Takeover Fight Bruised Both Prime and MAI

Earlier this year, Richard and Cathy Eckel had decided it was time to give up their one-bedroom apartment in suburban Boston and begin looking for a home more suitable for raising a family. But the young couple had a problem.

Eckel’s employer, Prime Computer, was under siege. MAI Basic Four, a Tustin-based computer company, had launched a hostile takeover bid for its larger rival. At Prime’s headquarters in Natick, Mass., the hallways and offices were rife with rumors that MAI Chairman Bennett S. LeBow, a New York takeover specialist, planned to dismantle Prime by selling off its operations in pieces and firing hundreds of workers.

The situation made the Eckels nervous, concerned that the corporate chess game being played out in distant boardrooms and courtrooms would disrupt their plans.

“I wondered where I would fit in if there was a big layoff,” said Eckel, 32, a public relations manager. “Would I survive? And if I survived, would I want to be here? I knew I might lose my job. What were we doing looking for a house?”

The uncertainty prompted Eckel to act. Reluctantly, he says, Eckel quit Prime in February to take a job with Lotus Development Corp., a major Boston-area software company. “When I left Prime, I had the sense it was very close to the end,” he said. “It looked like (MAI) was in a position to win.”

As it turned out, the takeover battle dragged on for another six months. And MAI didn’t win after all. In fact, the losers appear to outnumber the winners in the battle, which apparently ended with Prime’s acceptance earlier this month of a $1.2-billion friendly bid from J. H. Whitney & Co., a New York venture capital firm.

The nine-month fight, coming amid a continuing wave of mergers nationwide, serves as a case study in how corporate combat can hurt companies, employees and customers.

Prime and MAI say that they spent nearly $70 million battling each other since last November. Morale at both companies suffered as the long battle drove off key employees and triggered extensive layoffs. Further, at a time when Prime and MAI were struggling to survive in a desperately competitive minicomputer market, both lost skittish customers concerned that the battle would disrupt the firms’ operations.

When all was said and done, neither company got what it wanted.

Industry Consolidating

Prime Chairman David J. Dunn fought to keep the company independent, but was forced to find a “white knight” in J. H. Whitney to escape LeBow’s grasp. MAI, a relatively unknown computer maker, lost in its effort to expand; when MAI launched its bid, LeBow had argued that the merger would be good for both companies because only larger, stronger firms would survive as the industry consolidated.

“It’s difficult to argue that the customers or employees of either company have benefited or that Prime or MAI are in better shape now,” said Barry F. Willman, an analyst at Sanford C. Bernstein & Co., a New York investment firm. “The obvious winners are the lawyers and the investment bankers.”

MAI and Prime “were in a weak position last year and it didn’t get any better this past year,” added Jay P. Stevens, an analyst with Dean Witter Reynolds in New York.

And even MAI President William Weksel concedes that, ultimately, the takeover attempt was a mistake. “I don’t think either of the companies won,” he said.

Neither, apparently, did the MAI or Prime shareholders.

Prime snubbed MAI’s initial $20-a-share offer last November, calling it inadequate, but wound up accepting the J. H. Whitney offer that Wall Street has valued at about $18 a share. MAI’s stock, which had traded as high as $21 before the takeover, has recently languished near $5.

Lost Customers, Huge Fees

Both companies have acknowledged that the long battle cost them new business and tested the patience of even their most loyal customers. Prime’s research showed that 25% of its customers put off new equipment purchases because of the takeover.

“It was imperative for us to end this situation,” said Joe Gavaghan, a Prime spokesman. “We were starting to lose our customers.”

LeBow’s game plan had estimated that the Prime takeover would play out in three to five months. “The longer it took, the more adverse it became,” MAI’s Weksel said. “The time element defeated everybody in this situation.”

Lost customers and large fees paid to attorneys, investment banks and public relations firms battered both companies’ bottom lines.

Prime’s takeover expense bill totaled $42 million, leading to a loss of nearly $19 million in its latest quarter.

“It’s a miracle the loss wasn’t larger,” said Dunn, a San Diego resident who was one of Prime’s earliest investors.

Meanwhile, MAI said it expects to report an $18-million loss for its latest quarter, blaming $25 million in takeover-related costs. MAI is also cutting 10% of its work force--about 400 people--in a corporate realignment that it claims was not prompted by the Prime bid.

LeBow said Friday that his Brooke Partners investment firm will invest $30 million in cash and convert another $25 million worth of preferred stock to common stock in an effort to shore up MAI’s balance sheet. The investment will raise LeBow’s stake in the company to 51% from 37%.

Very Bad for Morale

In some respects, the takeover’s effect on employees of the two companies is hard to quantify. But both companies cite lower productivity, weakened employee morale and defections among middle and upper managers.

“Initially, it was all very exciting,” said one MAI manager, who was laid off Aug. 4. “Here we were taking over a company that was three times our size and this was going to put us in the big leagues. Executives were carrying around beepers and having secret meetings and there were unknown visitors here.

“As it goes on and on, you begin to get depressed. Nothing seems to be going well and it takes on an exaggerated impact,” added the manager, who asked not to be named because he is still looking for a job. “People begin to wind down their level of activity and spend a lot of time thinking and talking about it . . . A lot of people feel (LeBow’s) attempt has possibly killed two companies.”

Among the key executives lost in the battle were the presidents of both Prime and MAI. Prime’s former president, Joe Henson, who had planned to retire anyway, quit soon after MAI launched its bid to allow his successor, Anthony Craig, to spearhead the takeover defense. And former MAI President William B. Patton, who was viewed by analysts as a top-notch marketing executive, abruptedly quit his post in June.

“Dealing with the details of the tender offer has been a tremendous distraction,” said Prime’s Dunn.

Tough Road for MAI

The takeover contest, analysts said, has sapped strength from two companies that were already struggling in a difficult market. Personal computers and workstations are eating into the sales of minicomputers, file cabinet-sized computers that have filled the gap between PCs and the largest mainframes. The problems are affecting not only Prime and MAI, but also other minicomputer makers such as Wang Laboratories and Data General, which recently reported sales declines and quarterly losses.

Analysts said Prime appears more financially fit than MAI because it is larger, has good cash flow and minicomputers make up only one-third of its business. Through its hostile acquisition last year of Computervision Corp., Prime became a leading player in the fast-growing computer-aided design and manufacturing business.

MAI could face a tougher road because it is a relatively small player and is more heavily dependent on the slumping minicomputer business, analysts said. MAI’s expected quarterly loss and its plan to cut 400 jobs and slash expenses by up to $30 million annually is a sign of the company’s weakened position, they said.

Weksel said the cost-cutting program will put MAI “on a very solid and sound financial basis.” Eventually, however, “the need to form a strategic alliance to help the company grow and achieve a critical mass is still required,” he said.

But Weksel is quick to add that MAI has no plans to launch another hostile bid, apparently content to lick its wounds for awhile.

Meantime, LeBow isn’t quite finished yet. He plans a proxy fight at Prime’s Aug. 24 annual meeting to try and oust Prime’s directors. LeBow, who also controls Western Union Corp. and cigarette maker Liggett Group Inc., wants Prime to sell its minicomputer business to MAI. But even MAI executives say the proxy contest is a long shot at best.

Meanwhile, Eckel, the former Prime employee, is still keeping tabs on the happenings at Prime. He says he misses his friends and the professional challenges that he had there. Even so, he feels that his decision to leave in the midst of the takeover fray was the right one.

“These takeovers really trickle beyond the office and infringe on your personal life,” he said. “My wife and I wanted to get on with our lives . . . You always hear about the dollars, you read about the court cases, but you never know about how these things affect people.”

CHRONOLOGY OF THE MAI-PRIME BATTLE

Nov. 15, 1988: MAI Basic Four launches a $1.3-billion hostile takeover bid for Prime Computer. At the same time, MAI sues Prime in courts in Delaware and Massachusetts, seeking to nullify Prime’s anti-takeover defenses.

Nov. 22: Prime sues MAI in a federal court in Boston, claiming that MAI failed to provide full disclosure of its relationship with its investment adviser, Drexel Burnham Lambert.

Nov. 29: Prime’s board rejects MAI’s offer as inadequate.

Dec. 7: MAI, in a lawsuit, suggests that Prime Chairman David J. Dunn failed to disclose his purchase of nearly $1 million of Prime stock a week before MAI launched its bid. In an interview, Dunn denies doing anything improper and calls MAI’s suit “an exercise in slander.”

Dec. 28: Prime announces a major reorganization and lays off 1,200 workers--or 10% of its work force. Company says the cuts are the result of its Computervision acquisition, not the MAI takeover attempt.

Jan. 30, 1989: MAI says that 77% of Prime’s shares have been tendered.

March 3: MAI announces that it will launch a proxy fight to oust Prime’s board at Prime’s annual meeting.

March 17: MAI says that 68% of Prime’s shares have been tendered.

April 11: Prime says it will seek a friendly buyer willing to pay more than MAI has offered.

June 1: MAI, citing Prime’s deteriorating financial condition, lowers its tender offer to $1.1 billion.

June 23: Prime says it has agreed to be acquired by J. H. Whitney & Co. of New York, one of the nation’s oldest capital companies, in a friendly merger.

June 29: Whitney formally launches a $1.4-billion tender offer for Prime.

July 26: Whitney says its banks have told the company they won’t back its bid unless Whitney raises additional financing. The request comes as Prime announces a nearly $19-million quarterly loss.

July 28: MAI abandons its bid to acquire all of Prime and offers instead to purchase only Prime’s minicomputer division for $600 million.

Aug. 4: Whitney lowers its bid for Prime to $1.2 billion; Prime’s board reluctantly accepts.

Aug. 10: MAI withdraws its offer for Prime’s minicomputer business, the last remnant of its nine-month effort to acquire Prime. Through Brooke Partners, MAI Chairman Bennett S. LeBow vows to continue his effort to oust Prime’s directors in a proxy fight at the company’s annual meeting on Aug. 24.

Aug. 11: MAI announces a major reorganization and says it will lay off 400 people, about 10% of its work force. Company officials say the layoffs are not the result of the failed takeover attempt.