The Pentagon Ploy, for All It’s Worth : The Norton Co. wanted to fight off a British takeover bid. Then it found a corporate Lafayette.
In their fight for independence from British rule, our Revolutionary forefathers obtained critical military aid and loans from France. Indeed, the French welcomed the opportunity to undermine the British in the New World. When, more than 200 years later, the managers of a Massachusetts firm found themselves under attack from the British, they turned again to the French.
This time the battle is over control of the Norton Co. of Worcester, Mass., a defense contractor and the world’s largest manufacturer of abrasives, such as sandpaper and grinding wheels. In March, the British industrial conglomerate, BTR (formerly British Tyre and Rubber) launched a $1.64-billion tender offer for Norton. The $75 share price represented a large premium over the price at which Norton had been trading. As is common in such instances, Norton’s management was not flattered by the offer and responded by calling its lawyers and investment bankers to discuss the latest takeover defenses. One of newest, the “Pentagon ploy,” was especially attractive.
The Pentagon ploy involves the Exon-Florio provision of the 1988 Trade Act. This provision gives the President the authority to block foreign acquisitions of American businesses if there is “credible evidence” that a “foreign interest exercising control (of a U.S. business) might take action that threatens to impair the national security” and that other federal laws do not provide adequate protection. Exon-Florio is administered by the Committee on Foreign Investment in the United States, an inter-agency group chaired by the secretary of the Treasury.
The immediate aim of the Pentagon ploy is to pressure the Committee on Foreign Investment into instituting a formal investigation, thereby derailing the transaction for 90 days, an eternity when hostile takeovers are involved.
The ploy usually has two steps. First, the target company either refuses to cooperate with the committee or overstates the importance of the firm’s business to national security. Next, the target gets friendly outsiders in the press, on Capitol Hill, etc., to exaggerate the importance of the target to national security.
Norton went to Capitol Hill and obtained signatures of more than 120 representatives and senators to an April 19 letter to President Bush seeking a formal Committee on Foreign Investment investigation of the transaction, stating “we do not believe that any takeover of Norton would be in our economic security or national security interest.” A “dear colleague” letter seeking signatures for the Bush letter raised two national-security concerns--the possibility that Norton after the takeover would reduce its research and development and the possibility that critical and advanced technology would fall into foreign hands.
Of the more than 330 transactions notified to the committee, the BTR-Norton hostile bid became the subject of the eighth formal investigation. (To date the President has ordered the divestment of only one company, a Seattle aircraft parts manufacturer that was acquired by an arm of the Chinese government.)
What makes the Norton transaction especially interesting is the appearance of a white knight, Compagnie de Saint-Gobain, S.A., a French conglomerate, which offered $90 a share for Norton.
Saint-Gobain apparently has also promised to keep Norton in Worcester, to maintain Norton’s charitable contribution program, to follow Norton’s plans for expanding research and development, and to retain several key Norton executives. Now that the managers have been taken care of, their concern for U.S. national security has waned. While a few members of Congress still seek Committee on Foreign Investment review of Norton or the Saint-Gobain acquisition, most seem to have been assuaged by the appearance of a corporate Lafayette.
However, the Saint-Gobain and BTR bids present the same risk to U.S. national security. The English and the French are both allies, and Norton is the same company it was a month ago. It still makes radomes, missile domes and ceramic engine parts, and it is as much on the cutting edge of technology as it was then.
Many members of Congress who signed the letter to the President must feel exploited. When Congress passed Exon-Florio, it rejected the suggestion that foreign acquisitions could be blocked for reasons other than national security. An earlier version, omitted from the final bill, would have given the President authority to halt foreign acquisitions that threaten U.S. economic security. Perhaps Congress will learn from the experience. Target managers whose economic security is threatened by hostile takeovers should not be allowed to misuse Exon-Florio.
This is not to suggest that Norton was not right to resist BTR and embrace Saint-Gobain. Perhaps it was, and there were means available to do so under the federal securities and state corporate laws. Two centuries ago, Adam Smith observed that “defense . . . is of much more importance than opulence . . . “ Members of Congress should remember that the next time they pressure the Committee on Foreign Investment in the United States to use Exon-Florio.
