TAKEOVERS: RUMOR AND FACT : MSI Data Chief Cautions Other CEOs to Beware Buyout Sharks

The president of an Orange County technology company that lost its independence in a hostile takeover battle warned other executives Tuesday to be on guard against acquisition attorneys, investment bankers and other corporate predators.

Charles S. Strauch, chief executive at MSI Data Corp. of Costa Mesa, said that 15% to 20% of all technology firms in the United States are susceptible to hostile takeovers.

The prime targets, Strauch said, tend to be those companies with the least debt, the most cash and the highest profits. And many of those companies are run by entrepreneurs who aren’t prepared to mount an effective defense against a hostile bidder.

Most executives think, “It can’t happen to me,” Strauch said. “But it can.”

MSI Data, which manufactures hand-held inventory control computers, was the target of a hostile takeover attempt launched last September by its chief rival, Telxon Corp. of Akron, Ohio.

Strauch’s firm eventually fended off Telxon’s advances by finding a corporate “white knight” company willing to acquire MSI Data on more favorable terms. Symbol Technologies of Long Island, N.Y., purchased MSI Data in a $142-million transaction that cost the company its independence but left its operations basically intact.

Strauch has remained as MSI Data’s president and chief executive, although he now reports to Symbol Technologies executives in New York.

In remarks to members of the Orange Coast Venture Group, a nonprofit association of Orange County business people, Strauch recommended that other companies take several defensive steps to guard against unwanted suitors.

For example, he said that companies should hire investment banking firms familiar with hostile takeover strategies to protect their interests.

In addition, Strauch said, companies should consider amending their corporate bylaws to make a takeover more difficult. For example, they can make a takeover subject to the approval of a a “super majority” of 85% of their shareholders. And they can adopt staggered terms for members of their boards of directors to prevent new owners from replacing entire boards in one fell swoop, he said.

Companies also should determine how much cash they actually need to finance future growth so they are less susceptible to buyers whose primary motive is to raid the till, Strauch said. If they keep too much money on hand, he said, “an outsider can come in and buy (the company) at cash value.”

A few years ago, technology firms did not worry much about takeovers, Strauch said. But those days are gone, he said, primarily because of the greed and ego of lawyers and investment bankers who specialize in takeovers. “That is what is fundamentally driving the hostile bid today,” he said.

As an example, Strauch cited the fees paid by MSI Data in its hostile takeover defense last year. Legal expenses and investment banking fees exceeded $5.5 million for work done by six or seven people over a 3-week period. “The fees the bankers and lawyers get are astronomical,” he said.

When an attempted takeover begins, managers quickly discover how much disruption they can cause. “Once the bidding starts,” he said, “you’re out of control.”

Strauch took issue with claims that takeover activity has a beneficial effect on corporate America by making companies more efficient. “A company that grows through liquidation is building an empire on a not-so-strong foundation,” he said.

Companies that benefit from acquisitions represent a minority of all takeover targets, he said. In most cases, he said, productivity and capital are diminished, and customers and employees are lost because of takeovers.

“I find them to be disgusting,” he said.