Opening the Way for Heirs to the Raiders
In business, the 1980s seem to linger--like Dracula after sunrise.
Corporate raider Carl C. Icahn is in the news once more, campaigning for the votes of USX shareholders with a promise that if he wins their support at the May 7 annual meeting he will buy $800 million worth of USX stock at $48 a share, a substantial hike from the current price of about $34.
What’s his game? Basically he’s trying to double his bet in USX in a bid to double his profit.
Icahn, who owns 13.3% of the stock, contends that if USX--the result of the 1982 merger of U.S. Steel and Marathon Oil--were to split into separate steel and oil companies, the combined stock price would be $48 a share. He’s asking other shareholders to support him in a non-binding referendum urging management to split the companies.
It’s a confidence vote, of course, and Icahn doesn’t even have to win. If he gets a sizable vote from USX’s pension fund shareholders, management will have to take some action to boost the stock price.
And any boost would benefit Icahn, who began acquiring USX in a 1986 takeover bid that fizzled and now has 33.9 million shares, reportedly at an average cost of $24 a share, or $813 million total. So he’s got a profit in the stock of $10 a share today, or $339 million.
But in bidding $800 million more--claiming he can raise the money from a division of American Express and an old rail car company he owns--Icahn boosts his average cost to $32 a share but his potential profit to roughly $800 million if market action gets the stock up to $48.
What are his chances? He won’t win the vote but he’ll make life difficult for USX management in the runup to the annual meeting next week because he’ll probably attract support from some newly activist pension funds wanting to assert their authority over management. Raider Harold C. Simmons recently garnered surprising pension fund support in a proxy contest at Lockheed.
Shades of the 1980s, when corporate raiders like Icahn grew rich by milking U.S. companies: This stock market byplay won’t help USX produce more steel or oil and, in fact, could endanger employee pensions and investments in modern steelmaking equipment.
So why is it happening? Because the conditions that gave raiders opportunity in the 1980s are still with us, even if the raiders themselves--T. Boone Pickens Jr., the Belzbergs and the rest--are a spent force following the drying up of financing for takeovers. In the 1990s, indeed, new buyers for U.S. companies more powerful than any raiders may respond to those conditions.
To understand where we’re headed in the new decade, it’s a good idea to take a look at the conditions that shaped the last one.
A sharp rise in interest rates was the real culprit of the period, writes Margaret Mendenhall Blair of Brookings Institution in an essay that will be part of a new book, “Debt, Taxes and Corporate Restructuring.” At the start of the 1980s, interest rates rose in response to the inflation of the previous decade and surpassed the falling rate of return that U.S. companies were earning on many of their operations.
That explanation sounds dull and technical, but there’s clear history behind it. The returns on capital for U.S. business as a whole--as measured by the Commerce Department--had been falling since about 1950, as companies failed to get the productivity increases they needed. The condition was not readily apparent for many years because business was easy--U.S. companies could sell all they made, and overseas they could often expand effortlessly.
But thus lulled, many failed to invest quite enough in new equipment or new labor relations. It was easier to invest in doing things the old “tried and true” way--even though it no longer produced a superior profit.
The bill came due in the early ‘80s. As interest rates shot up, they cast the “tried and true” in a different light. It made no sense to borrow at 10% to invest in an operation returning less than that. Disconcerted by the numbers, U.S. business slowed investment.
And then came false prosperity as the flow of income from past investments accumulated in corporate coffers and corporate executives thought they had new-found power. But soon the raiders came for the cash.
Icahn, Pickens, Sir James Goldsmith and the rest forced companies to sell assets, cut staff, halt expansion and pay out cash. In one sense, they cleared away dead limbs. “If you don’t have gravediggers, you must have vultures,” observes business historian Peter F. Drucker. But in another sense they merely fattened on the misery of others, as millions of employees lost jobs and foreign competition trounced U.S. companies.
Lately, financing for raiders has dried up, as the junk bond dealer Drexel Burnham Lambert went bankrupt and commercial banks shut off merger loans. (Even Icahn may be hungry for cash; certainly Trans World Airlines, which he owns, is in sorry shape--strapped for cash and up for sale.)
But while raiders are a spent force, interest rates are as high as ever. And, remember, it was interest rates at historically high levels--adjusted for inflation--that led to the 1980s focus on financial assets and corporate takeovers.
Today, a lot of smart people say the ‘90s will see variations on the same theme, with pension funds and cash-rich companies--here and abroad--providing the financing. Just last week, for example, the big Minneapolis retailer Dayton Hudson acquired Chicago’s Marshall Field, and foreign investors bought Saks Fifth Avenue and Norton Co.
The trend to watch: That well-heeled, global companies and investors will call the tune in the new decade as the Drexels and Icahns set the tone of the last.
