ESOP Gains as an Anti-Takeover Defense

Avoiding a corporate takeover seems to be getting easier - if you can put together an ESOP that will hold up in court. That plan has apparently given Polariod some breathing space in its long-distance race against takeover by Roy Disney's Shamrock Holdings.

On Jan. 6, a Delaware judge upheld the employee stock ownership program (ESOP) that is a key part of the instant-photography giant's defense against the hostile raider. Shamrock is appealing the decision.

``It's win one for Polaroid relative to Shamrock,'' says Brenda Lee Landry, an analyst with Morgan Stanley & Company in New York. But, she adds, ``I don't think that Polaroid can yet rest on its laurels that it won't be taken over.''

``At this point, I think the odds of Shamrock taking them over have gone down substantially,'' says William Relyea, an analyst with Eberstadt Fleming Inc. in New York.

The ruling has actually made ESOPs more attractive to companies concerned about takeover, says Ms. Landry.

Robert Maney, an analyst with Prudential-Bache Securities in Rochester, N.Y., agrees, but cautions that ESOPs aren't for everyone.

``ESOPs are good in their place,'' he says, recommending them for small, healthy companies with strong employee groups. ``There are a lot of companies that can't use it. Or shouldn't.''

Polaroid's ESOP was part of an antitakeover package it put in place on July 12 last year, a week before Shamrock made public its hostile intentions. The filmmaker created 10 million new shares, which put 14 percent of its common stock in its workers' hands. The ESOP created a hurdle for Shamrock's hostile bid, because under the laws of Delaware, where Polaroid is incorporated, Mr. Disney's company would have to own 85 percent of the filmmaker's common stock to acquire the company immediately.

Shamrock sued, arguing that the ESOP had been created primarily to prevent takeover. In the end, Polaroid's contention that the move was devised to boost performance was upheld.

In a move aimed at boosting its sagging revenues, Polaroid also announced last July that it was going to market conventional color film. Sales of its instant film had been falling by 10 percent annually in the past decade.

Mr. Maney is critical of Polaroid's move into conventional film, because of Eastman Kodak's dominance of that brand-conscious market.

``Use your skills where you've got your skills'' is the strategy Maney urges for Polaroid. ``They were a research outfit.''

Mr. Relyea is more lukewarm about the new venture. ``I don't think it's a high-risk situation,'' he says, but neither is it ``a high-reward situation.''

Meanwhile, Shamrock continues its quest, and appears to be the only company that is seriously interested in acquiring Polaroid. It has been the only hostile bidder since the ESOP, and no white knight has emerged to place the filmmaker in friendly hands.

Even so, Polaroid may further shore up its antitakeover defenses, say Relyea and Landry, by finding a ``white squire,'' a company that will buy a friendly minority stake.