Sizing up the abuses in takeover battles
New York — ALMOST everybody - investors, corporate managers, employees, government regulators - loathes the hostile-takeover tactics and countertactics of corporate America.
Except, of course, the takers-over.
* When Walt Disney came under attack last summer by financier Saul Steinberg, who bought a big stock position and threatened massive reorganization (some call this ''greenmailing''), Disney's board of directors bought him out at a premium. A tiny handful of investors made out like bandits, but the huge majority of stockholders were left with shares in a weaker company.
* The T. Boone Pickens move on Gulf Oil made a number of stockholders wealthy this year - but did little to increase America's energy reserves. In fact, some argue it may have diverted capital from oil exploration by dismantling what had been the fourth-largest oil company in the United States and loading debt onto the eventual ''white knight,'' the Chevron Corporation.
* The Bendix-Martin Marietta episode three years ago caused two defense contractors to spend huge amounts of time and money maneuvering, Pac-Man-like, to devour each other.
All the moves were legal, but were they ethical or productive? Were product quality, company sales, or jobs enhanced as a result?
When Congress returns in January, hearings on proposals to deal with those questions are planned. But a comprehensive remedy appears to be some way off.
Takers-over contend that what they are doing is maximizing the value of their investments and helping to make a better market in stocks. This is what the free market is all about, they say - individuals looking out for their own interests and perhaps unintentionally working to the common good.
Critics, however, call these takeover tactics unproductive and unethical. Management spends inordinate amounts of time and money trying to defend itself, often loading up on new acquisitions or giving executives lucrative ''golden parachutes'' to make the corporation less attractive to the raider.
Critics complain that capital goes to personal enrichment instead of productive investment. The National Association of Manufacturers estimates that Merger consultant W. T. Grimm & Co. of Chicago says that in the first nine months of 1984 a record-breaking $103.2 billion in mergers was disclosed; 18 were in the $1 billion-plus category.
But what to do about greenmailing, sharkproofing, golden parachutes, and the like - or whether to do anything at all - is an open question.
Marti Cochran, counsel to the US House Subcommittee on Telecommunications, Consumer Protection, and Finance, noted recently: ''When I first got involved in this area, I figured that if I talked to enough experts the clouds would part, the heavens would open, and there would be an answer. But it didn't work that way.''
Still, Ms. Cochran told a meeting of the Financial An-alysts Federation in New York, subcommittee chairman Timothy Wirth (D) of Colorado has received more letters from small shareholders on this subject than on any other.
One factor in the takeover spree may be the huge pool of investment money that flowed from liberalized depreciation conditions in the 1981 tax act, says Walter P. Stern, vice-chairman of Capital Research Company, an investment manager. Other reasons: Stocks are currently cheap relative to the book value of many companies, and the Justice Department is taking a relatively benign view of mergers.
Congress and the Securities and Exchange Commission are examining the causes and effects of the takeover wave. In 1983, the SEC's Advisory Committee on Tender Offers came up with 50 recommendations for new laws and regulations on corporate takeovers. Some restrictions are on the way.
The SEC is set to narrow the 10 days allowed to disclose intentions in the Section 13(d) form when a buyer acquires more than 5 percent of a company. That period had been used by some targeters to acquire even more stock before a buying program became public knowledge.
The 1984 tax act put restrictions on ''golden parachutes'' awarded to corporate management in the event of a takeover. Employers may no longer deduct such payments, and the recepient gets hit with a nondeductible 20 percent excise tax. The tax act defines ''parachute payments'' as those that are triggered or accelerated by a change in control of the company, even if the employee's job is not terminated.
The takeover issue pits two powerful interest groups against one another: Wall Street usually sides with the raiders, since they help drive up the price of stock and enhance overall liquidity with their huge buying programs. Corporate executives and many longtime stockholders, on the other hand, side with management.
And institutional investors (pension funds, mutual funds, trusts) have their own agenda, argues James H. Fogelson, a partner in the New York law firm of Wachtell, Lipton, Rosen & Katz: ''Most seek short-term return, due to the pressure on them to perform (to report good quarterly earnings). That's inconsistent with many corporate programs which are long-term plans.
''Institutions,'' Mr. Fogelson adds, ''are very sophisticated and understand these takeover tactics. Individual investors, however, aren't quite as aware.''
Fogelson admits that courts have sided mostly with corporations, invoking the ''business-judgment rule,'' which assumes that a board of directors acted in the best interests of a company unless there was clear evidence of an abuse. He argues, however, that corporate defenses against takeovers are ''not necessarily abuses'' and complains that ''there is an unstated premise that somehow you can't trust a board of directors, that they are always acting in bad faith and are motivated by entrenchment.''
Linda C. Quinn, executive assistant to the chairman of the SEC, notes that ''a hostile bid is the only transaction that can occur without directors' approval. All mergers first go to the board, then the shareholders.''
She admits that ''two-tier offers are coercive.'' This is when a board buys out a threatening raider at a premium that is not offered to all stockholders. Ms. Quinn says the SEC's viewpoint is that tender offers ''should be regulated only where necessary.'' Concern about harm to shareholders ''is not enough to propose a pre-emption'' of an acquisition offer.
Slapping federal regulations onto corporate takeover activity, moreover, involves a tricky question of state and federal relations.
The SEC, an arm of the federal government, regulates the trading of stock in these corporations. Washington, therefore, has jurisdiction over the raider.
But state government has jurisdiction over corporate behavior, including anti-takeover techniques (called ''sharkproofing''). Tampering with that power balance could prove tricky.
Stemming takeover abuses would require a deep rethinking of aspects of federalism - even of the free-enterprise system itself.
What is needed? Parties who stand to gain or lose - depending on how the takeover occurs - say that perhaps the only immediate solution is for shareholders to demand that their boards of directors not give in to takeover threats and not block tenders if they are in the interest of investors.
And boards might exercise more courage. Some analysts argue that Disney might have invited Mr. Steinberg to join the board of directors. The raider might well have found that decisions the board was making were logical - or that now he was simply one voice among many on the board.