Mudslinging Abounds : Year of the Corporate Smear Attack

Corporate reputations have been taking a bruising all year in the software industry, beginning with the night when two young people hired by Borland International tiptoed into a darkened hotel in Palm Springs.

Their secret mission: to slip beneath the doors of 500 sleeping executives at a trade conference copies of a magazine story that portrayed Borland’s archrival, Lotus Corp. President Jim Manzi, as arrogant and ineffective.

Manzi may have been surprised at the attack, but he wasn’t above publicly belittling Borland a little later as a firm whose sales revenues are smaller than Lotus’ toilet-paper bill. Not to be left out in this roundelay of disparagement, Microsoft Chairman Bill Gates told a Boston crowd in May that if he were Manzi, he would “get a . . . manual and learn how to program.”

Well-Aimed Mudslinging

When business competition gets tough, no tactic is more tempting than an attack on the other guy’s good name. Surreptitious or overt, a well-aimed mudslinging campaign can blight a competitor’s sales, unravel its important deals and alienate its bankers and business partners.

The attractions--and risks--of the corporate smear have been rarely as apparent as this year.

American Express was recently caught feeding foreign newspapers false stories tying rival financier Edmond J. Safra to money-laundering, organized crime and the Iran-Contra affair. Last month, as penance, American Express agreed to donate $8 million to charities chosen by Safra.

In July, in the biggest libel judgment ever, a court ordered Home Shopping Network to pay $100 million to GTE Corp. for falsely blaming its slumping sales on customers’ inability to get through on GTE phone lines.

In the takeover wars, Avon Products instantly shut down an unwanted purchase bid from Amway Corp. by attacking Amway’s ethics. As Time Inc. and Warner Communications fought off Paramount Communications’ bid for Time, the three media conglomerates battered each other with new, and recycled, accusations of dirty dealings.

Sophisticated Tactics

Indeed, while corporate smears have been around forever, they have been developed to unequaled sophistication during the takeover boom of this decade. Executives locked in life-or-death corporate struggles are skillfully using takeover lawyers, public relations aides, private investigators and others to unearth the opposition’s most embarrassing secrets, then publicize them to inflict maximum damage.

The information shows up in ad campaigns, is handed over to government agencies to enlist their help, or shown secretly to the opposition with a tacit threat that it will be publicized unless the rival abandons the fight.

But the mudslinger doesn’t have all the weapons. The cases of GTE and Safra, who shut down American Express’ campaign by threatening to sue, suggest smear targets are becoming more willing to fight back, and are more likely to win when they do.

These targets overcame the victim’s typical reluctance to resist a smear because of the fear of negative publicity and the difficulty of proving damages in court. “A lot of lawyers have probably cautioned their clients about attacking the competition since those cases came out,” said James B. Astrachan, a Baltimore trade libel lawyer.

And a smear is a dangerous tactic even if the target doesn’t fight back, because the unpredictability of public opinion means the smear can badly backfire.

‘It’s a War Out There’

Philippe Kahn, the chairman of the software publisher Borland, may wish he had been more circumspect before he had hundreds of copies of the New England Monthly story about Lotus hauled across the country to be distributed at the computer conference.

“It’s a war out there, and sometimes you go too far,” concedes Kahn, who has apologized in a letter to Manzi.

The ultimate effect of Borland’s tactic was to generate sympathy for Lotus, a company often seen in the industry as arrogant. “The reaction was, ‘Poor Lotus’--and that’s a sentiment you don’t hear expressed a lot in this business,” said Heidi Sinclair, a Lotus vice president.

The unpredictable consequences of mudslinging were also evident in the outcome of American Express’ secret campaign.

Safra, a former American Express executive who now competes with the big financial services company for wealthy private clients, discovered that an investigator working for American Express had been planting negative stories about him for three years. Threatened with a lawsuit, American Express apologized and announced that the head of its public relations department would take early retirement.

But anyone who expected a public outcry has been surprised. “The lack of public reaction has been incredible,” said a Wall Street analyst, who asked to remain unidentified. “None of my investors seem to care about it . . . the stock price has been totally unaffected.”

Indeed, the reaction to American Express has consisted of two letters from customers threatening not to buy American Express travelers checks, the company says. “We’ve heard almost nothing, and I’d rather not have you write an article on it,” said Matt Stover, an American Express spokesman.

Such episodes don’t always fade quickly from memory.

Some city officials in Burbank say their relations with entertainment giant MCA may be soured for some time by the company’s surreptitious attempt to undermine Walt Disney Co.’s plans to build a theme park in Burbank two years ago.

After denying it for weeks, MCA acknowledged in November, 1987, that it had circulated a mailer denouncing the $100 million in tax subsidies it said Disney would receive for the park. The mailer contended that a theme park would bring Burbank even heavier traffic, and a blight of seedy motels, liquor stores and other undesirable businesses.

The leaflet, which identified itself as the work of a group called “Friends of Burbank,” included pictures purporting to depict how Disneyland had drawn such problems to Anaheim.

“MCA’s right near us, and we’re going to have to deal with them, but it’s going to be hard to forget this bitter experience,” said Burbank City Councilman Michael R. Hastings, who was mayor at the time. “Next time we’ll probably be a little more cautious with them.”

Dan Shapiro, the Encino lawyer who was retained by MCA to handle its lobbying on the matter, still defends the maneuver, saying the public would not have taken MCA’s arguments seriously if it thought they were coming from a competitor.

He compared MCA’s use of an alias to the use of the pseudonym Publius by Alexander Hamilton, James Madison and John Jay when the three Founding Fathers wrote the Federalist Papers. “This kind of thing has a long and glorious history, going back to the invention of the printing press,” Shapiro said.

MCA officials, who defended the tactic at the time, decline comment today.

Steal Clients

Just as bitter as such lobbying battles are mudslinging contests where business rivals disparage each other to steal away clients.

Beber Silverstein & Partners, a Miami ad agency, says it was smeared when a former vice president of the firm stole away one of Beber’s most visible customers, New York hotel queen Leona Helmsley, to start his own business.

In a lawsuit, Beber contended that Noel Frankel had secretly told Helmsley that the agency had been funneling off her advertising dollars to do work for her bitterest rival, New York real estate tycoon Donald J. Trump. Frankel told Helmsley that Beber was paying off a Helmsley executive, Geoffrey Lerigo, to conceal the diversion of money, the suit said.

“To get our account, he thought he had to go after our reputation,” says Joyce Beber, the agency’s president.

When she learned she had lost the account, Beber fought back by sending Helmsley a letter that denounced Frankel as “lazy, erratic, neurotic and talented,” court papers show.

The fight got even nastier. Helmsley sued Beber for fraud and breach of fiduciary duty; Beber sued Helmsley to recover $1 million in unpaid bills.

Frankel, who denied Beber’s charges, held onto the account for only a few weeks before he was fired. Helmsley eventually dropped her suit, and paid Beber’s bill.

Beber, who last year dropped the suit against Frankel, believes the case illustrates the frustrations of those who try to fight back against such smears. “We would have won the suit, but what would that have gotten us?” she asks. “He didn’t have any money; we would have had a pile of legal bills.”

Damaging Rumors

A business that bad-mouths a rival to a customer may run a high risk of being caught. Smearing may be less risky if a business can start a damaging rumor, or pass along one that’s already in circulation.

That is evidently what happened two years ago, when beer distributor Luce & Sons of Reno was caught passing along rumors that Corona Beer was contaminated with urine. Corona’s importer, Barton Beers Ltd. of Chicago, sued Luce, but dropped the suit when Luce agreed to say publicly that Corona was not contaminated.

When Procter & Gamble battled rumors that tied it to devil-worship, the path led to distributors for two rival home products companies, Amway and Shaklee. Procter & Gamble sued four Amway distributors and one Shaklee distributor in 1985 to stop their rumormongering. The suits were dropped when the distributors pledged not to pass on such rumors in the future.

While many covert smear campaigns eventually come to light, some experts assume many others inflict their harm without the public ever learning their origin. “For every one that gets discovered, there may be a dozen that don’t,” says Stephen A. Greyser, professor of marketing at Harvard University Graduate School of Business.

Sometimes smear campaigns are born of a desperate competitive situation. Jartran, a start-up truck rental company, used an ad campaign for three years that compared its rates and trucks with those of its far larger rival U Haul International.

The ads were artful, and won advertising awards. As it turned out, they were too artful: They were replete with false information and showed pictures of U Haul trucks that had been photographically reduced to make Jartran’s seem like a better deal.

U Haul’s $40-million legal award was upheld by a federal appeals court in 1986. But U Haul never collected, since Jartran in the interim had filed for bankruptcy court protection.

Takeover Battles

While rivals sometimes go too far in advertising, ferocious assaults take place routinely in the takeover world.

Facing a bitter takeover fight from the Coniston Partners investment firm two years ago, toiletries maker Gillette Corp. hired the private investigator Ackerman & Palumbo to dig up dirt on its adversaries. According to Paul Tierney, a Coniston partner, the investigator sent people to South America to check into his activities while he was in the Peace Corps there.

“I can only assume they were hoping to find some link to drug smuggling,” says Tierney. Gillette acknowledges the investigator checked the backgrounds of all candidates for corporate director, but denies anyone went to South America to do it.

Gillette used other tough tactics that didn’t serve the company well. The company ran newspaper ads hinting Coniston was strongly influenced by an Italian investor, whom Gillette portrayed as having mob ties. A judge ruled the ads had unfairly influenced an election of directors and ordered a new election.

A company in a takeover battle will sometimes turn to government agencies with its damaging information to try to undo the adversary. Harold Simmons, the Texas multibillionaire raider, found himself under investigation by the Securities and Exchange Commission, the FBI and the Federal Trade Commission when he tried to take over a steel company called Cyclops a few years ago.

“After that, I started spending money and doing some lobbying myself in Washington,” says Simmons. “That’s what you’ve got to do to defend yourself in that kind of situation.”

Smears to government agencies have also allegedly figured in the long-running battle for control of Guess? Inc., the jeans manufacturer.

The Marciano brothers who control Guess? last June accused rival Jordache of having an investigator use false information to start investigations of the Marcianos by the IRS, the Customs Service and Immigration Service. The Nakash brothers, controlling shareholders in Jordache, have denied the charge.

Publicizing derogatory information is another skill that has been well-crafted in the takeover game.

A classic case occurred 20 years ago, when a dental supply firm called Sterndent fought off Magus Corp. by arguing that at least one Magus investor was an Arab. Sterndent argued in ads that the Jewish dentists among its customers would drop Sterndent if Magus won, in what came to be known as the “Jewish dentist defense.” Not mentioned was the fact that Magus also had some Jewish investors.

When a company called General Cable was trying to take over a high-tech manufacturer called Microdot in 1979, Microdot used an ad to remind shareholders that General Cable’s chief executive wouldn’t get his usual generous annual bonus without the sales boost the acquisition would provide.

Richard Cheney, who was Microdot’s public relations adviser and is now chairman of the Hill & Knowlton public relations firm, suggested placing the ad in Robert Jensen’s hometown paper in Greenwich, Conn., to make pressure on Jensen all the more intense.

Microdot lost the battle, but not because the tactic wasn’t effective. Years later, Jensen acknowledged in a chat with Cheney that students at his son’s school in Greenwich “had teased the kid unmercifully,” Cheney recalls.