How Wall Street takeovers should be curbed. Tough new restrictions may be in store after the Boesky affair
THE Dow is up, but there is no joy in Wall Street. Mighty Ivan Boesky, the all-star of arbitrageurs, has struck out and been banned from the game for insider trading. Drexel Burnham, the pioneer of junk bonds, is under subpoena by the Securities and Exchange Commission. Heard on the Street is the persistent rumor that others may be implicated, since Mr. Boesky, facing a criminal charge, has turned informant and has been ``wired for sound.''Skip to next paragraph
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The question being asked is: ``What did they know and when did they know it?''
The risk arbitrage divisions of the ``respectable'' houses have been losing a ton since takeovers, the mother's milk of arbitrageurs, have slowed. And junk bonds, which have financed many takeovers, are coming to be suspect in the eyes of bankers and investors.
The White House has a task force to consider more-stringent restrictions against insider trading. And Congress, no doubt, will hold well-publicized hearings.
The Street fears that these investigations are bound to lead to increased regulation of takeovers. And it is the proliferation of takeovers, along with the increments of insider information and junk bonds, which has resulted in inordinate profits, not only to corporate raiders, but also to many investment bankers.
But the chairman of a leading company is quoted in a congressional report: ``Maybe there is something wrong with our system when companies line up large amounts of money in order to purchase stock when it doesn't help build one new factory, buy one more piece of equipment, or provide even one more job.''
This is perhaps too sweeping an indictment of the takeover game. There are takeovers that do achieve desirable results, takeovers that break up inefficient conglomerates full of inept managers. But all too many takeovers are merely contests for control of management, good or bad. Many of them involve unsavory devices, bordering on illegality; these takeovers proceed without regard to the interests of shareholders and the public. Information about takeovers tempts many into insider trading, and many takeovers can be financed only by high-interest, high-risk junk bonds.
In 1983 at the request of the House Banking Committee, I became a public member of the SEC Advisory Committee on Tender Offers. With all respect to the committee members, I found that a majority of them were tied to Wall Street. Their recommendations were, in my view, largely cosmetic and did not reach the nub of the problem.
I filed a separate statement in the committee's report; in effect, a dissent. The suggestions I made for reforms in tender offers are even more timely now.
Takeovers, as I have said, may or may not benefit shareholders of either the target company or the company making the offer. But shareholders have no way to judge the fairness of a tender offer, except by the market, which is more often than not unreliable in the long term.
One of the greatest abuses in takeover situations is the golden parachute. Golden parachutes typically provide for exorbitant sums, in addition to handsome salaries and fringe benefits, to be paid to managers of a target company in anticipation of a takeover. They are basically designed either to frustrate a takeover attempt or to ``feather the nest'' of existing corporate executives who may be fired in a takeover.