Takeover reform: firsthand ideas from a Bendix man
Takeover battles, Alonzo L. McDonald Jr. says, are ''not a pretty sight.''Skip to next paragraph
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He should know. Mr. McDonald is president of Bendix Corporation, the company now famous, or infamous, for attempting to buy Martin Marietta Corporation. The maneuver produced one of the strangest and most publicized struggles for control in corporate history.
''It was a bizarre situation,'' admits Mr. McDonald, a man with some experience in complexity as the chief negotiator for the United States during the recent ''Tokyo round'' of tariff reductions.
Mr. McDonald was here for a briefing last week at the Center for International Business, giving a talk on ''Corporate strategies: new directions for the multinational corporation in a fiercely competitive world.'' But he got more breathless attention when he defended Bendix's merger ambitions, which ended up with the auto parts supplier and defense contractor being taken over by the Allied Corporation.
In addition, he had two suggestions for reform of the merger game:
* Corporations should amend their charters to ban discriminatory offers for stock during takeover moves, in which a majority of stock is offered at a price higher than that offered for the rest of the stock in a second stage.
For instance, Martin Marietta, in its so-called Pac-Man maneuver, offered to buy 51 percent of Bendix shares for $75 and the rest in a share exchange worth about $55. Similarly, United Technologies Corporation, which briefly entered the fray, offered $75 for 51 percent of Bendix and, for the rest, Mr. McDonald figured, paper probably worth about $50.
The Bendix executive regards such proposals as ''grossly unfair'' to the second-stage shareholders.
Many of those shareholders quick to take up the first-stage offer are institutional investors, such as pension funds or mutual funds, with sophisticated managers. McDonald charged that such two-stage offers are ''encouraged by inherently irresponsible institutional ownership.''
Speaking of investment managers, Mr. McDonald warned the listening executives: ''They will sell you out on an eighth. When the day comes, they will tender and they will tender first.''
Those left behind tend to be company employee stockholders or individual shareholders. Bendix employees owned 23 percent of the company's shares, he noted. Under the Allied purchase of Bendix, the employees also got the highest possible price for their shares. ''The price should be the same for all shareholders,'' McDonald said.
* A so-called ''scorched-earth policy'' should be prohibited. To discourage a takeover, some companies have spun off their most attractive assets - their ''crown jewels.'' The idea is to make the company unattractive to the concern making an ''unfriendly'' purchase offer.
This, McDonald said, is ''sheer foolishness . . . completely inappropriate.''
He also disapproved of the Pac-Man maneuver which eventually blocked Bendix's plan to buy out Martin Marietta. It results, he noted, in a decapitalization of the companies involved. He likened it to the game called ''chicken,'' sometimes played by reckless youths. They jump into two cars and drive toward each other at high speed, with the ''chicken'' swerving out of the way.
The Bendix executive thought Martin Marietta's offer to buy out Bendix could be ''useful as a tactic.'' But he did find it astonishing that Martin Marietta actually carried it out, borrowing hundreds of millions of dollars to make the purchase. The company ended up - after swapping its Bendix shares for an equal dollar amount of its own shares held by Bendix - with only 25 to 30 percent of the equity value it held before the complex battle, Mr. McDonald estimates.
Martin Marietta, he noted, will have to service the huge debts it accumulated during the successful battle for its independence.
Moreover, he reckons Martin Marietta is now highly vulnerable to further takeover attempts by other corporations. He noted that Allied will retain about 38 percent of Martin Marietta's stock.
He also suspects the managers and board of directors of Martin Marietta could be hit by stockholder suits charging that they mismanaged the company to protect their own personal interests, not those of their shareholders.
Mr. McDonald denied similar charges that the Bendix chairman, William M. Agee , acted on the Martin Marietta bid for personal reasons - to massage a personal ego by building a larger corporate empire. He held that Bendix and Martin Marietta would have been ''a good match,'' producing ''an infinitely stronger competitive entity.''
Whatever, he did say that the commercial and economic purpose of any merger should be judged by four criteria. It should enhance shareholder value, at least after the first year or two. It should result in an equal or greater industrial opportunity for employment. It should hold together ''coherent entities'' in the merged company, although the merger would probably result in the redeployment of some assets. Finally, management control should be a weak fourth issue, since the average chief executive officer lasts only five years anyway.
He defended the ''golden parachutes'' given executives - the contracts that protect their financial position during a merger - as offering some assurance that executives will take the interests of the shareholders and employees to heart, not their own pocketbooks.
That is one side's view of the Bendix-Martin Marietta-United Technologies-Allied merger episode.