Lady Macbeth and The Great American Capitalist Dream
GREENMAIL, Golden parachutes, scorched-earth defenses, shark repellents, poison pills, Lady Macbeth strategies, white knights, and Pac Man defenses sound more like video-game tactics than serious moves by adult MBAs in the world of corporate takeovers.Skip to next paragraph
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But serious they are. Despite their joy-stick titles, these are not the product of 20-year-old software moguls but of pin-striped strategists in the hostile takeover wars. And the effect of some of the tactics has become a poison pill for 42 million average stockholders.
In the long run, it is upon the support of those stockholders - as voters who influence congressmen who write regulatory law - that the relatively unhampered continuance of a free stock market system may depend.
Many corporate mergers are logical. As more industries enter a world market, mergers can add to efficiency and productive capacity in the competition for that vast market.
What does not make sense, in terms of the long-term health of the capitalist system, is the unfair practice called ''greenmail'' and its associated gambits.
(Shark repellents and poison pills are schemes that protect corporate management against raiders, sometimes to the detriment of stockholders. Golden parachutes guarantee big payoffs to executives in case repellents don't work. A Lady Macbeth strategy is (pardon the gender change) a white knight who gallops up to save a company, then joins with the raider to do in the king and take control. Lady Macbeth, in this case, wants all the perfumes of Arabia not for spot cleaning but to rival Saudi assets.)
Greenmail, in case you have missed some recent takeover battles, occurs when a corporate raider or group of raiders buys a minority position in the stock of a target company. This threat to win control then provokes a buy-back offer from the worried executives of the threatened corporation. The buy-back typically gives the greenmailers a sharply higher price per share than the other, more common holders of common stock can get for theirs. To add insult to injury, this extra expenditure of company (i.e. stockholders') money dilutes the value of the other shares. No Mafia protection seller could fail to admire the quick and unfair results of this system.
Recent examples abound:
cc19p6rr Rupert Murdoch's attempt on Warner Communications (his 7 percent holding was bought back at 35 percent more than ordinary stockholders could get); the Bass brothers' feint toward Texaco (their stock was bought back at 12 percent over market prices); Charles Hurwitz's run at Castle & Cooke (a 23 percent over-market buy-back); and Saul Steinberg's foray into Quaker State Oil (a 33 percent over-market premium).
Even if these buyers were genuinely after their prey, and not just threatening in order to cause a panicky buy-back, the result was an inherently unfair distortion of the market trading system. Buyers of share certificates expect to see the price of their holding set daily for one and all by the free play of supply and demand. They do not expect some holders of the same certificates to be more equal than others.
The very meaning of the word ''share'' is that each holder shall own a share in the enterprise proportional to the number of units he or she bought.
It's true that every day someone is out there offering more or less for that share than the buyer originally paid. But the new buyer offers the same price to all takers - to anyone who can rush in first to meet the offer.
In the long growth period of the postwar US economy, one of the fundamental tenets of capitalist faith was that stock ownership - like home ownership - was becoming widespread. The main slogan for the phenomenon was ''people's capitalism.'' And its prime examples were the millions of owners of AT&T stock and the general dispersion of stock ownership throughout the middle class. Currently some 42,360,000 Americans own stock.
In the postwar period, American society began to fulfill what communism in the Soviet Union was only promising in a hollow way: popular ownership of the means of production. With broadening stock ownership also went wider interest in keeping the reformed capitalist system stable - until Vietnam and Watergate undercut a new generation's faith in the political fairness of the system.
With the maturing of that generation, and the hard lessons of the worst recession since 1945, there has been a renewed interest by the so-called little guys in market investment, entrepreneurship, and the productivity benefits of competitive enterprise. Millions of other Americans, who may own little or no share of industry personally, participate through pension plans.
Greenmail, two-tier buyouts, and the other hostile takeover gambits threaten that interest because they are unfair to small stockholders. Congress is rightly looking at measures to curb these anti-free enterprise tactics.
Two proposals have been suggested to Congress. Neither addresses the problem in the most direct way: namely, to make illegal any buying at a premium that is not offered to all stockholders.
At the moment, a plan proposed by Martin Lipton, a Wall Street lawyer noted for advising corporate raiders, comes closer to achieving the goal. It would require a takeover buyer to offer the same price to all stockholders once he owns more than 10 percent of a company. No premium could be offered to attract more shares after that. This would protect shareholders on a buy-in and supposedly make an unfair buy-back unlikely. In theory, company officials would not pay greenmail to someone owning less than 10 percent. But Warner paid a 35 percent premium to Mr. Murdoch when he held only 7 percent of its shares.
The other House proposal is more leaky. It would prohibit a premium buy-back from a raider - unless he had held shares for more than two years. Such a rule would give target companies time to mount better defenses. But it would not necessarily prevent unfairness.