White Knights and Black Eyes

By John S. DeMott

The price of corporate derring-do is often painful

It was a strangely quiet denouement to one of the dirtiest, sloppiest, most wasteful takeover battles in U.S. corporate history. At its height, the contest was an unseemly spectacle of "cannibals gorging on one another," in the apt metaphor of Television Commentator Bill Moyers. Last week it ended with a whimper. In meetings at Southfield, Mich., and Morristown, N.J., shareholders of Bendix Corp. and Allied Corp. formally approved the merger of their companies. There was scarcely any dissent, but there was some sober reminiscing. Allied Chairman Edward L. Hennessy Jr., 54, said of the torturous maneuvering leading to the $2.3 billion deal: "It was a pretty sorry spectacle that gave American business a black eye."

Hennessy is a man who ought to know. Allied played the role of "white knight" in the merger mess, which was stirred up last summer when Bendix Chairman William M. Agee, 45, made a surprise tender offer for the shares of MX missile contractor Martin Marietta. But Martin Marietta turned the tables on Agee. The company promptly retaliated by trying to buy Bendix, and the result was a corporate donnybrook in which the two companies acquired huge chunks of each other and made headlines in the process. Finally Allied was called in by Bendix to buy Bendix stock and save it from falling into the clutches of Martin Marietta.

Now that the battle is over, there are growing worries within Allied as to just how it is going to digest Bendix--and doubts all around about the merits of white knighthood in general. The corporate Lancelots usually pay a great deal more for the companies that they rescue than hostile raiders would have paid in the first place. And they must live with the results of such expensive derring-do. Too often that means coping with huge financial burdens and assimilating unfamiliar corporations. Some of the mergers may eventually work out, but few of them, at least so far, are showing any great success.

The largest white knight merger of all was Du Pont's purchase of Conoco in September 1981 for $7.4 billion, against hostile bids by Mobil and Seagram. Conoco has turned into Du Pont's most profitable division; its performance blocked Du Pont's earnings last year from being even lower than they were. But the recession has weighed heavily on the chemical giant, making the huge debt from the Conoco purchase harder to carry, and forcing the company to omit its customary extra year-end dividend. To save money, Du Pont executives have announced plans to close Conoco's Connecticut headquarters next July and move selected employees to Du Pont's home base in Delaware.

Occidental Petroleum is currently groaning under the burden of Cities Service, for which it shelled out $4 billion last year. Oxy's long-term debt has now jumped from $1 billion to $5 billion, while its earnings have dropped from $722 million to $221 million. Similarly, U.S. Steel fought off Mobil to rescue Marathon Oil and is now struggling with the $6.7 billion price of its chivalry. Its steel business is down sharply, and while Marathon's earnings were at a record high last year, they are currently threatened by the downturn in oil prices. To help compensate, Big Steel has put its Pittsburgh headquarters building up for sale.

Quite a few of Wall Street's more powerful mergermakers now concede that some rescued companies might have been better off with the hostile raider, which had at least studied its quarry and knew its own intentions. In contrast, white knights have little time for arming themselves and can sometimes fall victim to decisions made in haste. Occidental's negotiations for Cities Service, for example, took just nine days. Other deals have been set in motion on the basis of a quick telephone call from one chairman to another. As one Wall Street investment banker puts it, "How can anyone be expected to investigate all the ramifications of a $1 billion or $2 billion commitment in such a short time?"

About 15 years ago hostile takeovers, and hence white knights, were rare. A hostile takeover was like "spitting on the floor," says Martin Lipton,* a Wall Street lawyer who specializes in mergers and acquisitions. "It just was not done." Hostility has prevailed, though, in the newest round of mergers that started about two years ago when Kennecott Corp. sold out to Standard Oil Co. of Ohio shortly after a takeover bid by Curtiss-Wright.

More and more marriages have been encouraged by depressed stock prices and banks that seem almost eager to lend potfuls of money for mergers. In all, corporations have spent $258 billion since 1978 to gobble each other up, instead of pumping that money into research or modernizing existing plants.

Allied's relationship with Bendix has only just begun, but it shows little promise of being sunny. Allied faces the daunting task, as Harvard Business School Professor Robert Hayes puts it, of "assimilating a dispirited conglomeration of auto parts, aerospace and machine tool businesses into its own conglomeration of chemicals, plastics, oil, gas and electrical businesses."

Allied's Hennessy says his company should benefit in the long run from Bendix's strengths, particularly in aerospace technology. But the price was high. Allied wound up paying $2.3 billion for all of Bendix and 38% of Martin Marietta. The deal enriched Bendix shareholders, who saw the price of then-holdings jump 61% during the tussle. But it saddled Allied with a $2 billion debt, which it will have to pay off by selling some of its own assets and others that came with Bendix. Among the possible candidates: Bendix's large RCA holdings. Meanwhile Allied's stock has suffered. Instead of rebounding with the powerful market surge that started in August, Allied's shares sold at about $34 last week, down slightly from three months ago.

There is also the problem of meshing Bendix's executives with Allied's, a chore that claimed its first victim within hours of last week's meetings. Bendix President Alonzo L. McDonald Jr., 54, was forced out of his $725,000-a-year post as the company's No. 2 man behind Bill Agee.

That was seen as further evidence of the frigid relations between Bendix's Agee and Hennessy. The Allied chief has vowed that Agee "will have no line duties at Allied," even though he is the company's titular president. McDonald's departure will have the intended effect of keeping Agee tied down at Bendix in Michigan, inhibiting him from becoming involved in Allied affairs back East. Hennessy has also promised that he will study, presumably with a critical eye, the "golden parachute" package fashioned by Bendix directors for Agee during the merger battle. Under its terms, Agee would receive his current $825,000 annual salary plus bonuses for up to six years should he be forced to resign.

Agee has thus paid the ultimate price for the blundered Martin Marietta merger: he has lost Bendix. Yet he was keeping up a brave front. Said he last week: "I firmly believe that where mergers are intelligently done, they create jobs and wealth. And this one was." He pledged to stay on at Allied "as long as I'm needed."

That would be anywhere from six to 18 months, judging from other white knight mergers. Top managers of acquired companies rarely stay past the time it takes for the acquiring company to learn the ropes and bring in its own people. It took only 16 months, for example, for John Duncan, 62, to pull the ripcord on his $1 million golden parachute after the company he headed, St. Joe Minerals Corp., was bought 18 months ago by Fluor Corp. to escape a hostile bid by Seagram Co. Ltd. of Canada.

Similarly, Allegheny International played rescuer to Sunbeam in late 1981, saving it from takeover by IC Industries, Inc. Soon, however, Sunbeam Chief Robert Gwinn and 160 of his colleagues found themselves out of jobs. Complained one executive: "They went at us with a meat ax. If Allegheny is a white knight, God save us from white knights." But Allegheny has complaints too. Chairman Robert Buckley said he discovered in Sunbeam "problems under the surface that were greater than they seemed."

Not all the jousting is in vain. When Detroit's Stroh Brewery Co. bought much larger Schlitz eight months ago, it looked to Wall Street as if two sick chickens were being gathered in a single coop. But, says an industry watcher, "they've done a little better than expected. The jury is still out on Stroh-Schlitz."

For now, it seems, the mergermakers are in a mood to back off from deals born in hostility. This year's corporate marriages will not be as big or as exciting. They will also be between less disparate companies in similar industries. That could lead to friendlier arrangements and so reduce the need for lances, maces and battle-axes. Firm handshakes between reasonable people could make the white knight obsolete.

-- By John S. DeMott. Reported by Frederick Ungeheuer/New York and Barbara B. Dolan/Detroit

* It was Lipton, apparently, who first popularized the term white knight. In his book Takeovers and Freeze-outs, co-authored with Erica H. Steinberger, he describes the process metaphorically. A count (read corporation) under attack from a marauding black knight tries to defend his castle. But when all else fails, he turns to a white knight, "a neighboring count or foreign potentate [who] vanquishes the black knight, repacifies the serfs and moves into the castle. But alas it is the white knight's men who now sit at the council table. The count either swears fealty or joins his fellow exiles in Palm Beach or La Jolla."

With reporting by Frederick Ungeheuer, Barbara B. Dolan This file is automatically generated by a robot program, so viewer discretion is required.