Falling Stocks Could Make Unfriendly Bids More Popular
Hostile takeovers, the epitome of 1980s-style corporate aggression mostly out of fashion for nearly a decade, may become the big-ticket item on Wall Street this winter.
That’s the thinking of some of the nation’s influential investment bankers and lawyers, who are advising their company clients to stock up on “shark repellents” and refill prescriptions for “poison pills”--legal measures used to ward off corporate predators.
Some advisors are also working the other side of the street, telling clients to shop fiercely for companies that have suddenly become bargains.
Although no one is predicting a return to an ‘80s-like hostile-takeover frenzy--because such moves are costly, time-consuming and difficult to win--many investment bankers and lawyers are predicting there will be more hostile activity now that the stock market’s downturn has slashed the value of many companies, in effect red-tagging them for sale.
“The whole world went on a 50%-off sale” at the depths of global markets’ declines between July and September, said Ken Moelis, a managing director at investment banking firm Donaldson Lufkin & Jenrette in Los Angeles.
And although blue-chip U.S. stocks have rebounded in recent weeks, there still are many stocks off 40% or more from their peaks--making those companies vulnerable targets.
“This will be a period in which the strong will get stronger. Companies with healthier balance sheets will pursue more acquisitions than ever, and one likely consequence will be an increasing level of hostile activity,” said Daniel Ewell, a managing director and head of corporate finance for Morgan Stanley Dean Witter in Los Angeles.
Already this year, there has been about $1.25 trillion in announced merger deals--the vast majority of them friendly. That historic level of activity has already surpassed last year’s record $912 billion.
So far, there have been just 38 hostile or other unsolicited merger-and-acquisition bids, representing 6.3% of all announced takeover offers, according to Securities Data, a data tracker in New Jersey.
That compares with 56 such offers in all of 1997, or 8.8% of the deal total. But many experts say the hostile-deal count is sure to rise.
Motives for Any Kind of Takeover
Until the stock market downturn brought deal activity to a virtual standstill in September, companies were racing to merge for all of the classic reasons: to raise returns for shareholders, achieve cost benefits through larger size and to better compete in the global market.
These same reasons will drive a less-friendly round of deals, some bankers predict. For one, pressure to post strong earnings and create growth is only likely to intensify as the U.S. economy slows.
“Some companies are so committed to maintaining their growth profile, an acquisition can become the obvious way to enhance earnings--so they may feel they can’t let incumbent management stand in their way,” said Harry McMahon, co-head of Merrill Lynch’s investment banking practice in Los Angeles.
Another stock market decline also could fuel a new wave of hostile takeovers, just as a slew of such bids immediately followed the stock market crash of 1987. What makes for an ideal hostile-bid environment is that many targets become more reluctant to sell out “low” as their stocks drop, while bidders become all the more enticed.
Indeed, some bankers and lawyers already report an increase in ‘80s-style tactics, such as “bear hug” letters, in which an unsolicited would-be buyer makes a juicy offer privately to a company’s board, attempting to pressure a deal before management can mount a defense.
At Goldman Sachs in Los Angeles, Suzanne Nora Johnson, a partner who specializes in health care--an industry that continues to see rapid consolidation--said she believes there has been an increase in bear hug letters, which are not publicly disclosed.
“This, to us, is an indication that there is already some hostile activity out there,” Johnson said. “We expect to see more.”
Likewise, more potential targets are looking for help in shoring up their corporate bastions.
“A lot of our clients are calling to ask, ‘How strong are my defenses?’ ” said Charles Cogut, a lawyer with Simpson Thatcher & Bartlett in New York. “And other clients are calling, saying, ‘How strong are Mr. X’s defenses?’ ”
A company is most vulnerable to a hostile takeover, Wall Street deal-makers say, if its stock price has fallen by 40% or more from recent highs, it has mostly tangible assets (i.e., real property, not just ideas in employees’ heads), and it doesn’t have a founder or family controlling a large block of its stock.
Businesses in almost every industry could be fair game, bankers say.
“If [vulnerable] companies aren’t looking at what their defenses are, they are making a big mistake,” said Brian McCarthy, a lawyer with Skadden Arps in downtown Los Angeles. He is currently working on so-called shark repellents--maneuvers that can ward off a takeover--for three corporate clients, which he declined to name.
The most common such repellent is a type of “poison pill” that will cause a company’s outstanding shares to balloon in number if an unfriendly bid is made--thus making the company potentially too expensive for the would-be acquirer.
California could see more hostile activity than other states, not only because of the number of fast-growing, medium-sized companies based here, but also because the state lacks strict anti-takeover laws, attorneys said. Many defensive-minded companies incorporate in other states that have such measures--Pennsylvania, Delaware and Nevada among them.
Overall, the weapons available to companies that want to stay independent are formidable. That’s one reason only seven of the 56 hostile offers made in 1997 have actually been completed. Thirteen others are still pending and the rest failed or were withdrawn, Securities Data found.
Similarly, most of the recent hostile takeover attempts quickly became bogged down in lengthy legal battles or were abandoned.
One of the biggest--and ugliest--fights today involves Pennsylvania-based AMP, which is seeking to fend off a $9.3-billion takeover by New Jersey-based AlliedSignal. AMP, which makes electrical connectors, has sued to block the deal.
Late last year, Beverly Hills-based Hilton Hotels abandoned its $12-billion hostile bid for New York rival ITT after a bruising 10-month battle. And this year, Bank of New York withdrew its hostile $24.2-billion bid for Mellon Bank after Mellon executives promised to fight.
These well-publicized failures naturally have some Wall Street analysts skeptical that there will be any kind of hostile takeover revival in the next year. Unfriendly acquisitions can turn into costly, drawn-out fights, given all of the ways a target can defend itself.
Besides classic poison pills, other defenses include filing lawsuits, threatening to break up the company without a shareholder vote and going on a shopping binge for firms that the suitor would have no interest in owning.
In September, about 45 companies nationwide enhanced their hostile-takeover defenses by updating or adopting new poison pills, according to Securities Data. As it happens, 1998 marks the 10-year anniversary of the boom in poison pills, most of which were adopted during the late 1980s.
About 450 companies have a poison pill that will expire in the next 12 to 18 months, according to Corporate Control Alert, a New York newsletter. Among those are such giants as Chevron, GTE and Walt Disney.
Although pill adoption is again on the rise, the newsletter found, it has a long way to go before it approaches the totals of 1988 and ‘89--when more than 1,200 pills were adopted.
Robert A. Kindler, a New York lawyer with Cravath, Swaine & Moore who specializes in acquisitions, believes the array of defensive measures will curb hostile takeovers. He doesn’t expect a surge in such deals.
“People periodically predict there will be more hostile deals, but the truth is, it’s getting harder and harder to win these,” Kindler said. “The problem is, when you start a hostile bid you have to be willing to pay more than anyone else to win.”
What’s more, companies taken over against their will may not perform well--especially if key employees choose to leave.
Even so, plenty of companies aren’t taking any chances, and are looking for help--which, of course, benefits the bankers and lawyers who get paid for such advice.
Los Angeles mergers lawyer Alison Ressler, for one, believes hostile deals can succeed. She has recently helped sharpen poison-pill defenses for several clients, including Gemstar International Group, which adopted a defense that helped the Pasadena-based technology firm fend off a hostile bid launched in July by United Video Satellite Group of Tulsa, Okla.
Noting the recent slowdown in deal activity, Ressler said many firms have been “shellshocked” by the roiling stock market. If the market heads back down, Ressler expects more hostile bids to be launched, especially for companies that don’t have the benefit of significant ownership by a founder or a family.
“I believe you can win hostiles--if your target is a company with a heavy institutional shareholder base, which is typical today, and you’ve got a good story to tell,” Ressler said.
Acquisitions as Competitive Strategy
Major institutional investors, which increasingly own large stakes in U.S. companies, become critical players in the case of hostile bids, because they can put pressure on a target’s board to accept an unwanted offer--if the payoff for the shareholders would be rich enough, and the fit between the companies is logical.
But most specialists agree future hostile activity won’t be of the ‘80s variety, when players such as Texas oilman Boone Pickens and corporate raider Carl Icahn used debt to buy some of America’s largest companies, only to break them apart and sell the pieces.
The new style of hostile deals, analysts say, will be similar to the friendly mergers in recent years--except for the friendly part. They will continue to be cash or stock deals (as opposed to debt-financed deals) and will be driven by companies’ desire to make strategic business additions that beef up their ability to compete in global markets.
Because such deals aren’t typically done to break up companies and sell them for a quick buck, today’s hostile deals don’t have the stigma of the late-’80s deals, bankers and lawyers say.
Most aren’t worried that the abuses of the 1980s will return, pointing out that buyers today often are major blue-chip companies, such as AlliedSignal, with recognized names and reputations to protect.
“An unfriendly takeover is no longer the calling card of Carl Icahn. You’re seeing the unfriendly takeover in strategic mergers where synergies are there,” said Merrill’s McMahon.
One particularly vulnerable area could be the oil industry, hit hard by global economic conditions and near-bottom prices for crude. Los Angeles-based Atlantic Richfield and Occidental Petroleum, once proud leaders of the area’s economy, are now seen as possible acquisition targets. They’re “appearing on our screens,” said one local banker who asked not to be named.
Another vulnerable company could be Petco Animal Supplies, the San Diego pet food chain with 461 stores nationwide, including more than 130 in California, whose sales have been dramatically hurt by competition from mega-retailers such as Wal-Mart.
Petco’s stock, which last year at this time was trading at about $33 a share, has plummeted to about $8--below even its initial public offering price four years ago, adjusted for splits.
That decline could make Petco alluring to a large buyer or rival, some bankers said.
Sensing vulnerability even though executives said there were no offers on the table, Petco moved on Sept. 22 to adopt its first poison pill defense.
“We simply thought it was a good idea,” said Don Cowan, Petco spokesman. “Looking at the historical value of our stock, this was the time to do it. It can ward some people off, and we believe it will give us the opportunity to get the maximum value if someone does come along.”
Preparations to Avoid a Takeover
Another Southland company taking similar action last month was Northrop Grumman, which filed Sept. 24 to update the rights offering--another name for a poison pill--it already had in place. Like many firms, Northrop adopted anti-takeover measures in the late ‘80s that are now expiring.
“The board believes the current acquisition climate in the business community is similar to what was around in the late 1980s,” said Jim Taft, Northrop spokesman. “A company needs to protect itself and its shareholders from abusive takeover tactics.”
In the Los Angeles office of one major Wall Street investment house, bankers who did not want to be named said they are busy updating five companies’ takeover defenses--at the same time they are working with about a dozen companies considering going hostile.
“It’s not like we are suddenly going to see five a day,” said Judith Radler Cohen, editor of the New York-based weekly newsletter Mergers & Acquisitions. “But it’s likely we are going to see more.”
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Debora Vrana can be reached by e-mail at debora.vrana @latimes.com.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Going Hostile
Hostile takeover activity, after reaching a peak in the late 1980s, has been rare during most of this decade. But recent stock market turmoil could mean a comeback, some analysts believe, noting the spike in hostile takeovers in 1988 after the stock market crash of October 1987. Hostile and other unsolicited bids as a percentage of the dollar value of all announced U.S. merger and acquisition activity.
Peak after 1987 crash: 22%
1998: 6.3%
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Unsolicited Bids: A Tough Sell
Seven of this year’s 10 largest hostile or unsolicited takeover offers have been withdrawn. A look at the year’s major hostile bids:
Target: Mellon Bank
Bidder: Bank of New York
Date Announced: 4/22
Status: Withdrawn
Value (billions): 24.2
*
Target: Computer Sciences
Bidder: ComputerAssociates
Date Announced: Withdrawn
Status: 2/10
Value (billions): 9.5
*
Target: AMP
Bidder: AlliedSignal
Date Announced: 9/21
Status: Pending
Value (billions): 9.3
*
Target: Echlin
Bidder: SP
Date Announced: 2/17
Status: Withdrawn
Value (billions): 3.8
*
Target: American Bankers Insurance
Bidder: Cendant
Date Announced: 1/27
Status: Withdrawn
Value (billions): 3.1
*
Target: Excite
Bidder: Zapata
Date Announced: 5/21
Status: Withdrawn
Value (billions): 2.0
*
Target: Allied Group
Bidder: Nationwide Mutual Insurance
Date Announced: 5/18
Status: Pending
Value (billions): 1.6
*
Target: Questar International
Bidder: Pax International
Date Announced: 6/5
Status: Pending
Value (billions): 1.5
*
Target: Telxon
Bidder: Symbol Technologies
Date Announced: 4/21
Status: Withdrawn
Value (billions): 1.0
*
Target: Metromail
Bidder: American Business Information
Date Announced: 3/18
Status: Withdrawn
Value (billions): 0.9
Source: Securities Data
