Bid and Battle for a Publisher

With a hoard of cash, American Express aims at McGraw-Hill

In the great takeover race of the past few years, American Express has been left at the starting gate. The financial and travel conglomerate has made offers for Philadelphia Life Insurance Co., Walt Disney Productions and Book-of-the-Month Club, only to be turned down or outbid. It has also sounded out others but received a polite no. Amexco's young, aggressive management is not about to give up. Faced with heating competition for its dominance of credit cards and traveler's checks, the company is looking for profitable new uses for its money. That hoard is so huge--$4.4 billion in cash and securities, plus the $1.8 billion "float" of uncashed traveler's checks--that Amexco can make a handsome offer for almost any corporation. Last week it surprisingly bid for McGraw-Hill Inc., the publishing empire (1977 sales: $659 million) that produces Business Week, some 60 other magazines, newsletters and information services, as well as books and Standard & Poor's bond-rating service; it also owns four TV stations.

The drama began Monday when James D. Robinson III, Amexco's 43-year-old chairman, walked into the office of Harold McGraw, 61, chairman of McGraw-Hill. Robinson brought with him Amexco President Roger Morley, who is also a McGraw-Hill director; Morley earlier had dropped some hints of Amexco's interest, but they were so subtle that McGraw may have failed to pick them up. The two American Express chiefs gave McGraw a letter proposing that Amexco buy all of McGraw-Hill's stock for $830 million in cash, or cash and Amexco stock if McGraw-Hill stockholders preferred, and run McGraw-Hill as a subsidiary without changing the management. Morley accompanied that with a letter resigning from the McGraw-Hill board.

The meeting was brief and cordial, and McGraw did not then answer. The next morning he said he was "negative" and asked stockholders to do nothing until the board meets this week to study the offer. The Amexco bid comes to $34 a McGraw-Hill share, a fat premium over the $26 market price just before the bid. But Harold McGraw, grandson of the company's founder and a man set in his ways, wants to keep the family in command.

To help fight one of the biggest takeover bids in history, McGraw hired Morgan Stanley & Co., the old-line investment banking firm that is expert in defending takeover targets or at least in forcing the bidder to raise the price. There were hints too that McGraw is shopping around for a "white knight," a buyer more to his taste. Not totally convincingly, American Broadcasting Co. denied reports that it had made an offer for McGraw-Hill.

On its side, American Express enlisted the aid of the Lazard Freres investment banking firm, and Lazard in turn engaged Joseph Flom, a lawyer famed for his skill in fighting long delaying actions against takeovers and thus an expert on how to counteract such tactics. American Express further arranged $700 million in stand-by credits from major banks. It obviously does not need the money, but might prefer to borrow for the takeover rather than cash in some high-yielding securities.

Wall Streeters expect Amexco to win, though it probably will have to raise its bid above $40 a share. McGraw-Hill has prospered: between 1971 and 1977, earnings increased from $19.8 million to $51.4 million. But it has an image of unadventurous management, and the stock has declined from a high of $56 in 1967.

Worse, the company has been rent by management and family feuds. Charles C. ("Jim") Randolph was fired in 1976 as publisher of Business Week, for reasons that say much about the company. Dashing, articulate Randolph did not get on well with earnest, staid Harold McGraw; he also demanded more autonomy for his magazine, which is the company's richest moneymaker, than McGraw was willing to grant. In this battle, Randolph made the mistake of allying with Executive Vice President Donald McGraw, who fell out with his cousin Harold and then quit the company and later left the board under pressure. Since Harold became chairman in 1976, another cousin, John McGraw, has also resigned as executive vice president.

The feuding family directly owns about 12% of the stock, and perhaps as much as 23% when the holdings of other relatives and family trusts are counted. Last week most family members publicly backed Harold McGraw, but some hinted that they might vote with their pocketbooks if Amexco sweetens its price. Indeed, one much rumored reason for Donald McGraw's leaving the company was that he was willing to listen to takeover bids while Cousin Harold was not.

American Express has reason to persist and even to raise its offer. Under Howard L. Clark, who was chairman from 1960 through early 1977, revenues soared from $75 million to $3.4 billion, and profits hit $262 million. Growth has continued under new Chairman Robinson, the workaholic scion of an Atlanta banking family and protege of Family Friend Clark. But Amexco has largely saturated the market for high-income holders of credit cards, and competitor Visa and some major banks are also trying to sell their own traveler's checks. Earnings from Fireman's Fund Insurance Co., acquired by Amexco in 1968, are large (48% of the company's profits) but cyclical. Amexco stands to get a much higher profit by investing its pile of cash in a capital-intensive business like publishing instead of in securities. The company could sell magazines and books to its 9 million mostly affluent credit card holders, allow them to charge their subscriptions on the card, and, if the cardholders gave their permission, automatically renew the subscriptions without going to the costly bother of resoliciting them every year or two.

Some McGraw-Hill employees fear that a takeover would cramp their editorial independence, though it is hard to see how Amexco would be different from any management, including the present one. In any case, those fears have an ironic ring. In a mostly laudatory cover story on Robinson and American Express ("a cash machine"), Business Week advised in its Dec. 19, 1977, issue that Amexco's "best response" to new competition would be "to look for additional products for its affluent market, or to find other businesses that fit [its] specialized mold." Little did the staff guess that their own company would be target No. 1.

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