Shamrock Holdings’ decision Monday to give up its $3-billion, eight-month bid to buy Polaroid Corp. comes after Polaroid’s innovative, three-part defense withstood every legal challenge that the Burbank investment firm threw at it.
Polaroid was successful because it established an impregnable legal shield consisting of a large employee stock plan, it sold a block of convertible preferred stock to a friendly investment fund, and the company set up a stock buyback in which it is repurchasing slightly more than one-fourth of its shares.
Although Shamrock, a Burbank investment company that is owned by the family of Roy E. Disney, nephew of the late Walt Disney, lost the takeover battle, it is still likely to make a sizable profit on its investment.
The 4.96 million Polaroid shares that Shamrock accumulated before launching its bid in August were purchased at an average price of $30.85 each. The company will make a pretax profit of about $26 million on the 1.33 million shares that it sells back to Polaroid in a $50-a-share stock buyback that expired last week. Ultimately, analysts and traders expect Shamrock to be able to sell its remaining shares at a profit, possibly earning as much as $40 million before taxes on all of its stock.
Shamrock’s settlement agreement with Polaroid includes a provision that Polaroid will distribute to shareholders, either through dividends or stock repurchases, part of its after-tax proceeds from a copyright infringement suit that Polaroid won against Kodak. Some analysts expect Polaroid to recover $1 billion to $2 billion in the damages phase of the trial this year.
In addition, the settlement requires Polaroid to spend $5 million in advertising on radio and television stations owned by Shamrock and to reimburse Shamrock about $20 million in legal and investment banking expenses.
The fight for Polaroid, the Cambridge, Mass., company that pioneered instant photography and became one of the world’s best-known brand names, was noteworthy because of Polaroid’s creative use of an employee stock ownership plan, or ESOP, as a key defensive move.
The ESOP defense took advantage of a clause in the takeover laws in Delaware, where Polaroid and most other major companies are incorporated, that requires an unfriendly suitor to gain approval from 85% or more of a company’s shareholders in order to quickly finish a merger. Without 85% approval, it takes three years to complete a merger. Polaroid’s legal defense was concocted principally by Wall Street investment bankers Shearson Lehman Hutton and the Cravath, Swaine & Moore law firm.
The first move in the ESOP defense came in July when Polaroid announced that it had sold a 14% block of the company’s stock to its ESOP the day before Polaroid’s chief executive, I. MacAllister Booth, was scheduled to meet with Shamrock President Stanley P. Gold and with Roy E. Disney.
Shamrock had told Booth in June that it was a major Polaroid shareholder and had requested a meeting with him. Shamrock promised that it would not buy more than 5% of Polaroid’s stock before the meeting. Once an investor buys more than 5% of a company’s stock, it becomes public knowledge through a required disclosure to the U.S. Securities and Exchange Commission.
Polaroid agreed to the meeting, then Booth canceled the meeting while Gold and Disney and his wife, Patty, were headed for New York. Gold said later that Shamrock had been “sandbagged” by Polaroid.
Polaroid maintained that it had always planned to establish an ESOP and that the 14% figure was arbitrary, although court documents show that Polaroid executives were so alarmed that Shamrock was a major shareholder that they had a financial analysis, called “Project Israel” (Israel is Booth’s first name), drawn up to show how an unfriendly suitor could finance an acquisition.
The stock for the ESOP was bought with borrowed funds that will be paid off over many years with money deducted from employee paychecks. That block, combined with the preferred stock sold to the friendly investment fund, Corporate Partners, and the reduction in shares that comes with Polaroid’s stock buyback, put close to 30% of the company’s stock into friendly hands.
The “Polaroid defense,” as it is being called on Wall Street, has been criticized as violating the spirit of ESOP-type programs and their goal of giving employees a stake in the company they work for.
“Instead of doing something to get the stock price up, which is the perfect defense, they set up a block with the employees’ money,” said Ralph V. Whitworth, director of the United Shareholders Assn., a shareholders advocacy group. Whitworth said his group may lobby Congress for legislation to prevent ESOPs from being used in takeover defenses.
Besides losing the takeover battle, Shamrock also lost the public relations battle for support from Polaroid employees. Gold tried, ineffectively, through interviews and newspaper ads to rally Polaroid employees to Shamrock’s position as he portrayed Polaroid’s management and directors as insensitive to shareholders and called their anti-takeover measures “the Boston Shareholders Massacre.”
Instead, Gold became arguably the most unpopular man in Boston since former Red Sox first baseman Bill Buckner’s error in the sixth game of the 1986 World Series cost the long-suffering team its first world championship in nearly 70 years.
Some 5,800 Polaroid employees signed petitions saying they didn’t want Gold to be their boss. T-shirts and bumper stickers were printed, saying “Polaroid family say no to Stanley” and “Polaroid does not want to be a Mickey Mouse outfit. Say No to Roy Disney.”
A rock song called “We Share a Dream” was played on Boston radio stations. Although it never refered to Gold by name, the tune accuses him of wanting to “cut out the heart and take the money and run” and ultimately poses the question: “Aaah, what will become of us . . . at Polaroid?”
Gold has previously portrayed himself as a misunderstood executive who wanted to turn Polaroid around and invigorate it.
But the criticism has clearly gotten under Gold’s skin. After he was referred to in the Boston Globe as “the dreaded Californian who hopes to own Polaroid,” Gold sent T-shirts to reporters covering the Polaroid-Shamrock battle. The T-shirts read: “I have met the dreaded Californian. . . . He’s really a cupcake.”
After a column about him by writer Alex Beam appeared in the Boston Globe, Gold asked the newspaper to quit referring to him as a corporate “raider.” That drew a response from Beam: Another column was entitled “The Thin-Skinned Stanley Gold.”