Patton Praises Junk-Bond Financing : MAI Head Optimistic on Completing Takeover

William B. Patton, president of MAI Basic Four Inc., said Tuesday that the odds “look very good” that the Tustin computer maker will prevail in its $970-million hostile takeover bid for Prime Computer Inc.

MAI’s $20-a-share tender offer for the Natick, Mass., minicomputer manufacturer expires at midnight today. As of last week, more than half of Prime’s stock had been tendered to MAI. Combined with shares already owned, the tendered stock gave MAI potential control of 64.8% of Prime.

But MAI must obtain at least 67% of the shares under the terms of Prime’s corporate bylaws, which require a two-thirds majority to approve a merger under certain circumstances. MAI also must overcome pending court challenges to the deal.

“It appears that we will succeed with the acquisition,” Patton said in an interview after addressing more than 100 business executives who gathered in Irvine to hear his views on corporate strategy and the virtues of junk-bond financing.

If MAI succeeds in its takeover bid for Prime, junk-bond financing will be part of the reason. The investment banking firm of Drexel Burnham Lambert has agreed to raise $875 million from the sale of high-yield bonds to help finance the bid.

Spate of Problems

Patton said he remains confident the money will be raised, despite the spate of problems recently encountered by Drexel. Last month, Drexel agreed to plead guilty to six counts of mail fraud, wire fraud and securities fraud and to pay a $650-million fine to the government.

“We do not consider the financing to be the problem whatsoever,” Patton said.

In one pending court case, however, a federal judge has blocked the takeover until MAI and Drexel can prove that they can come up with a financing package that does not violate margin requirements, which limit the amount of stock that can be pledged as collateral in a takeover.

In his speech, sponsored by the Orange Coast Venture Group, Patton said that had it not been for junk bonds, his company might not have survived 4 years of declining profits in the early 1980s.

Bonds Seen as Vital

Junk bonds, he said, provided the capital that enabled MAI to transform itself from a faltering computer firm to a force to be reckoned with in the technology arena.

“I believe it would have been devastating if we had not had access to this capital,” Patton said.

He said cash flow alone does not provide enough capital to allow most businesses to grow fast enough to compete in today’s business climate.

Before the advent of high-yield junk bonds, most up-and-coming businesses were effectively isolated from the public bond markets because they were too small and too unfamiliar to obtain a credit rating from either of the two major rating agencies, Moody’s and Standard & Poor’s.

“Junk bonds are issued by companies on the way up, not on the way down,” Patton said. “The myth persists that these bonds are largely used by uncreditworthy companies to finance risky, speculative ventures. Some tend to sensationalize such debt as a threat to economic security. But our company exists today as proof that is just not true.”

After completing a leveraged buyout with junk-bond financing in 1985, MAI management streamlined the company, made several acquisitions and increased sales from about $200 million in 1985 to $450 million in 1988. Today, the company employs 4,500 people and does business in 39 countries, Patton said.

Apparent Benefits

Nowhere have the benefits of high-yield financing been so apparent as in California, where only 60 companies have “investment grade” ratings from the rating agencies, Patton said.

In the decade ended in April, 1987, 391 California companies issued high-yield bonds, raising a total of $37 billion, Patton said. These companies, which include Western Digital Corp. in Irvine as well as MAI, employ 301,000 people.

Other forms of raising capital, such as issuing stock, or borrowing from a bank, have become less desirable for financing business expansion, Patton said. For instance, gyrations in the interest rate over the past decade have made banks more reluctant to offer long-term loans.