Takeover Artists Now Find Every Fight Isn’t a KO
The takeover battler who defeated the managements of TWA Inc., USX Corp. and a string of others was beginning to sound a little frustrated as the final tally of votes began in what proved to be his failed proxy contest against Texaco.
“I think this is going to be the last of the big proxy fights,” Carl C. Icahn predicted last month at the close of Texaco’s annual meeting in Tulsa, Okla. “Because if you can’t win one against this kind of management, you can’t win.”
Icahn may not be the only one feeling some frustration. Over the past several months, some of the takeover game’s top practitioners have been losing proxy fight after proxy fight. And as their defeats have mounted, some takeover specialists have been talking about a shift in the balance of power between America’s corporate managers and the challengers who have so often humbled them.
Indeed, if 1987 will be remembered as the year when corporate managements won important new state and federal legal protection from corporate raids, 1988 may go down in the annals of takeover warfare as the year when managements repulsed well-organized, well-financed assaults through the proxy fight process.
Proxy contests are the traditional means by which shareholders can call for a vote on such questions as how the company should be run and who should control it through seats on its board of directors. In this year’s biggest fights for corporate control, the results have looked pretty one-sided.
As Texaco overcame Icahn, shaving products maker Gillette Co. rebuffed the Coniston Partners investor group, Irving Trust upset Bank of New York, manufacturer USG Corp. handily beat the Desert Partners investor group, and the Media General communications concern repelled Hollywood producer Burt Sugarman. Only last week, the Centel Co. telephone concern scored a proxy fight victory over an investor group led by financier Asher B. Edelman.
To be sure, dissidents have won other recent fights and have frequently--even without winning control--forced managements to sell off assets or take other steps to boost their stock prices. The kind of hostile takeovers considered most beneficial to shareholders--those built on premium-priced, all-cash tender offers for 100% of company shares--continue at a torrid pace.
Yet in the past two years, corporate managements have spiked some of the challengers’ biggest artillery.
Managements’ so-called poison pill defense, in which a company threatens to issue so much new stock that a takeover would become prohibitively expensive, has survived repeated court challenges. New state and federal laws and regulations have largely blocked a classic raiders’ maneuver in which a small company can take over a far larger one by selling off some of the target’s assets to finance the deal.
And this year, the proxy contest has been shown to be a blunt weapon for dissidents trying to take over large companies or trying to put them “in play”--that is, trying to flush out another bidder.
Concerted Lobbying
“In the old days, T. Boone Pickens could come along and just growl and get his way with a company,” says Robert A. G. Monks, former U.S. Labor Department pension official and now a consultant to institutional shareholders. “Now the pickings are a lot slimmer.”
Some takeover experts attribute the shift in the balance of power largely to the concerted lobbying efforts of big-business groups such as the Business Roundtable. The group has pushed in Washington and state capitals for a variety of changes to the laws governing tender offers, and it is lobbying heavily for further changes in bills now pending in Congress.
“Corporate managements are feeling more secure these days against manipulations and abuses of the (takeover) system,” says Cliff Whitehill, general counsel to General Mills and the Business Roundtable’s point man on takeover matters. “But we still want more.”
Corporate managements had been expecting this year’s spring proxy season to be a test of the hostile bidders’ new tactics for some time. Its importance grew in January, when a tough new anti-takeover law was enacted in Delaware, whose laws apply to most large American corporations.
“Historically, proxy fights for control just weren’t brought against large corporations, so this season was going to be a testing of the waters,” says Joseph Flom, a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom and an elder statesman of the takeover game. “And, as it turned out, they were unsuccessful.”
According to the informal tally by the Investor Responsibility Research Center, a nonprofit group in Washington, so far this year 32 proxy contests for board seats have been scheduled. Of those, 13 votes ended in management victories and five in wins for dissidents.
Scheduled votes at four other companies were dropped when managements put dissident representatives on the board, seven other scheduled votes were simply dropped and two votes have yet to be counted.
What the figures don’t convey is that managements had nearly a clean sweep in contests at the biggest corporations. (Votes in the Gillette and Irving Trust battles are now being contested in court, but few takeover specialists believe that the litigation will reverse those outcomes.)
Expenses Add Up
Takeover specialists say incumbent managements have a variety of advantages over challengers in proxy contests. “They’ve always had the edge, and they’ve always won a lion’s share of the battles,” says James E. Heard, a consultant to institutional shareholders at Analysis Group in Belmont, Mass.
Among the advantages, management has full access to the corporate treasury to pay for their proxy solicitation effort, while the acquirer pays for his campaign from his own pocket. These expenses run up: Carl Icahn has estimated costs of $5 million to $7 million for his Texaco proxy fight.
Corporations have a better idea of how to reach the shareholders that they want to sway to vote on their side, because, in many cases, they have contacted them before, for earlier proxy votes. Knowledge of how to reach the holders provides an important advantage when there are tens of thousands of shareholders.
“It’s the most important reason dissidents have been far less successful in fights against the really big companies,” says John A. Pound, assistant professor at Harvard University’s Kennedy School of Government.
In a proxy contest, managements have also been successful in applying pressure on the professional money managers who are in charge of casting ballots for institutions. This pressure is sometimes indirect: The fund managers worry that if they vote with the dissidents, word will get out that they aren’t loyal to management, and big companies will take their money-management business elsewhere.
“A big company is likely to have tentacles all through the financial community,” says Steve Matthews, an assistant New York City comptroller and one of the officials who decides how New York pension funds with $32 billion in assets vote their shares.
For all of these reasons, dissidents in the past have preferred tender offers to proxy contests to try to wrest away corporate control. “The proxy system looks like it would be a superior way to take control of a company, since you can theoretically put your people on the board without buying the whole company,” Pound says. “In fact, it’s miserably inefficient.”
Still, many were shocked this year when some dissident efforts went down to defeat. Coniston Partners had been so sure of its position with shareholders that it had predicted victory in the Gillette contest.
Prevailing Wall Street opinion was that Bank of New York would succeed in its proxy effort to replace Irving Trust’s 16-member board with its own slate and would dismantle Irving’s anti-takeover defenses. Icahn had said he was confident of success in his effort to put himself and four associates on the Texaco board and then win permission for a shareholder vote on his tender offer.
The proxy defeats have come as hostile bidders have tried to cope with a thicket of new regulation and laws that have made takeovers more difficult and far more expensive. Tax law changes adopted last year, for example, mean that acquirers will have to pay far higher taxes when they try to sell off assets of an acquired company.
Challengers May Come Back
A 1987 change in federal antitrust law now requires challengers in takeover partnerships--such as those that have been used by Icahn and T. Boone Pickens--to disclose their stock holdings at an earlier date. And the anti-takeover laws that have been adopted by more than 30 states in the past couple of years have aided management by giving them more time to fashion legal defenses, restructure or look for a preferable merger partner.
State laws were the specific reason why many dissidents turned to the proxy fight to win control.
The new Delaware state law, for example, blocked Icahn from taking control of Texaco by the commonly used strategy of acquiring at least 51% of Texaco’s shares and then paying for the deal by selling off assets. (The law requires that a bidder who has 15% or more of a company’s shares immediately boost his stake to 85% or be barred from a hostile takeover for three years.)
Icahn, who did not return calls seeking comment, has said that the last round of new laws and regulations have made unsolicited takeovers more difficult and more expensive.
Can the challengers turn the tables? The history of the takeover game suggests that the hostile bidders may find a way around the obstacles that have been placed before them.
Some observers note that Gillette’s victory was by a narrow 4% of the vote and that other proxy battles easily might have gone the other way as well. But others expect that next year will not bring so many proxy assaults on big corporations.
“If Icahn had won with Texaco, I think we would have seen a flood of these things,” says Harry De Angelo, finance professor at the University of Michigan. “As it is, I think we’ll see some pulling back.”
Icahn, who bought much of his Texaco stock at depressed prices right after the crash, would make about $400 million if he sold his holdings. But most challengers stand to lose huge sums if they are defeated in a proxy contest.
“It’s a rare case where a challenger can make money winning or losing a fight like this, like Icahn did,” says Jim Martin, executive vice president of the College Retirement Equities Fund. “I think a lot of people have seen that managements can defend themselves, and they’ll think twice.”
A key to the dissidents’ future success in proxy fights may lie with the big institutional stockholders, such as pension funds, that have recently been more active in pushing for their interests, some observers believe.
Texaco secured its victory after promising public pension fund officials a voice in the naming of future directors--a practice Icahn denounced as “boardmail.”
But these big holders haven’t just been been siding with management. Indeed, this year they showed an increasing independence, as was evident in the growing acceptance of shareholder proposal to remove the poison pill anti-takeover devices. Shareholders at Santa Fe Southern Pacific, for example, voted 61.2% this year in favor of a non-binding resolution urging dismantling of that company’s poison pill.
“Managements like Texaco’s have begun to bargain, and if the challengers want their votes, they’re going to have to offer something, too,” says consultant Heard.
