Request by Sen. Kennedy : SEC Examining Takeover Bid by Tustin Company

At the request of Sen. Edward M. Kennedy (D-Mass.) and a Massachusetts congressman, the Securities and Exchange Commission is scrutinizing MAI Basic Four’s hostile takeover bid for Prime Computer Inc. for possible violations of margin financing requirements.

The SEC inquiry is the latest skirmish in a protracted corporate takeover battle that began in November when MAI, a Tustin-based computer maker, made a surprise $970-million bid for Prime, a Massachusetts computer maker three times its size.

Jeffrey Bagner, an MAI attorney, said Monday that the company has had “informal, cordial and cooperative discussions” with the SEC regarding the value of the collateral that MAI has pledged to finance its takeover offer.

“We’ve answered all the questions the commission has asked,” Bagner said. “As we’ve stated before, we believe the offer complies with margin rules.”

Federal Reserve Board rules limit the amount of unsecured debt used in a takeover to 50% of the value of the target company’s stock. MAI has said it will need to borrow $1.5 billion to complete its acquisition of Prime. Of that total, about $875 million will involve unsecured borrowing.

“It’s our opinion that the amount that would be borrowed for purchasing Prime securities exceeds” the margin requirements, said Jay P. Urwitz, an attorney for Prime.

Prime has fiercely resisted MAI’s $20-per-share offer, filing several lawsuits seeking to block the bid and undertaking a sweeping corporate reorganization that included 1,200 layoffs. Prime employs about 12,000 people worldwide, mostly in Massachusetts.

Prime has also enlisted the help of Massachusetts government officials, including Gov. Michael S. Dukakis, who recently visited Prime’s headquarters in Natick, Mass., and spoke out against the takeover. And a group of Prime employees opposed to the takeover recently traveled to Washington to lobby Massachusetts lawmakers.

SEC spokeswoman Mary McCue declined Monday to comment on the inquiry.

In a Feb. 16 letter to Rep. Edward Markey, SEC Chairman David S. Ruder said the agency was investigating “factual and legal questions relating to possible margin violations in . . . pending tender offers.” Ruder did not specifically mention the MAI/Prime battle in his letter.

An aide to Markey said the congressman had written to Ruder this month asking that the SEC enforce the margin requirement, and singling out the Prime/MAI case.

Kennedy also expressed concern about SEC enforcement of the margin rules. In a Feb. 10 letter, Kennedy wrote to Ruder urging tougher enforcement of the federal margin requirement rule and singling out Prime/MAI as a case that should be examined.

“It is my understanding,” Kennedy wrote, “that the SEC has seldom if ever brought an enforcement action against a tender offer or for violation of the margin requirements, even where courts have found it likely that such violations have or will take place if a tender offer proceeded. . . .”

“If the commission fails to act,” the Kennedy letter stated, “the law will go unenforced and tender offerers will be able to pursue even more risky offers.”

Doug Cahn, a spokesman for Rep. Barney Frank (D-Mass.), said Frank sent a letter to Federal Reserve Chairman Alan Greenspan on Feb. 10 to “get them off the dime,” hoping to prompt an examination of the Prime takeover.

Markey and Kennedy have also raised questions about Shamrock Holdings Inc.’s hostile bid for Polaroid Corp. in Cambridge, Mass.

In December, a federal judge in Boston blocked MAI’s bid, questioning the “highly leveraged nature” of the deal and warning that MAI might be in violation of the margin requirements. MAI has appealed the ruling to a federal appellate court in Boston, and a hearing is scheduled for Thursday.

As of Feb. 15, a total of 27.7 million, or 61%, of Prime’s common shares outstanding had been tendered to MAI. Although that percentage is short of the approximately 67% figure that MAI says it needs to complete its purchase of Prime, analysts have said MAI has the upper hand in the takeover.