Kennecott and the White Knights

Its Carborundum buy sets off a shareholders' storm

Of all the bizarre business takeovers in this year of furious financial raiding, one has raised howls of hearty laughter among Wall Street insiders and others. It is the takeover by Kennecott Copper Corp. (1976 sales: $956 million), the nation's largest copper company, of the Carborundum Co., a Niagara Falls-based diversified firm (sales: $614 million). Reason for the mirth: Kennecott paid the astonishing price of more than $560 million, or $66 a share--twice Carborundum's book value. Many of Kennecott's nearly 72,000 stockholders were sclerotic over the deal. Some had hoped that the company would eventually distribute to them in the form of a special dividend the $1.2 billion in cash and securities that it got from the sale of Peabody Coal last June; others had hoped that the cash-rich but troubled copper company, which lost $22 million in the last quarter, would itself become the target of a takeover attempt involving a generous tender offer.

Angry telegrams from stockholders flooded Kennecott's New York headquarters. Company switchboards lighted up with so many abusive telephone calls that four secretaries threatened to quit, complaining of the scatological remarks coming over the wires. One vice president, trying to persuade an irate California stockholder that the merger would prove beneficial in the long run, got the reply: "Sonny, I'm 84 years old, and I ain't waitin' around for the long run." Kennecott stock sells for about $22 a share, or $20 below book value.

Frank Milliken, 63, Kennecott's president, deputized Senior Vice President Milton Stern to justify the purchase of a company for twice its book value. Stern's explanation: "We liked what we saw at Carborundum in terms of the people, products and continuing growth. We know that $66 is good value." Stern also says that Kennecott had to pay a premium price because it was in "a bidding situation"--meaning that it was in competition with other companies interested in acquiring Carborundum.

The first public bid for Carborundum was made by Eaton Corp., the Cleveland-based auto-parts maker, nearly three weeks ago; Eaton offered $47 a share for Carborundum, a pretty premium of $14 for a stock that never sold higher than 40% during the past ten years. When Carborundum rejected that offer, a furious auction began that finally concluded early last week in the Manhattan offices of Morgan Stanley & Co., which represented Carborundum. After some unnamed other bidders called in by phone, Kennecott offered $66, or some 14 times this year's projected earnings.

Founded in 1891, Carborundum, which has 85 plants in 24 countries, produces more than 2,000 industrial products ranging from air filters to diesel engine camshafts. It has, along with the Norton Co., a leading position in abrasives--grinding materials essential for all elements of the metal-bending business. The company has great hopes for experiments now being conducted in its new laboratory near Niagara Falls, where it hopes to produce materials that will replace the rare metals that endure high temperatures in turbines and jet engines.

For Carborundum stockholders and some arbitragers like Goldman, Sachs and Salomon Bros., it was a satisfying deal, to say the least. It was also a notable coup for the patrician Mellon family of Pittsburgh, which has for decades owned a large block of Carborundum stock.

Whether a merger of a copper company that is losing bushels of money with a highly diversified technology outfit can succeed will not be known for years. But Vice President J. Thomas Hill of First Boston Corp., the investment banking house that represented Kennecott in the deal, put the case for the merger this way: "Once it becomes public that a company is fighting off a takeover bid, that company inevitably has to be sold. The sharks begin to circle, but then the white knights like us move in and rescue the company." Now some Kennecott shareholders are doubtless looking for a white knight.

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