Gillette escapes takeover in a close shave, but the cost is high

It's tough to lose - but walking away with a cool $34 million can alleviate some of the disappointment. After not quite two weeks of public jockeying to buy Gillette, Ronald O. Perelman, chairman of the New York-based Revlon Group, was said to be ``very disappointed'' when his $4.2 billion bid for the shaving products giant failed.

Instead of expanding his cosmetics empire, Mr. Perelman was forced to settle for a reported $34 million profit when Boston-based Gillette bought his 9.2 million shares back at a premium.

The settlement, says a company spokesman, ``will enable Gillette to pursue its long-term strategy of the same profitable growth, while maintaining the company's financial structure in sound condition ... [and] best serve long-term interests of the shareholders.''

Gillette's managers went to the wall to avert Perelman's takeover challenge. And in the end, they did avert it - but at a high cost: $558 million. Part of the total included $9 million to pay for Revlon's costs in attempting the takeover.

But it doesn't include the cost of accusations that Gillette is paying Perelman ``greenmail'' to avoid the takeover.

``This is classic greenmail,'' says Joseph Auerbach, a professor at the Harvard Business School.

``It requires a degree of faith in management and a stretch of imagination that may or may not be warranted,'' Dr. Auerbach says. ``The act of faith is that management can make it worth the $65 offered by Perelman.''

There are also, undoubtedly, a number of stockholders angry that management didn't accept Perelman's $65-a-share offer. Perelman is being paid $59.50, or $13.62 more for his stock than the value of stock held by other Gillette stockholders.

It's a double blow to shareholders other than Perelman: They saw their stock drop in value $10.75 on Monday because of the settlement.

The Gillette-Perelman agreement came only a few days after Goodyear Tire and Rubber Company of Akron, Ohio, announced a settlement with Sir James Goldsmith in a similar takeover bid. While some observers consider the Goldsmith-Goodyear episode greenmail also, there is this important difference: All of the Goodyear stockholders, not just Sir James, are being paid a premium for their shares.

But the cost is high. The tiremaker said Tuesday that fourth-quarter profit will be cut $150 million because of the takeover attempt. A restructuring plan will mean the loss of 3,200 jobs.

Many analysts agree the buyback of Perelman's shares is bad for Gillette in the short run (bringing debt to about $1 billion) and unfair to stockholders other than Perelman.

In the long run, Gillette's extra debt will probably force a restructuring - but at least the cost to the company has not been as high.

In the relatively brief public battle, Gillette's defense swung from one tactic to another.

At first, it looked as if the company was digging in for a long fight. Gillette management alleged that Perelman had actually generated takeover rumors on Wall Street to gain a bargaining advantage. Gillette took him to court on that basis to block the merger.

Such is a fairly common takeover-defense tactic, but the allegations carried extra weight in the wake of the recent insider-trading scandal centered on arbitrageur Ivan Boesky. Drexel Burnham Lambert, an investment bank tied to Mr. Boesky, was also being employed by Perelman.

Then, over the weekend, Gillette management told Perelman it had found a friendly suitor; it would sell 20 percent of the company to St. Louis-based Ralston Purina.

But when all was said and done, Gillette management felt it couldn't do anything else but dangle a financial carrot within Perelman's reach while whacking him with disincentives to get him to halt his bid.

Perelman finally came around.

Critics say that Gillette might have been a bit quick to pay Perelman off and should instead have called his bluff - and perhaps that of his financier, Drexel Burnham. Drexel had gone to great lengths, however, to affirm that it was ``highly confident'' it could get ``junk bond'' financing for the Gillette takeover.

But on the post-Boesky Wall Street, confidence in Drexel has dropped amid the Securities and Exchange Commission's widening investigation of insider trading.

Thus some believed that if Gillette had said, ``Sure you can have a seat on our board - if you can raise the money,'' it might not be getting angry letters and phone calls from its stockholders.

``It's easy [for management] to have faith in [itself],'' says Professor Auerbach. ``It's harder if you're a stockholder to have faith in management.''

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