CORPORATE MERGER MADNESS
Kahn, Harry & Melville, Keith
Questions about corporate takeovers become more and more insistent. There is a fear that takeovers sap America's competitive strength and contribute to an unhealthy obsession with...
...Felix Rohatyn, a partner of Lazard Freres & Co.—a firm that will earn more than $10 million for arranging mergers this year—has expressed serious reservations about the size of those fees and the apparent lack of concern about the effects of mergers...
...There was so much latent concern about the dangers of permissiveness on antitrust matters that the Administration was forced to act...
...An alternative is to revise the antitrust laws...
...They poured their lifeblood into Bendix...
...Some people will respond that in this country it is neither desirable nor efficient to appoint another government agency to make such judgments...
...If he has a good appetite, eats and sleeps well, nothing in the universe besides can disturb him...
...Ordinary people—the rank and file as well as nonbargaining-unit people like clericals and engineers— got the short end of the stick...
...The "external" costs of mergers— their human impact, their impact on morale, jobs, and communities—outweigh the alleged benefits to society...
...2) result in more productive management of corporate assets, new goods and services, or a reduction in the price of existing goods and services...
...Many Bendix employees accepted early retirement or bailed out prior to the merger...
...But the size of those fees, and the zeal with which investment bankers pursue deals, only underscores the question: In the midst of this high-level wheeling and dealing, who's looking out for the public interest...
...In this particular chicken coop, the foxes were quite numerous...
...and if he has the power to prevent it, depend upon it, he will use it without remorse and without control...
...What needs to be widely understood is not only the huge amounts of capital that are consumed by these transactions, but also their harmful effects...
...The consequences are placed beyond the reach of his imagination, or would not affect him if they were not, for he is a fool, and good-natured...
...WILLIAM HAZLITT, On Good-Nature" q 481 sions that may be in the interest of chief executive officers are also in the public interest...
...In most cases, the unique chemistry of a successful company eroded and often was destroyed...
...He will send out his mandate to kill and destroy with the same indifference or satisfaction that he performs any natural function of his body...
...This one provided a prominent display of large egos at work in corporate boardrooms, and it revealed how much time and effort companies vulnerable to takeovers have to put into their defense against them...
...Peter Rodino...
...The Rodino bill would require the assistant attorney general or the Federal Trade Commission to determine that mergers of companies with assets in excess of $5 billion serve the public interest...
...WHAT SHOULD BE DONE to deter corporate takeovers that are not in the public interest...
...IF IT IS DIFFICULT to identify who the winners are when mergers and acquisitions take place (other than executives protected by "golden parachutes," and the brokers who negotiate the deals), it is a simple matter to identify the losers...
...Although that merger did not lead to massive layoffs, Hennessey's figures are somewhat deceptive...
...If they were lucky enough to find another job, it probably pays $3 to $4 less per hour than they were making at Bendix...
...A more fundamental rethinking of antitrust laws should take place, and it might begin with a measure such as the one proposed by Rep...
...Hennessey stated that all but 25 of the 175 people let go have found new jobs...
...As the laws currently stand, corporations are allowed to exclude from taxation 85 percent of the dividend income on their holdings in other companies' stock...
...but a good-natured man cares only about himself...
...They concluded a disappointingly narrow review of merger policy by taking a position compatible with the hands-off approach of the Administration...
...Mergers hurt average Americans indirectly because of lost tax revenues...
...Some practices—such as bidding wars, which lead to overvalued shares—should be banned...
...The Bendix affair raised too many questions for the Reagan administration to let the matter pass without further scrutiny...
...From my perspective [says Karas], the whole Bendix-Allied thing was a disaster...
...There is a fear that takeovers sap America's competitive strength and contribute to an unhealthy obsession with shortterm growth...
...They lost their jobs while the corporate heads were lining their pockets...
...A good-natured man hates more than anyone else whatever thwarts his will, or contradicts his prejudices...
...Rodino's proposed law, H.R...
...What is notably absent from the Reagan administration's deliberations about antitrust policy is a concern for what economists refer to as the "external effects" of mergers and acquisitions...
...CONSIDER THE EVIDENCE on merger activity over the past year...
...Several of the committee members were investment bankers or lawyers specializing in launching unfriendly tender offers...
...But if they were hoping for some assistance from the committee in thinking about merger policy, their hopes were in vain...
...While defenders of takeovers have taken the position that few negative effects have been demonstrated, a strong case can be made against them...
...Most Americans are hurt by mergers in a more direct way, too...
...Members of the Senate Banking Committee urged the committee to undertake a broad examination of the corporation's obligations to its stockholders, employees, and the community in a takeover situation...
...3561, would require firms proposing large mergers to bear the burden of proof...
...The Administration's lenient antitrust policies have slighted the human impact of mergers in the name of economic efficiency...
...If that bill becomes law, companies proposing mergers would have to show that the acquisition would (1) increase competition...
...Their results show that stock prices for companies making such acquisitions declined by an average of 4 percent in the months surrounding the announcement date, and typically did not recover this loss...
...The jobs lost because of those sales are not included in Hennessey's figures...
...It is likely that the merger wave has not yet crested...
...More mergers can be expected in the auto and steel business, and in financial services...
...It is likely, too, that some of the industries that have not been seriously affected by the merger wave—such as the high-technology sector—will feel its impact...
...Neither does the evidence suggest that mergers and acquisitions create long-term value for the shareholders of the acquiring company...
...As a result, the SEC announced formation of an advisory committee on tender offers, presided over by its chair...
...The members of that group were unable to agree that any "substantial economic benefits or detriments of takeover activities have been conclusively established...
...When you consider that the combined companies have in excess of 100,000 people," said Hennessey, "I don't think that's too bad...
...The investment bankers who act as brokers in these transactions have never had it so good...
...4) not result in excessive transaction fees...
...The Rodino bill deserves serious consideration because it acknowledges what this Administration has overlooked...
...Just one recent deal—the Getty Oil/Texaco merger— generated $47 million in fees for four such firms...
...Precise figures are hard to come by, even in a visible merger such as the Bendix takeover...
...The Boston Consulting Group recently surveyed more than 50 large public acquisitions that have taken place over the past five years to determine how such acquisitions affect the value of the stock...
...The official line from Allied's president Edward Hennessey is that only 175 jobs were lost as a result of the merger of Allied and Bendix, and that all of the jobs lost were from the corporate offices of the Bendix Corporation in Southfield, Michigan...
...Equally unusual, therefore, is a significant improvement in the acquirers' long-term stock price trend...
...The value of merger transactions in that period was a recordbreaking $103.2 billion, almost double the $53.3 billion total for the first nine months of 1983...
...There are persuasive arguments against the current wave of mergers...
...Before another prominent hostile takeover forces Congress to take action, there should be serious discussion of measures that might be taken to prevent such mergers...
...The takeover phenomenon and its manifold effects raise further questions about whether deci"The President Is a Cheerful Man" A king who is a good-natured man is in a fair way of being a great tyrant...
...For such firms as Morgan Stanley, Goldman Sachs, First Boston, and Kidder Peabody, mergers and acquisitions are a most lucrative operation...
...The most marked increase has been in the "megadeals...
...The destruction of the lives or liberties of his subjects will not stop him in the least of his caprices, but will concoct well with his bile, and "good digestion wait on appetite, and health on both...
...In his words, "It's time to send a clear signal to corporate America that we will no longer tolerate unrestrained warfare between top managements for control of corporate assets...
...A king ought to feel concern for all to whom his power extends...
...In the first nine months of 1984, according to figures compiled by W. T. Grimm & Co., merger consultants and publishers of the Mergerstat Review, there was a record number of 18 transactions of $1 billion or more...
...Rick Karas, president of UAW Local 155 in Michigan, which included many workers affected by the Bendix merger, describes its effect as "very traumatic" for many residents of the area...
...In the first six months of 1984, 1,337 mergers were consummated, which represents an 18-percent increase over the figure for the first half of 1983...
...It's sad to see how people suffered—people with 20 to 30 years in the company...
...More and more," he says, "corporate customers are looking upon investment bankers not as advisers but as people peddling companies— some kind of buccaneers, samurai, or gunslingers— who will do anything to get a deal done...
...A good, profitable company with good employees was reduced to a shambles...
...In fact, says Walter B. Kissinger, chairman of the Allen Group, "the claims for synergistic benefits may be good public relations, but typically they do not materialize...
...It is not sufficient to conclude, as the Shad Commission did, that until "substantial economic detriments" are conclusively established, no further measures should be taken to deter takeovers...
...There has been a frenzy of activity as, month after month, deal-makers have put together buyouts, takeovers, and mergers involving smallfamily businesses and multimillion-dollar firms...
...And there was a significant amount of premerger "dumping" 480 at four Bendix plants in the Detroit area...
...When mergers are consummated, they typically result in job losses and disrupted communities...
...More important is what happens to the long-term performance of the stock: In the five years following these acquisitions, it is extremely unusual to find improvements in growth or profitability that are significant enough to provide a reasonable return on the acquisition price including the premium...
...Peter Drucker recently commented that the SEC, founded to protect investors against the financial wolves, has by encouraging takeovers become the protector of the wolves...
...One argument for mergers is that, through the synergistic effect of combining firms, new firms are created that are stronger and more competitive...
...That panel provides a mechanism for judging whether, on balance, a takeover is likely to be beneficial to the various parties concerned— including stockholders and the public...
...At a time when the public is becoming increasingly concerned about short-sighted management objectives and underinvestment in productivityenhancing technologies, it is essential to keep in mind this unseemly spectacle that Bill Moyers characterized as "cannibals gorging on one another...
...In one company after another threatened by takeover raids, employees— from senior managers down to rank-and-file office and factory workers—are demoralized...
...The evidence indicates that the average public acquisition actually destroys a considerable amount of shareholder wealth, in both the short and the long term...
...Furthermore, many Bendix employees who wanted to retain jobs with the parent company were forced to move out of state— especially to a large Allied plant in Morristown, New Jersey...
...It was not surprising, then, that the SEC panel defined its task narrowly, and limited recommendations to specific technical changes...
...There has been increasing interest in Washington in the way the problem is approached in Britain, where the government routinely refers unfriendly merger bids to a "takeover panel" for a final "yes" or "no...
...It should be public policy to balance the interests of companies seeking acquisitions and the interests of the target companies, their employees, and shareholders...
...THE QUESTION of whether such corporate mergers are in the public interest was raised in a particularly blatant form by the Bendix/Martin Marietta 479 affair—an example of a new breed of merger, the hostile takeover...
...That would reverse the current situation in which regulatory agencies have to argue persuasively that a merger would not be in the public interest...
...Companies may also deduct interest on money borrowed to pay for the stock...
...The suspicion of a takeover creates a climate of uncertainty that seriously undermines both morale and productivity...
...3) not unduly disrupt employees or management...
Vol. 32 • September 1985 • No. 4
