Determined Suitor Won’t Take ‘No’ for an Answer : MAI Fights for Prime Computer Despite Wall Street’s Doubts
With all due respect to your previously expressed desire not to pursue a business combination with MAI Basic Four, we are convinced that a business combination of MAI Basic Four and Prime Computer is so compelling that we must pursue it.
MAI Chairman Bennett S. LeBow, in a Nov. 15 letter to Joe M. Henson, then president of Prime.
There was a familiar ring to the opening sentence of the letter Bennett S. LeBow sent to former Prime Computer President Joe M. Henson, putting him on notice that MAI Basic Four had launched a bid to seize control of his company.
Not by accident, the wording of LeBow’s letter was nearly identical to that Henson had used 11 months earlier in a letter to the chief executive of Computervision, alerting him of Prime’s hostile offer for his company.
LeBow, a New York financier, was trying to drive home a point: What’s good for the goose is good for the gander.
Prime prevailed in its $435-million takeover of Computervision in February, but it may not be so successful in fighting off a $970-million hostile tender offer from MAI, a Tustin computer maker less than one-third its size.
Strong Resistance
Prime has strongly resisted MAI’s $20-a-share bid. Last week, Prime formally rejected MAI’s offer as inadequate, while at the same time enacting a series of takeover defenses. Those defenses included the granting of lucrative severance packages known as “golden parachutes” to 23 Prime executives.
MAI has vowed to keep fighting. “We’re going to be successful,” William B. Patton, MAI’s president, said in an interview last week. “We’re not going to be deterred by what is happening.”
The MAI bid, launched Nov. 15, has been met by a heavy dose of skepticism on Wall Street. Prime’s shares have floundered below the $20 offering price. However, the stock climbed slightly this week, closing at $17 Friday, after Prime disclosed that it had been approached by an unidentified third party about a friendly business combination.
The emergence of a third party raised speculation that Prime might seek to escape LeBow’s grasp by finding a “white knight” willing to buy the company on more favorable terms. Some of those being mentioned by analysts as possible suitors include Ford Motor Co., Prime’s largest customer; Rockwell International Corp., the El Segundo-based aerospace giant; and three European electronics concerns, West Germany’s Siemens A.G. and Nixdorf Computer A.G., and Italy’s Ing. C. Olivetti & Co.
Investors’ skepticism has centered on the issue of whether Prime and MAI have enough in common that they would be stronger by banding together than by remaining independent. Both companies make business computers, but there is little overlap among their customers.
Prime is a major manufacturer of minicomputers, the broad category of computers costing between $10,000 and $1 million that fill the gap between personal computers and large mainframes. Prime’s computers are used mainly by scientific research institutions, government agencies and large corporations.
With its recent $435-million acquisition of Computervision, Prime also became the second leading supplier of CAD/CAM (computer-aided design and computer-aided manufacturing) equipment. Prime also owns Versacad Corp., a Huntington Beach firm that develops CAD/CAM software.
MAI manufactures computers and software for small and medium-size companies. Rather than trying to sell to all types of businesses, MAI has successfully followed a strategy of marketing its products to eight specific business groups, including manufacturing, hotels, construction, apparel and transportation. About one-third of MAI’s revenue comes from its Canadian and U.S. computer service business.
LeBow has adamantly insisted that a combination of the two companies would create “a powerful competitor in the rapidly maturing computer industry.” For example, he said, MAI’s strength among small and medium-size companies will complement Prime’s position with larger firms. Merging the two firms’ product development, manufacturing, distribution, marketing and computer repair operations will reduce costs and increase profits, he said.
Profits Seen Sufficient
“The company’s anticipated profits will be more than sufficient” to pay off the substantial debt MAI will face if it buys Prime, LeBow said in a letter to Prime management. Most of the deal would be financed through high-yield “junk bonds” underwritten by Drexel Burnham Lambert.
Many industry analysts are not buying LeBow’s argument that the merger would benefit both computer makers.
“It’s very difficult to see any significant savings that could make up for the additional debt they would have,” said Donald Bellomy, an analyst with International Data Corp., a Framingham, Mass., market research firm.
Analyst Charles Foundyller argued that MAI would not bring much to the marriage. “The question is not so much if there are synergies, but are there significant synergies,” said the president of Daratech Inc., a Cambridge, Mass., computer research firm. “The question is whether MAI can help Prime increase its traditional business by more than 2% or 3%. I’d say no.”
Foundyller says MAI’s segment of the minicomputer business is facing stiff competition from personal computer networks that can perform the same tasks as larger machines, as well as from companies that specialize in business software packages sold in retail stores. For example, some companies are producing accounting software programs for hotels that can be used on a variety of computers.
“MAI is in a market that will eventually vanish,” Foundyller said, “while Prime is in a market that is growing.”
A few analysts, such as Robert Johnson of the Houston investment firm Rotan Mosle, do give credence to LeBow’s view.
“LeBow has taken a new way of approaching the computer industry,” Johnson said. “He’s saying this is a low-growth, mature industry. And I think he’s saying there are other ways to run these businesses and that it can be done with a fair amount of debt.”
Sandy Gant, an analyst at InfoCorp. in Santa Clara, sees synergies between MAI and Prime’s direct sales forces and the fact that, because they serve different markets, their product offerings would be broader after a merger. “Their direct sales operations complement each other and so do their markets,” Gant said.
LeBow, who owns or controls 54% of MAI stock, has argued that consolidation is necessary and inevitable as the computer industry matures. The annual growth rate in the minicomputer field is predicted to slow to 4% this year from an average of 10% during the past 5 years.
‘Industry Has Matured’
“There’s no question that the computer industry has matured and the growth rates are lower,” MAI’s Patton said. “In that context, there should be consolidation.”
Takeovers, hostile or friendly, have been rare in the industry because companies worry about incompatible product lines and the possibility of losing talented engineers and scientists. Another concern is the affect of a debt-financed buyout on a company’s ability to raise cash for other expenses, such as new product develop ment, which is vital in the fast-changing industry.
Some analysts said Prime management has found it more difficult than it planned to merge Computervision’s operations with its own. “The company hasn’t seen the synergies and profitability from the Computervision merger it wanted,” said one Boston area consultant.
At least partly as a result of the Computervision deal, Prime’s earnings have been hurt and its stock price depressed, which has made the company an easier takeover target, analysts said.
Prime officials declined to respond to comments and questions about the Computervision deal.
MAI officials have been discouraged by Wall Street’s generally negative reaction to the Prime offer. To try to win some support, LeBow and Patton plan to plead their case in separate meetings with securities analysts and financial reporters scheduled for Monday afternoon in New York.
Orchestrated by LeBow
The MAI bid is being orchestrated by LeBow, a New York financier who also owns controlling interests in Liggett Group Inc., a North Carolina cigarette maker, and Western Union Corp.
LeBow has acted as the front-man in the offer, Patton said, because he is MAI’s chairman, controlling investor and also “a very visible and trusted individual.” He said LeBow’s New York investment company has “a proven ability to attract capital” and his involvement was an “absolute necessity” in MAI’s attempt to buy a company as large as Prime.
Patton denied Prime’s claims in a lawsuit that junk-bond dealer Drexel Burnham is actually controlling the MAI offer.
“That’s specious, spurious and ridiculous,” Patton said. “Drexel doesn’t control us, it doesn’t control LeBow. Someone just wanted to put that out there to emotionalize the situation.”
Many analysts don’t like LeBow’s chances of pulling off the Prime deal.
“It looks like it would take a minor miracle for LeBow to pull it off,” said Bellomy, the IDC analyst. “But that’s not to say that Prime will necessarily come out of this remaining independent.”
One factor that could work in LeBow’s favor is the large amount of Prime stock owned by institutions. Two-thirds of Prime’s stock is held by institutions, with about a third of that amount in the hands of half a dozen major holders, such as the state of Michigan and J.P. Morgan & Co. The fewer major shareholders there are, the fewer people LeBow must convince of the value of the merger.
But the bad news for LeBow, Bellomy said, “is that these are conservative institutions who are hard to convince and who have historically been interested in long-term returns.”
MINICOMPUTER MARKET SLOWS DOWN
Worldwide shipments of mid-range computers by U.S. manufacturers
(In billions of dollars)
Amount of % Increase From Year Shipments Prior Year 1984 $24.5 24.0 1985 26.9 9.8 1986 28.0 4.0 1987 29.8 6.4 1988 * 31.0 4.0
* Estimate
Source: International Data Corp.
