WHEN WORLDS COLLIDE
The price tag for Sprint in MCI Worldcom’s bidding war was a staggering $115 billion. That’s more money dropped in a single transaction than the gross national income of more than 1/3 of the world’s countries. In the converging voice, data and video world as well as the rest of business and industry this record will stood…for awhile. Like any record it has been broken again and again over the past 24 months. But in the dotcom, dotnet, dotdisaster environments which impact every aspect of life and business the high water marks will continue to be surpassed.
While the big numbers garner the headlines there are thousands of smaller and less visible mergers and acquisitions taking place every week. AT&T has made an aggressive series of acquisitions. Now almost unbelievably it looks vulnerable to attack. Financial institutions are buying other financial institutions. The petroleum, pharmaceutical and distribution industries are all consolidating. The transportation industry is “consolidating.” Retail organizations are buying other retailer organizations. The communications industry is being reshaped at mind boggling evaluations even as red ink bleeding and there is no sign of clotting in sight.
While highly visible, the latest round of deals isn’t isolated events. For the first ten months of 2000, more than 58,520 similar transactions were completed. There were 2,500 LBOs (leveraged buy-outs), including divestitures as well as friendly and unfriendly takeovers in the United States and abroad.
That’s nearly 195 M&A activities a day – about 8 per hour. That's almost 9 LBOs per day.
Corporate mergers as well as friendly and unfriendly takeovers are reaching epidemic
proportions. They are draining management's time and company resources. In the long run, takeovers that provide a quick profit to purchasers, but leave the company devastated or divided exhaust many companies.
The global financial marketplace is placed with two anomalies. At the one end, we have most company stock (public and private) is grossly under-valued--the stock market created a rich-feeding ground for financial sharks, as well as for public firms and organizations anxious to place their initial public offering (IPO). At the other end of the spectrum we have an Internet-based economy based on a “garner eyeballs at any cost and get-rich-quick” mentality where valuations and ROI were totally out of whack.
Many merger targets are companies churning out mixed to weak earnings and have significant assets, which make them tempting prey for acquisition. Still others are part of the nuevo wave of “fantastic” opportunities that have minimal business plans and a dot in their name.
The same is true of pension fund managers. Investment bankers, financial institutions and lawyers have large sums of money available from deregulated banks that want to improve their return on deposits as well as deep pocketed individuals and funds. European, Middle Eastern and Pacific Basin raiders are mounting an aggressive invasion of the U.S. marketplace to gain a stronger foothold in the American economy.
Meanwhile, the M&A (merger & acquisition) specialists are standing on the sidelines smiling--they take a cut from both sides of the deal.
When companies are tending to business and churning out earnings, their stocks remain dramatically undervalued. The value of a company's assets will often continue to rise while its stock value remains stagnant or declines. At the same time we have Internet-based firms flounder begging for an infusion of green blood to keepthe shell alive.
The disparity represents a juicy potential for profit through the sale and resale of company stock. It's often too much for mere mortals to resist. The new on-line day traders have found a new way to get an adrenaline high by buying and selling on razor thin margins. Raiders buy on the basis of earnings/potential and sell on the basis of assets. And to protect themselves in these deals they have begun to hunt in packs.
Tearing Firms Apart
The objective of most corporate raiders is to reap high returns by tearing apart the company and selling off its parts. If any vestige of the original firm remains, it is so laden with debt that management is forced to focus on short-term survival, rather than long-range competitive strategies. To quiet and appease investors they focus on quarter-to-quarter profits rather than the vision that initially started the company.
It's relatively simple to rape a company. All management needs to do is eliminate investments in R&D, marketing, promotion and communications; then pay the savings to the moneychangers. No need for any special concern about the people who made the company a going concern--after it is stripped of its productive potential; they will be gone anyway. Chainsaw Al built an image, a career and a lifestyle around this approach.
It's little wonder that today's conscientious executives spend fitful, sleepless nights. Rather than focusing on building their organizations in a healthy, profitable manner, they're often forced to fight off corporate buccaneers who want to ravage, dismantle and sell off the organization.
At first glance, recent defensive moves by corporate management seem to run counter to sound management practice. Rather than retaining earnings for future growth, management is extending leveraged debt as much as possible to make their firms less desirable for takeover.
New Team Players
To help fend off unwelcome advances, boards of directors, company presidents and officers are adding new members to their teams. Today, these teams include shareholder, M&A and takeover lawyers; investment bankers; proxy solicitors and PR counsel. These new players are added because hungry (some might say greedy), smart and very handsomely rewarded people around the globe are spending all of their time developing ideas for the next round of potentially lucrative take-over deals.
M&A activities used to be carried out on a target-of-opportunity basis. But today, they are an integral part of the organization's long-range, growth-planning strategy.
Unfortunately, few corporate heads have received training or education in such activities as mergers, acquisitions, take-overs or LBOs--and trial by fire is the most difficult way to gain such expertise.
Since management is often ill equipped to handle these problems, it generally relies on defensive moves, rather than offensive and preemptive measures. While most of these efforts
have negative side effects and are ultimately fruitless, their goal is to make the firm unattractive, difficult or too expensive to acquire.
When unfriendly or undesirable overtures are sounded, the most common response is to run to legal counsel and put together a defensive plan.
Often, this includes incorporating provisions requiring majority shareholder approval of mergers and liquidations, acquisition of properties that create regulatory barriers, preparation of "black books" with defensive contingency plans, incorporating cumulative voting requirements and/or reclassification of the board of directors.
Public relations activities (on both sides) can play a crucial role, as both sides carry out campaigns to persuade shareholders to give their proxies to either management or the prospective buyer.
For the most part, such activities are carried out like the last presidential campaign--black hat/white hat, character assassination and guilt by association. It includes scores of news releases and position statements, a multitude of Web postings, a myriad of phone calls and urgent, hasty decisions regarding what should and shouldn't be said.
To avoid being put on the defensive, management needs to develop offensive and strategic plans to address the critical questions that arise in a takeover situation. These questions
include, "What are the maximum capital and earnings values of the company's assets?" and "Who can best manage them to provide the best return for the investors?"
To add credibility and viability to their firms, management needs to aggressively posture and "sell" the company to the financial community, even if the organization is not publicly held.
These activities include an aggressive, prompt disclosure program on new products and services, research breakthroughs and contracts, as well as sales and earnings results. The annual report should be more than a simple report to the investors--it should be an important source of information on the company. The annual report can serve as an effective selling tool throughout the year.
Management should develop fact files or "white paper" kits for the press and financial community; they should have meetings with brokers, funds and analysts; a concerted publicity program should be carried out in the business and financial press, and pulse-taking efforts should be made with shareholders and industry analysts.
Such activities allow management to tell how well it is managing company assets, and to address issues such as asset, values and management. By taking these measures, management adds credibility to its position, making unwelcome tender offers more expensive and proxy fights more difficult.
These activities are well within management's control.
Another activity management can undertake individually, or in organized groups, is aggressively lobbying Washington and the EU to take action dampening merger mania through tax legislation.
If these bodies pass proposed legislation to eliminate "mirror" transactions, it will eliminate a loophole that lets highly leveraged buyers avoid taxes by creating and then selling subsidiaries. Elimination of the deduction for interest on acquisition debt is another way for the governments to discourage non-productive mergers.
Drawing Battle Lines
In taking these and similar actions, management, investors and the government all share a common understanding and long-range goal. The investor will receive a framework for projecting earnings and return on investment. Management will give investors a sound platform for showing that proposed offers might be inadequate or against the best long-term interest of their company.
Today's frenzied M&A activity is the commercial equivalent of war. As in war, no one can (or should) rely on defensive weapons alone. Instead, the strongest weapons--including an aggressive, offensive strategy--must be used to preserve management control of events.
Hostile takeovers and meaningless acquisitions are battles that require a dramatic improvement in management's planning and strategic thinking. By taking appropriate actions at the outset, the managers of take-over target companies can stave off many hostile takeovers, or at least negotiate terms that are favorable for all concerned ...management, shareholders, employees, customers, suppliers and the industry.
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