Merger Mania of 1988 Hits Close to Home, Grabs 7 Firms
In 1988, the urge to merge reached a crescendo. The money spent on merging and acquiring companies this year is likely to reach a record $250 billion, led by the staggering $24.5-billion deal proposed by the New York investment firm Kohlberg Kravis Roberts & Co. to buy the tobacco and food conglomerate RJR Nabisco.
This year in the San Fernando Valley area, seven major companies were acquired, or have agreed to be bought in deals that are pending, for a total of nearly $1 billion.
The October, 1987, stock market crash, which made many companies less expensive targets, as well as concerns that Congress might act to slow takeovers, seems to have triggered a busy year for buyouts. On a national level, the number of mergers and acquisitions totaling at least $1 million came to 1,786 in the first 9 months of the year, up nearly 20% from a year earlier, according to W.T. Grimm, a Chicago financial consulting firm.
The seven major local buyouts took place for various reasons. Two of them--involving Cherokee Group, a clothing company in Sunland, and Micom Systems, a Simi Valley computer equipment maker--were sparked by internal feuds and low stock prices.
Internal Takeovers
Three companies, Redken Laboratories, a Canoga Park shampoo and cosmetics company; AME, a video outfit in Burbank, and insurer Republic American Corp. in Encino, were bought or are about to be taken over by shareholders who already controlled the companies. In two other deals, Price Pfister, a plumbing company in Pacoima, and the Hamburger Hamlets restaurant chain in Sherman Oaks, were bought in friendly deals by outsiders who liked the businesses.
Here is a summary of the seven major acquisitions in the Valley.
CHEROKEE GROUP: The rag trade’s bitterest battle erupted this year at Cherokee Group, which in the last 5 years emerged as one of the nation’s fastest growing apparel firms by selling its casual women’s clothes and shoes to such stores as Macy’s, Mervyn’s, Broadway and Nordstrom.
On one side of the fight was founder James P. Argyropoulos, who began his business as a Westside shoe repair shop in 1968. On the other side was Robert Margolis, the company’s president whom Argyropoulos brought in to move Cherokee into the clothing business. Margolis made clothing Cherokee’s dominant source of business and triggered the company’s spectacular growth spurt in the early 1980s.
Court filings show that both men long disagreed on how to run the company, but few knew of that until a Margolis-led group made a $174-million bid for the company in September, assisted by the Los Angeles investment firm Deutschman & Co. Argyropoulos sued, saying the group would sell more clothes to discount retailers, which would cut profits and tarnish Cherokee’s image among premium retailers.
Stock Dropped
Cherokee’s stock had fallen, dropping to less than $6 a share following the October, 1987, stock market crash, after having been as high as $25 in 1987. Ironically, Argyropoulos owned about one-third of Cherokee’s stock in early 1986, but sold about half that stake well before the crash at a sizable profit, believing that his remaining 14.5% stake would be enough to keep control of the company.
Even before the stock market crash, however, the women’s apparel business fell out of favor with many investors, who worried about declining profits.
“At the time, we had both the crash and the subsequent realization that the women’s apparel market, which is 85% of Cherokee’s business, was in the tank,” said Peter Tamny, a Cherokee director and managing director in the Los Angeles office of Shearson Lehman Hutton, which was involved in putting together the Cherokee deal.
Argyropoulos talked of putting together a counteroffer to buy Cherokee, but that never happened. He ultimately dropped his suit, and the Deutschman-Margolis deal is expected to be approved and completed next year.
MICOM SYSTEMS: Another internal feud led to the sale this fall of Micom Systems, a Simi Valley maker of computer communications equipment, to the New York investment firm Odyssey Partners for $301 million.
Micom’s sale was brought about by dissent on its board of directors. Directors John and Sally Thornton, along with founder William Norred, split with the rest of the board, led by chief executive Roger Evans, over how the company should be run.
The dissident group had several gripes. For one, Micom’s stock had tumbled from nearly $50 a share in 1983-84. After the ’87 stock market crash, Micom traded as low as $6.50 a share. In addition, Micom’s earnings had flattened out.
Made Poor Buy
Micom also stumbled in some of its decisions. In late 1987, the company bought a Virginia data communications company for $19.4 million in cash and stock, which was widely criticized as an excessively high price. Indeed, less than a year later, Micom sold the same business, fetching less than half of what the company paid for it.
In March, Micom offered to settle the feud by buying back half of its stock, including the stakes of the dissident directors, for $144 million. But several groups subsequently showed interest in buying the company, so Micom was put up for sale.
In August, Odyssey’s bid was accepted, and Evans later resigned as CEO. Odyssey executives did not returns calls, but they have indicated in Securities and Exchange Commission filings that big changes are planned, including selling a chunk of the business within 2 years to pay back money borrowed to buy the company.
REDKEN: Paula Kent Meehan was tired of running a public company at Redken Laboratories, a Canoga Park outfit that sells shampoo and other hair-care products to salons.
For one thing, there is constant pressure to produce good earnings, which makes some companies gun-shy about investing in new areas that may not produce immediate results.
“We may see a product opportunity and be willing to invest in it to take advantage of it. That can cause some significant costs on a quarterly basis that, as a private company, you don’t care about,” said Wallace B. Jones, Redken’s vice president of finance.
In addition, none of Redken’s principal competitors was public and so, unlike Redken, they were not required to disclose financial results and other relevant material. When Redken’s earnings fell, company officials say, some competitors went to Redken’s customers and cited the financial results in an effort to portray the company as unstable.
Meehan and her husband, John, owned nearly half of the company anyway. So in May, they bid to buy the rest for $34 a share. Ultimately, the price was raised to $34.90, or $40.5 million, for the shares they did not own.
REPUBLIC AMERICAN: Less than 2 years ago, American Financial Corp., a company headed by reclusive Cincinnati financier Carl Lindner, publicly sold a one-third stake in the Encino workers’ compensation insurance company for $17.50 a share. A Lindner-controlled company, Penn Central of Greenwich, Conn., plans to buy back Republic American for $15.75 a share.
In those 2 years, the company’s stock, like the stock of a lot of insurance companies, fell out of favor with investors and securities analysts. Republic’s stock fell below $12 a share. Lindner slowly began buying back shares. In October, Penn Central agreed to pay $249 million for the stock it didn’t own, although $96 million of that is for stock already owned by Lindner.
Accounting Maneuver
The reasons for the buyout extend beyond price. Lindner’s Penn Central has substantial tax-loss carry-forwards, which are accounting adjustments that allow a company to shelter current income from taxes by offsetting it against past losses. Penn Central is believed to have accumulated as much as $1 billion in tax-loss carry-forwards. Making Republic American part of Penn Central would allow Lindner to shelter Republic’s earnings.
Richard Haverland, Republic American’s president, said stocks of California insurers have been particularly hard hit by various insurance reform movements such as the passage of Proposition 103 in November, which, if put into effect, will cut auto insurance rates and require the state’s insurance commissioner to be an elected official.
“If you look at all of the insurance companies in the country since that time, you’d find the average company’s stock was down 20% to 25%,” Haverland said. “I’d say if you look at companies in California, the average is down 30% to 40%. This company has gone down less than that.”
PRICE PFISTER: Peter S. Gold came into a heap of gold this year when Price Pfister, the Pacoima faucet maker he headed, was bought for $215 million by Emhart Corp.
Gold’s share of the company was about $62.5 million. He and the company’s other major stockholders, David P. Russo and the family of Sydney M. Irmas, had stakes worth $140 million.
Gold said he and the directors of Price Pfister had no intention of selling. Since they controlled more than two-thirds of the stock, that made it seem an acquisition was all the more unlikely.
Price Pfister first sold stock publicly at $15 a share in August, 1986. After the stock market crash, it fell as low as $6 a share.
“There was no great impetus to sell the company. But they made us an offer we couldn’t refuse,” Gold said.
Buyer From East
That offer came from Emhart, a $2-billion Hartford, Conn., conglomerate that makes everything from golf shafts to lawn equipment. In March, Emhart offered to buy Price Pfister in a friendly deal. At the time, Emhart had been thwarted in its effort to buy Stanadyne, a plumbing supply company, for $820 million. Stanadyne instead agreed to be bought by Forstmann Little & Co., a large New York investment firm.
Emhart’s $18.50-a-share bid for Price Pfister was a substantial premium for shareholders. The price was roughly twice what the stock had been selling for in the months leading up to the bid.
In the end, Gold, unlike many chief executives whose companies are acquired, got to keep his job running the company. He has invested much of the money he received for his stock in bonds and real estate. And he’s keeping his tax man busy.
HAMBURGER HAMLETS: One of the best-known restaurant names in Southern California changed hands in a deal cooked up by Weatherly Private Capital, which completed acquisition of Hamburger Hamlets in May.
The price, $9.20 a share, was below the price of more than $15 a share recorded a couple of years ago. But at the time of the offer, it was about $3 a share above the stock’s trading range.
The company was always closely held. Owners Harry and Marilyn Lewis owned 70% of the restaurant chain that they founded. They are staying on as consultants and will buy back for an undisclosed sum their Kate Mantilini restaurant in Beverly Hills. Marilyn Lewis has since founded a Beverly Hills production company.
AME: Andrew M. McIntyre took AME, one of Hollywood’s biggest videotape service companies, public in April, 1987, when he sold a 33% stake in his Burbank firm for $16 million. Now he’s hit the rewind button and wants to buy back the stock.
Last week, directors of AME, which is partly owned by an employee stock plan, accepted a $38-million takeover bid from a group led by McIntyre, which offered $13.75 a share for the 56% of the company that he doesn’t own. The stock had fallen sharply from its $13.50-a-share initial offering price to as low as $6.25 after the stock market crash.
McIntyre is getting back a bigger company. Sales climbed 29% to $47.6 million in the year that ended Sept. 30, from $37 million a year earlier. Profits, however, fell 22% to $3.2 million, partly because of the 154-day writers’ strike against major movie and television producers.
FUTURE BUYOUTS: As for 1989, the deal making is expected to continue at a brisk pace unless federal laws change drastically to limit buyouts.
In the Valley area, financier Saul Steinberg has been shopping around his 31% stake in Zenith National Insurance, a large workers’ compensation and auto insurance company in Woodland Hills. So far, there have been no takers.
A buyout offer for Malibu Grand Prix, a Woodland Hills operator of amusement centers with amateur auto racing, is pending. Chairman Ira L. Young has offered 95 cents a share, or about $5 million, for the 41% of the company that he does not own.
Some companies’ stock prices have plunged, especially in high-technology, to the point where they may become subjects of buyouts or acquisitions.
The stock of Tandon, a Moorpark personal computer maker, has been trading at about $1 a share. And Micropolis, a Chatsworth maker of disk-drive data storage equipment for computers that was once one of the area’s hottest stocks, has plunged to about $7 a share from more than $44 in early 1987.
A New York investment group has notified Dataproducts that it has acquired 5.2% of the Woodland Hills computer printer maker and may seek to acquire the company, according to SEC filings.
THE VALLEY AREA’S BIGGEST BUYOUTS IN 1988
Buyout Price All-Time Per Share High Name Acquirer of Stock Per Share AME Inc.* Andrew McIntyre $13.75 $13.75 (4/87) Cherokee* Deutschman & Co., $14.00 $25.00 (6/87) Robt. Margolis, others Hambrgr Hamlets Weatherly Capital $9.20 $15.50 (6/86) Micom Systems Odyssey Partners $16.00 $49.75 (6/83) Price Pfister Emhart Corp. $18.50 $19.00 (8/87) Redken Labs Paula Kent Meehan $34.90 $35.00 (2/85) Republic Amer.* Penn Central $15.75 $17.88 (7/86)
* Pending
