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Hostile Bids on the Rise as Stigma From 1980s Fades

The hostile takeover bid is still the exception rather than the rule on Wall Street, but the combination of a strong economy, a wild bull market and ever cockier chief executives is likely to make such bids far more common in 1997.

They don’t always succeed, of course--just ask Mattel about its attempt to coerce toy industry rival Hasbro into a deal last year.

But for many CEOs who are intent on empire building, the hostile route no longer has the stigma that it carried in the early 1990s, when memories of the 1980s’ ruinous takeover battles were fresh.

“Three years ago there wasn’t a CEO or board of directors that had the stomach to do an unfriendly deal,” said Michael S. Koeneke, co-head of mergers and acquisitions for Merrill Lynch & Co.

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Now, he said, most acquisitive companies would still prefer to do friendly transactions. But what has fueled more hostile bids is that CEOs “see others who have done this, and been successful.”

Indeed, H.F. Ahmanson & Co. CEO Charles R. Rinehart, in ambushing Great Western Financial Corp. with a surprise takeover offer Monday, lifted a page out of Wells Fargo & Co.'s strategic manual.

Wells’ take-no-prisoners attitude in bidding for First Interstate Bancorp in 1995--even as First Interstate made clear that it wanted to marry First Bank System of Minneapolis--eventually wore down First Interstate management and forced it into a deal.

Similarly, Hilton Hotels Corp. surprised ITT Corp. with a takeover offer last month, and Hilton shows no sign of backing off, despite ITT’s cold reception so far.

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With confidence in the economy high and stock prices soaring as well, many CEOs believe this is the ideal time to swap stock for real assets and grow by acquisition. But high stock prices also can convince target companies that they shouldn’t sell. Sound like a sure recipe for conflict? Welcome back to the ‘80s.

The usual justification for an unsolicited bid, then, is that an intended target won’t sit down and talk nicely with a suitor.

But whether talks are in progress or not, there are good reasons to spring an offer publicly on a potentially difficult target.

For one, the element of surprise can be just as big an advantage in the corporate world as on the African savanna. By catching your prey off guard, you are in control of the situation, at least initially.

The media, for example, are likely to give the bidder’s “spin” on the deal primary play in the first story on the offer, because the target’s lawyers will always advise just saying, “No comment.”

In Ahmanson’s case, Rinehart tried to push all the right buttons to convince key constituencies that the deal makes sense and that Great Western ought to quickly accede to the offer.

On the community relations front, Rinehart cited the idea of creating a hometown institution that would “solidify Los Angeles’ standing as one of the leading financial centers.” For employees, he vowed “enhanced career opportunities” (at least for those who aren’t laid off). And most important, for shareholders he promised fantastic cost savings and an accounting procedure that would allow for stock buybacks and/or dividend increases early on.

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Getting all of this out for public consumption while the target is still frozen like a deer in the headlights sets certain wheels in motion. Analysts at brokerages, for example, begin to nod in assent to the “wisdom” of a merger. Big shareholders start thinking about making a call to the target’s CEO to impress that serious consideration ought to be given to the offer.

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Still, going public with an unsolicited bid doesn’t guarantee consummation. For one, many companies adopted “poison pills” in the late 1980s, and they still can present a formidable obstacle to a takeover. At the very least, they give a target more time to decide whether it wants to accept an offer, find another suitor or take steps to remain independent.

In addition, by making a takeover bid, a suitor immediately invites the attention of its rivals, who may decide the target is worth more--and bid accordingly.

But investment bankers say the most intelligent hostile bids today are those that are made at prices that factor in what other potential bidders would probably be willing to pay--and either meet those prices or top them.

“As a hostile bidder, you better be serious--and you better have done your homework,” says one banker who asked for anonymity.

Whether Ahmanson’s offer for Great Western is so serious as to be inevitable remains to be seen. With Ahmanson’s own stock up sharply Tuesday, the market either believes this deal is doable--or that Ahmanson itself may soon be prey for a bigger predator in the jungle.


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