Texaco, American Brands, McGraw-Hill Often Mentioned : ‘Hit List’ of Takeover Candidates Expanding

Corporate takeover artists have their pencils poised, ready to tick off names of targets. Expansion-oriented companies have their own acquisition plans, and executives nervous about low stock prices are mulling restructurings.

But the looming question is just who is on these secret hit lists for the latter half of 1988, a period ripe for fast-paced buyouts.

A relatively cheap dollar is expected to keep luring foreign investors, while a fear of tighter regulations in the post-Reagan era should keep domestic-led takeovers rolling.

Topping it off is a plethora of companies whose share prices remain depressed in the wake of October’s stock market blood bath, rendering them relative bargains.

Most Wall Streeters covet such opportunities and are more than reluctant to point fingers at potential takeover or restructuring targets.

“People pay us for our opinions,” said one analyst at Bear Stearns & Co., “so I don’t want to give them to you for nothing.”

But the grapevine is abuzz with names such as Texaco, Whirlpool, American Brands, McGraw-Hill and plenty more.

Using a purely numerical approach to identify targets, Linda Zimbalist Smith said she searches for stocks that would jump in a takeover, restructuring or leveraged buyout. And while a company may appear on her list today, a few ticks upward in its stock price could render it undesirable in an instant, according to her complex formula.

In May, Smith, head of the Greenwich, Conn.-based research firm Zimbalist Smith, named 28 target companies--including American Brands, Monsanto, Whirlpool, Goodyear and Zayre--but many of these companies no longer pass her test.

Still, experts remain keen on American Brands, a company with far-flung interests from tobacco to biscuits.

Red Flags

“It is one of the ultimate consumer conglomerates, with dozens of separate companies pasted together without any synergy,” noted Michael Metz, an analyst at Oppenheimer & Co.

That means the company’s separate parts could be spun off or sold to finance a takeover or pay shareholders a handsome dividend. For the investor, a takeover is not the only way to cash out. Any kind of restructuring or leveraged buyout is designed to boost shareholder value and put profits in the pockets of investors.

Smith conceded that American Brand’s break-up value is great and that its stock price is hampered by the cloud hanging over the tobacco industry.

A depressed stock price alone is not the only red flag on a potential target. Internal forces, such as low debt levels coupled with higher projected earnings, also can highlight target companies.

“You have to look at the financials of a company, the cash flow, the balance sheet, and you have to look outside directors, whether they are friends of management,” said Metz.

Anti-takeover provisions are likely to be only a slight deterrent to takeover offers.

There are even more subtle issues to consider. “We look for values as well as a catalyst,” said Mario Gabelli, who heads the investment firm Gabelli & Co.

Among his so-called catalysts are “things like divorce, death, big blocks of stock in the hands of octogenarians.”

For example, Gabelli said he is buying lots of stock in Thomas Industries Inc., a Kentucky-based lighting manufacturer. The company’s founder, Lee B. Thomas, died in March, and a spokesman said he does not know what became of Thomas’s stake in the company.

Costly Divorces

Newell Co., an Illinois home hardware concern, apparently also likes Thomas. Newell has picked up a 6.5% stake in the company and could serve as an important ally to a potential suitor--if it does not make a bid of its own.

Divorce is taking its toll on R. P. Scherer Corp. Karla Scherer Fink, who has filed suit to divorce the company’s president, has said she wants to sell the pharmaceuticals company in which she holds a 33% stake. One investor group that controls more than 13% of the company has already held talks with her and may be jockeying for an acquisition.

If internal strife is a major criteria, nowhere is such a force more evident than at Texaco Inc. Despite defeating raider Carl C. Icahn in a critical proxy battle, the oil giant remains vulnerable.

Icahn’s 14.9% stake may be for sale, giving any purchaser a solid springboard for an offer. In addition, the aggressive New York investment firm Kohlberg, Kravis Roberts & Co., which sided with management in the proxy battle, conceivably could push for a leveraged buyout and retain Texaco management, with whom they likely have established a working rapport, Oppenheimer’s Metz said.

One deal often turns the spotlight on an entire industry. “It starts a conflagration, and investors and speculators look to mirror images and clones to see if other potential vehicles could go the same way,” Metz said.

Turmoil at Texaco has turned up the heat on other oil companies, in particular Unocal Corp. and Phillips Petroleum Co. Both are “selling at large discounts considering their break-up value as well as in terms of cash flow and the value of underlying gas and oil reserves,” Metz said.

In the publishing industry, Macmillan Inc.’s announced recapitalization as a defensive measure against offers from the Robert Bass group sparked rumors that Time Inc. and McGraw-Hill Inc. might also be targets.

Indeed, McGraw-Hill reorganized into three new operating companies in late June in what some analysts described as a protective move. The company’s stock jumped $3.625 a share the day the restructuring was announced.

Some Uncertainty

And General Electric Co.’s acquisition of Roper Corp. turned fresh attention to the home appliance market. Since then there has been plenty of talk about Whirlpool Corp. and fellow appliance maker Maytag Corp., including rumors that Whirlpool might make a bid for Maytag.

Not all undervalued companies are targets. Most drug companies, for example, are trading at a discount but are not choice candidates. Metz noted that these companies are undervalued in part because of the uncertainty surrounding the future of government health insurance plans and because the revived dollar will not benefit their overseas sales as it did in the previous year.

But Smithkline Beckman Corp. is one pharmaceutical company whose stock is so downright depressed it just might be attractive. Smithkline’s stock recently plummeted from about $54 a share to the $45 range after the company revised its earnings projections downward.

Because of Eastman Kodak Co.’s megapurchase of Sterling Drug Inc. earlier this year, Zimbalist Smith has the company on her “watch list.”

“It’s in line to do something to boost its stock price, and there’s a lot it can do” now that it has more pieces to sell off, she said.