DOGFIGHT FOR GRUMMAN : The Rush to Do Deals
Northrop Corp.’s stunning decision to launch a hostile bid for Grumman is another sign that many companies--and not just defense companies--believe the time to do strategic deals is now, investment bankers say.
That should translate into a pickup in hostile takeover offers overall this year, perhaps bringing back memories of the tremendous corporate battles of the late 1980s--and providing a welcome new source of support for stock prices.
Yet the reality is that few large hostile deals have succeeded recently, as QVC Network’s recent failed bid for Paramount Communications vividly demonstrated.
The major reason that hostility hasn’t worked is the most obvious reason: A company that really doesn’t want to be bought makes a poor partner, assuming that the deal is meant to be a true merger and not a bust-it-up, sell-it-off transaction like so many in the ‘80s.
“Not a lot of people meet their future spouses under difficult situations,” one investment banker noted wryly.
The heyday for hostile deals was in 1988, the RJR Nabisco era, when such takeover offers totaled $210 billion and accounted for 62% of U.S. takeover bids, according to Securities Data Co.
But with the collapse of the junk bond market in 1989, the subsequent ruin of many corporate raiders and the bank credit squeeze that began in 1990, hostile takeovers became far more difficult to do. In 1992, the value of announced hostile offers was a mere $7.8 billion, or just 5% of all deals, Securities Data says.
Last year, hostility revived as a takeover concept, pushing the value of announced hostile offers to $18.2 billion, or 7.5% of all bids. Much of that total, however, was accounted for by the ill-fated QVC offer for Paramount.
Why believe more buyers will go hostile this year? First, a pickup in unsolicited offers will be a function of more deals in general, friendly and hostile. With the U.S. economy on solid footing and corporate confidence soaring, many companies are eager to expand their businesses in significant ways, investment bankers say.
“I think this is going to be the year for intra-industry consolidation,” says Dan Case, a principal at the investment banking firm Hambrecht & Quist in San Francisco.
He believes potential acquirers will be motivated in large part by investors’ optimistic expectations for corporate profit growth, which are reflected in high stock prices. In an extremely competitive world economy, it’s tough to produce the healthy earnings growth your shareholders expect without also increasing your market share meaningfully, Case says.
Most important, hostile deals are easier to launch now because financing is once again plentiful. Major banks are in better fiscal shape than in many years and so are eager to lend money, as Northrop discovered: It apparently had no trouble lining up $2.8 billion in financing commitments from Chase Manhattan and Chemical Banking for the Grumman bid.
“Banks are willing to lend a bigger percentage of an acquisition price than they were even a year ago,” says James Zukin, a principal at Century City-based Houlihan Lokey Howard & Zukin, a firm that advises companies in takeover deals.
In addition, raising money via high-yield junk bond offerings is again a snap for companies that choose to go that route. For example, Thrifty Drug Stores is using high-yield bonds to buy PayLess Drug Stores, a deal that might have been impossible just two years ago.
Banks and junk bond investors are necessary parties to most hostile offers, because unsolicited offers need to be in cash--not in the acquirer’s stock--to have a decent shot at succeeding, investment bankers note.
While it makes sense for friendly takeover deals to be done with stock swaps (especially if the buyer’s stock is selling for a high price relative to earnings, making it a cheap currency for the buyer), the best way to lure an unwilling target’s shareholders is with cold cash.
That may also be the only legal way to close a deal, especially if a hostile offer is made for a company that has already chosen another suitor.
In the Paramount case, the Delaware court that heard QVC’s challenge to Viacom’s friendly takeover deal with Paramount made it clear that once a company puts itself up for sale, the directors’ responsibility is to get the highest and best price.
In the end, Viacom was able to convince Paramount shareholders that its offer was best, but not before allowing QVC into the bidding process.
With many companies angling to jump far ahead of their competitors in market share as the economy expands, friendly takeover offers are more likely to be followed by rival bids this year, bankers say. In effect, an offer for a competitor is a challenge to all other potential suitors in the field.
And with cash more readily available from banks and junk bond buyers, “it becomes tougher to defend that first deal out of the box,” one investment banker says.
Still, this isn’t likely to be 1988 all over again. Most deals are done for strategic reasons today--a company seeking a fit with another, as both Northrop and Martin Marietta believe that Grumman’s defense operations can be successfully integrated with their own, for shareholders’ gain.
In the late ‘80s, in contrast, takeovers were led by raiders who simply sought to buy a business for $100, then sell its pieces for $150.
Before this takeover wave is finished, however, it’s also possible that classic bust-up transactions will reappear, so long as the money to finance them remains available.
“History tells you that liquidity begets transactions,” a banker reminds.
Indeed, in the defense sector, the strong cash flows enjoyed by many of the players, and the relative ease with which individual defense contracting units can be broken off, may make what’s left of the industry particularly vulnerable to bust-ups.
Consider: General Dynamics has essentially chosen to go that route itself, selling off pieces of the company and distributing the proceeds to shareholders in cash dividends. Litton Industries decided last year to split itself, leaving defense operations in the old Litton and spinning off its oil field services and other commercial businesses in a new company, Western Atlas.
In the defense industry and many others, “There’s a sense of urgency on the part of a lot of corporations to do something,” one banker says.
And to a large degree, we may just be at that phase of the economic cycle where takeover mania is inevitable: As confidence returns to business, egos take over and corporate managers begin to believe that growth by eating others is their manifest destiny.
Plus, of course, it generally beats being eaten.
Hostile Deals: A Tough Sell
Hostile takeover offers have been increasing in number, but the recent success rate for the largest ones hasn’t been stellar. How the biggest hostile offers of the past year have fared:
Target Bidder Status Paramount QVC Network Rejected PSI Resources IPALCO Ent. Rejected Med. Care Amer. Surgical Care Rejected Fieldcrest Springs Indus. Rejected WLR Foods Tyson Foods Tender under way Katy Indus. Rosecliff Pensler Rejected Integ. Resources Penguin Group Pending Lifetime Corp. Abbey Health. Rejected
Source: Securities Data Co.
