Merger Rules

By Alexander L. Taylor III.

The SEC tackles takeovers

The takeover fever that has infected American business continued to burn unabated last week. Beatrice Foods, which owns such brands as Tropicana orange juice, La Choy Oriental food and Swiss Miss chocolate mix, offered $2.8 billion for Esmark, which owns Playtex, Max Factor and Avis. The bid, which Esmark approved, topped by $400 million the offer made only three weeks earlier by the New York investment banking firm of Kohlberg Kravis Roberts, and was $300 million more than Beatrice's earlier bid.

Just as the advertisements appeared on business pages announcing this latest megabuck merger, a congressional committee opened hearings on proposals by the Securities and Exchange Commission that would curb some of the wheeling and dealing that accompanies such corporate marriages. Colorado Democrat Timothy Wirth, chairman of the House Subcommittee on Telecommunications, Consumer Protection and Finance, is supporting the SEC recommendations. Says he: "The tactics and strategies used by both bidders and targets in recent years have raised questions about the adequacy of current laws to a ensure the fundamental fairness of the takeover process. In the heat of a contest, important shareholder, employee and community interests may be overlooked."

One goal of the SEC recommendations is the elimination of defensive tactics that preserve the jobs of incumbent management but lessen the value of the company to shareholders. Such stratagems can include buying back company stock and issuing "poison pills," like preferred stock, which dilute the value of other outstanding shares. The Carter Hawley Hale department store chain has used both techniques in fending off a takeover attempt by The Limited. So far, its tactics have succeeded. The Limited Chairman Leslie Wexner said last week that his firm's tender offer will not be extended, though he hopes to make another bid.

The SEC also wants to deflate "golden parachutes," which give special payments to executives if they leave a company after a takeover. If the sale of Esmark goes through, for example, Chairman Donald Kelly, 62, would collect three years' salary and sell his 245,000 shares of stock for $60 a share. Total reward: $17.4 million.

Another key target of the SEC recommendations is the practice known as "greenmail." This involves buying up sufficient shares in a company to pose a takeover threat or proxy challenge. In order to head off the move, many companies are willing to buy back the purchased shares at a premium price. Greenmail practitioners include New York Financier Carl Icahn, 48, whose group pocketed $30 million when he sold his stock in Marshall Field to England's B.A.T. Industries, and Publisher Rupert Murdoch, 53, who made $40 million when Warner Communications bought back his shares at 35% more than the market price.

Greenmailers like Icahn contend that acquisitions serve a useful purpose by ousting incompetent managers who fail to make the most of a company's assets. He argues that if antigreenmail laws are enacted, they should be accompanied by measures to ensure that bad bosses cannot entrench themselves at the expense of shareholders. Actually, it is usually the stockholders, who do not have the same opportunity to sell their stock at a premium price, who are hurt by greenmail.

Texas Oilman T. Boone Pickens made $760 million for his backers when he sold out his stock in Gulf Oil to Standard Oil of California after a merger struggle. Though Gulf arranged the deal with Socal to avoid a possible takeover by Pickens' Mesa Petroleum, he carefully separates himself from the greenmailers. Says he: "Our record is good. When we take a position in any company, we are quite willing to run it." But Pickens adds, "I have no problem with greenmail artists myself. They don't bother me at all. My problem is with the managements who respond to that type of thing, when it's not working in the best interests of the stockholders."

To discourage greenmail, the SEC would prohibit a target company from repurchasing a block of 3% or more of its shares held for less than two years at a premium price without making the same offer to all its shareholders. That would eliminate any incentive for greenmailers to acquire stock unless they intended to make a formal takeover bid. The SEC would also allow shareholders to vote on repurchase questions. If they did not like the existing management, they could vote down the repurchase and give the greenmailer a chance to take over the company.

Whatever moves the Government makes, they will probably come too late to stop Saul Steinberg, one of the best-known greenmail artists. Last week Steinberg, 44, received a go-ahead from regulatory authorities to increase his holdings in Walt Disney Productions to 25% from his current 12.1%. Steinberg says he is buying the shares for "investment purposes only." Disney officials claim he is trying to seize control of the company. Stay tuned. --By Alexander L. Taylor III. Reported by Christopher Redman/Washington and Adam Zagorin/New York

With reporting by Christopher Redman, Adam Zagorin