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Takeover Activities Grow

Written by: Andy Marken

Article Overview: MANAGEMENT HAS TO LEARN NEW LANGUAGE, NEW STRATEGIES IN FIGHTS FOR FIRM'S SURVIVAL

Takeover Activities Grow

Across the country, the press is giving more and more
coverage to the growing number and dollar size of mergers and
acquisitions.
While the big ticket buys and attempted buys capture the
headlines, there are nearly 300 friendly and unfriendly mergers/
acquisitions a day. And this figure doesn't take into account
the equal or greater number that are started and aborted.
Such activities can and do eat up management's time in
fighting off unfriendly overtures.

Management's Dilemma
Since most corporate stock is grossly undervalued, finan-
cial sharks find their feeding grounds very rich. Institu-
tional stockholders, looking for ways to improve their port-
folio performance, are happy to help feed the sharks. In
addition, deregulated banks have produced a new breed of invest-
ment bankers and lawyers who have access to large sums of money
from banks that are trying to improve the returns on their
deposits.
It's not surprising that healthy, progressive companies
sometimes feel like wounded seals in a tank of Great Whites. And
it is the healthy, growing companies that fall victim since high
interest rates lower the value of the dollar earnings while
inflation has increased the value of the firm's assets.
The sharks buy on the basis of earnings and sell on the
basis of assets.
While the great oil company deals have grabbed the
headlines, the computer/electronics industry has been subject to
the same problems. In the big ticket area, the industry has
had the General Motors/EDS, IBM/Rolm, Exxon/Reliance, Xerox/SDS,
SmithKline/Beckman, and similar mind-boggling "sales."
It's little wonder that the feeding frenzy gives company
presidents fitful, sleepless nights. They have to divert more of
their attention from the day-to-day operations of their firms and
devise plans to protect their organizations.

New Language
Along the way, boards of directors, company presidents and
company officers have developed a rich addition to their vocab-
ularies. Expressions like "lead horse," "golden parachute,"
"white knight," "scorched earth," "shark repellent," "poison
pill," "greenmail" and "arbs" (see box) are as well understood as
microprocessor, megahertz, byte, venture capital, and burn rate.
In addition, management has added new members to their
teams that include takeover lawyers, investment bankers, proxy
solicitors and PR counsel.
The new language and team members have been thrust upon
management because there are hungry, smart, and well-paid people
across the country who do nothing all day long but dream up
deals. It used to be that mergers and acquisitions were mere
targets of opportunity. Today, they are an integral part of an
organization's long-range growth planning strategy.
Unfortunately, few corporate heads have received any
training or education in such activities as mergers, acquisi-
tions, and take-overs. Trial by fire is a difficult way to
gain such expertise.

Defensive Moves
Because management is so poorly trained in or doesn't think
about such potential problems, it generally relies on defensive
moves rather than offensive and preparatory measures. In most
instances these are expensive, disruptive and fruitless.
But with some proper actions, management can either make
the firm unattractive to such overtures or difficult/expensive to
acquire.
Or management may determine that a merger is in the best
interests of the company and stockholders, enabling the firm to
meet their short- and long-term objectives. If this is the case,
the merger or acquisition will be mutually beneficial.
When companies begin making unfriendly or undesirable
overtures, the most common response is to run to the corporate
lawyer and put together a defensive plan. This can include the
incorporation of provisions requiring majority shareholder
approval of mergers and liquidations, acquisition of properties
that create regulatory and antitrust barriers, preparation of
"black books" with a number of contingency defensive plans, the
incorporation of cumulative voting and reclassification of the
board of directors.
Public relations activities also play an important role in
these campaigns as management carries on a strong, aggressive
and effective effort to persuade shareholders to give their
proxies to management.
Many equate the PR activities in these situations to those
carried out in a political campaign--black hat/white hat, char-
acter assassination, and guilt by association. The fast paced
campaign includes scores of news releases and position state-
ments, a myriad of phone calls, and instantaneous decisions
regarding what should and should not be said.
Quality and carefully planned media activities can play a
key role in advancing management's cause, in clarifying/solid-
ifying management's position and in influencing public opinion.

Offensive Moves
Management should look for offensive and strategic methods
to prevent themselves from getting on the defensive. Defensive
moves can't address the critical questions which arise in a
takeover situation, such as: What are the maximum capital and
earnings values of the company's assets? Who can best manage
them to provide the best return to the investors?
Few private firms do anything to posture themselves with
the financial community. Even those firms that are public meet
only the basic SEC requirements. They do nothing to "sell"
themselves to the investor or financial communities.
Activities that they should consider include an aggressive,
prompt disclosure program on new products or services, research
breakthroughs and contracts, as well as sales and earnings
results.
The annual report is more than a report to investors. The report
can be an important compilation of information on the company
which actually serves as a year-long selling tool.
Other activities include fact files or "white paper" kits
for the financial community and press; meetings with brokers,
funds, and analysts; strong publicity activities aimed at the
business/financial press; and pulse-taking with shareholders and
industry analysts.
All of these activities add credibility and viability to
the firm. They provide an excellent platform for management to
control and present its messages. They provide an opportunity
for management to tell how well it is performing in managing the
company's assets. They allow management to address the issues of
asset values and asset management.
By showing the true value of assets and management's plans
for these assets, management adds credibility to its position.
This also makes tender offers more expensive and proxy fights
less likely.

Battle Lines are Drawn
By pressing home these results, management gives investors
a much better understanding of the company. The investor also
receives a framework for projecting earnings and return on
investment. Management also gives investors a sound platform for
showing that a proposed offer is inadequate, without indicating
what an adequate offer might be.
Corporate takeover fights are management's equivalent of
war. And as in war, no one can rely solely on defensive weapons.
Instead, the strongest weapons must be used--aggression and
strategy--to advance management's case and position while con-
trolling the issues.
Takeovers, proxy fights, mergers, and acquisitions are wars
that require a dramatic addition to management's vocabulary and
planning/strategy thinking. But by taking the right actions at
the outset, the war can be won ... or defeat can be accepted on
favorable terms.

Words to Fight by
Lead Horse -- The investment banker who calls the shots in
the proxy fight, tender offer, or acquisition.
Golden Parachute -- Large payments to senior management if
they lose the takeover challenge to make certain they are well
paid if they are fired or lose their responsibilities.
White Knight -- A company that comes to the aid of another
in the takeover fight. They rescue the firm being attacked by
acquiring it on better terms.
Pac-Man Defense -- A tactic by which the company being
attacked turns around and attempts to acquire the pursuer. It
can succeed, or it can frighten off the initial firm.
Scorched Earth -- The company discourages takeover by
making itself less attractive through the sale of divisions or
assets or incurring major debts in the event of a takeover.
Shark Repellent -- Measures used to fight off the pursuing
firm including changing the bylaws to make it difficult to be
acquired.
Poison Pill -- An action that makes it so expensive to
acquire the firm that the predator goes off to seek other game.
Greenmail -- Expensive blackmail payments to buy stock back
from the predator plus payment for his "expenses."
Camomail -- Camouflaged greenmail or black-and-blue mail.
Arbs -- Arbitrators are intermediaries in the transactions
who often make millions for a few days of work in putting "deals"
together.
# # #

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