. As a result, hostile takeover attempts are viewed with public contempt.

Hostile takeovers also detract from competitiveness by reducing the availability of funds for research and development.

Because of substantial debt incurred to finance takeovers, the ensuing increased interest costs undercut investment in research and development as well as other parts of the innovation cycle.

Finally, the threat of hostile takeovers also detracts from the long-term research and development component of innovation. Corporations tend to favor short-term investments in innovation at the expense of the long term in order to maintain quarter-to-quarter earnings growth. Ironically, this is needed to maximize company stock prices to make the company less attractive as a target for a raider.

On the other hand, our foreign competitors, not having such constraints, are making more long-term investments and, as a result, displacing American companies in many important advanced material markets, such as semiconductors.

Because Congress hasn’t yet acted, a number of states have passed legislation to mitigate the adverse effects of hostile takeovers. One of the most important provisions in several state laws is the requirement for increased disclosure of the economic effects of the raider’s proposal, including impact on employees, communities, creditors, pension funds and governmental units.

Raiders, investment bankers, Wall Street lawyers and others, who make enormous profits from hostile takeovers, lobby intensely against both state and federal legislation. They even strongly oppose the provision for more disclosure. If hostile takeovers are as good for the country as claimed, proponents should want more known about what is planned. And fairness requires that, at a minimum, shareholders, employees, communities and other constituents have a right to know what is being contemplated.

Fortunately, there is evidence that the tide of public opinion is turning against the raiders. Recently, a Harris Poll reported that 65% of the public favors legislation to regulate hostile takeovers. This was good news indeed. It reaffirms the adage that “you can fool all the people some of the time, and some of the people all the time, but you can not fool all the people all of the time.”

While such opinion polls will weigh favorably with members of Congress as they consider anti-takeover legislation, opponents are fighting even harder because of progress with state legislation. Part of their strategy is to preempt effective state laws with watered-down federal legislation. Therefore, it behooves everyone to urge congressional representatives to pass effective federal anti-takeover legislation that does not preempt state laws but that does require more disclosure. A large number of jobs--maybe even your job or mine--is at stake.