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Part I
Background
Chapter 2
History of Mergers
Trendsetting Mergers of the 1970s

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The number of M&A announcements in the 1970s fell dramatically, as shown in Figure 2.3. Even so, the decade played a major role in merger history. Several path-breaking mergers changed what was considered to be acceptable takeover behavior in the years to follow. The first of these mergers was the International Nickel Company (INCO) acquisition of ESB (formerly known as Electric Storage Battery Company).


Figure 2.3 Merger and Acquisition Announcements, 1969–1980. Source: Mergerstat Review, 2014.


INCO versus ESB

After the third merger wave, a historic merger paved the way for a type that would be pervasive in the fourth wave: the hostile takeover by major established companies.

In 1974, Philadelphia-based ESB was the largest battery maker in the world, specializing in automobile batteries under the Willard and Exide brand names as well as other consumer batteries under the Ray-O-Vac brand name. Although the firm's profits had been rising, its stock price had fallen in response to a generally declining stock market. Several companies had expressed an interest in acquiring ESB, but all these efforts were rebuffed. On July 18, 1974, INCO announced a tender offer to acquire all outstanding shares of ESB for $28 per share, for a total of $157 million. The Toronto-based INCO controlled approximately 40 % of the world's nickel market and was by far the largest firm in this industry. Competition in the nickel industry had increased in the previous 10 years while demand proved to be increasingly volatile. In an effort to smooth their cash flows, INCO sought an acquisition target that was less cyclical.

INCO ultimately selected ESB as the appropriate target for several reasons. As part of what INCO considered to be the “energy industry,” ESB was attractive in light of the high oil prices that prevailed at that time. While it featured name brands, ESB was also not in the forefront of innovation and was losing ground to competitors, such as Eveready and Duracell.

Because the takeover was an unfriendly acquisition, INCO did not have the benefit of a detailed financial analysis using internal data. Before INCO acquired ESB, major reputable corporations did not participate in unfriendly takeovers; only smaller firms and less respected speculators engaged in such activity. If a major firm's takeover overtures were rebuffed, the acquisition was discontinued. Moreover, most large investment banks refused to finance hostile takeovers.

At this time, the level of competition that existed in investment banking was putting pressure on the profits of Morgan Stanley, INCO's investment banker. Although it was seeking additional sources of profits, Morgan Stanley was also concerned that by refusing to aid INCO in its bid for ESB, it might lose a long-term client. Morgan Stanley, long known as a conservative investment bank, reluctantly began to change posture as it saw its market share erode because of the increasingly aggressive advance of its rivals in the investment banking business. Underwriting, which had constituted 95 % of its business until 1965, had become less profitable as other investment banks challenged the traditional relationships of the underwriting business by making competitive bids when securities were being underwritten.38

Many banks, seeking other areas of profitability, expanded their trading operations. By the 1980s, trading would displace underwriting as the investment bank's key profit center.39 This situation would change once again toward the end of the 1980s as fees related to M&As became an increasingly important part of some investment banks' revenues.

ESB found itself unprepared for a hostile takeover, given the novelty of this type of action. INCO gave it only a three-hour warning of its “take it or leave it.” ESB had installed some antitakeover defenses, but they were ineffective. It sought help from the investment bank of Goldman Sachs, which tried to arrange a friendly takeover by United Aircraft, but by September 1974, INCO's hostile takeover of ESB was completed.40 The takeover of ESB proved to be a poor investment, primarily because INCO, as a result of legal actions associated with antitrust considerations, was not given a free hand to manage the company. Not until 39 months after INCO had completed the acquisition did it attain the right to exercise free control over the company. Moreover, as noted previously, ESB's competitors were already aggressively marketing superior products. By 1981, ESB was reporting operating losses; INCO eventually sold it in four separate parts. INCO continued to be the world leader in the nickel business. Interestingly, it stepped into the role of white knight in 2006, when it made a bid for Canadian Falconbridge, a leading copper, nickel, and zinc producer, which was the target of an unwanted 2005 bid from the Swiss mining company Xstrata. This led to a long and complicated takeover battle involving several companies. Eventually, INCO was acquired for approximately $17 billion by the world's largest producer of iron ore, Brazilian company CVRD.

Although the ESB acquisition was not financially successful, it was precedent-setting. It set the stage for hostile takeovers by respected companies in the second half of the 1970s and through the fourth merger wave of the 1980s. This previously unacceptable action – the hostile takeover by a major industrial firm with the support of a leading investment banker – now gained legitimacy. The word hostile now became part of the vocabulary of M&As. “‘ESB is aware that a hostile tender offer is being made by a foreign company for all of ESB's shares,’ said F. J. Port, ESB's president. ‘Hostile’ thus entered the mergers and acquisitions lexicon.”41

While the Inco-ESB deal was precedent setting in the U.S. market as it was the first hostile takeover by a major corporation and supported by a major investment bank, it was not the first hostile takeover. As we have already noted, such deals were attempted in the United States in the 1800s. In Europe, the first major hostile deal appears to be the 1956 takeover of British Aluminum by Reynolds Metal and Tube Investments. This deal, known as the “aluminum war,” was engineered by the then up-and-coming investment bank S. G. Warburg.42

United Technologies versus Otis Elevator

As suggested previously, following INCO's hostile takeover of ESB, other major corporations began to consider unfriendly acquisitions. Firms and their chief executives who were inclined to be raiders but inhibited by censure from the business community now became unrestrained. United Technologies was one such firm.

In 1975, United Technologies had recently changed its name from United Aircraft through the efforts of its chairman, Harry Gray, and president, Edward Hennessy, who were transforming the company into a growing conglomerate. They were familiar with the INCO-ESB acquisition, having participated in the bidding war for ESB as the unsuccessful white knight that Goldman Sachs had solicited on ESB's behalf. Up until the bid for Otis, United had never participated in a hostile acquisition.

At that time the growth of the elevator manufacturing business was slowing down and its sales patterns were cyclical inasmuch as it was heavily dependent on the construction industry. Nonetheless, this target was extremely attractive. One-third of Otis's revenues came from servicing elevators, revenues that tend to be much more stable than those from elevator construction. That Otis was a well-managed company made it all the more appealing to United Technologies. Moreover, 60 % of Otis's revenues were from international customers, a detail that fit well with United Technologies' plans to increase its international presence. By buying Otis Elevator, United could diversify internationally while buying an American firm and not assuming the normal risk that would be present with the acquisition of a foreign company.

United initially attempted friendly overtures toward Otis, which were not accepted. On October 15, 1975, United Technologies bid $42 per share for a controlling interest in Otis Elevator, an offer that precipitated a heated battle between the two firms. Otis sought the aid of a white knight, the Dana Corporation, an auto parts supplier, while filing several lawsuits to enjoin United from completing its takeover. A bidding war that ensued between United Technologies and the Dana Corporation ended with United winning with a bid of $44 per share. Unlike the INCO-ESB takeover, however, the takeover of Otis proved to be an excellent investment of United's excess cash. Otis went on to enjoy greater-than-expected success, particularly in international markets.

United's takeover of Otis was a ground-breaking acquisition; not only was it a hostile takeover by an established firm, but also it was a successful venture and Otis remains a valuable part of United today. This deal helped make hostile takeovers acceptable.

Colt Industries versus Garlock Industries

Colt Industries' takeover of Garlock Industries was yet another precedent-setting acquisition, moving hostile takeovers to a sharply higher level of hostility. The other two hostile takeovers by major firms had amounted to heated bidding wars but were mild in comparison to the aggressive tactics used in this takeover.

In 1964, the Fairbanks Whitney Company changed its name to Colt Industries, which was the firearms company it had acquired in 1955. During the 1970s, the company was almost totally restructured, with Chairman George Strichman and President David Margolis divesting the firm of many of its poorly performing businesses. The management wanted to use the cash from these sales to acquire higher-growth industrial businesses. As part of this acquisition program, in 1975, Colt initiated a hostile bid for Garlock Industries, which manufactured packing and sealing products. The deal was path-breaking due to the fact that Garlock fought back furiously and aggressively by using public relations as part of its defensive arsenal. Colt responded in kind and eventually acquired Garlock. This deal is notable for making hostile deals truly hostile. Such deals are commonplace today.

LING-TEMCO-VOUGHT: GROWTH OF A CONGLOMERATE 43

Ling-Temco-Vought (LTV) Corporation was one of the leading conglomerates of the third merger wave. The company was led by James Joseph Ling – the Ling of Ling-Temco-Vought. The story of how he parlayed a $2,000 investment and a small electronics business into the fourteenth-largest industrial company in the United States is a fascinating one. Ling-Temco-Vought was a sprawling industrial corporation, which at its peak included such major enterprises as Jones & Laughlin Steel, the nation's sixth-largest steel company; Wilson & Co., a major meat packing and sporting goods company; Braniff Airways, an airline that serviced many domestic and international routes; Temco and Vought Aircraft, both suppliers of aircraft for the military; and several other companies. The company originated in a small Texas electrical contracting business that Jimmy Ling grew, through a pattern of diverse acquisitions, into one of the largest U.S. corporations. The original corporate entity, the Ling Electric Company, was started in 1947 with a modest investment of $2,000, which was used to buy war surplus electrical equipment and a used truck. By 1956, Ling Electronics had enjoyed steady growth and embarked on one of its first acquisitions by buying L. M. Electronics. Various other electronic and defense contractors were then acquired, including the American Microwave Corporation, the United Electronics Company, and the Calidyne Company. Acquisitions such as these – companies that lacked the requisite capital to expand – were financed by Ling through a combination of debt and stock in his company, which traded on the over-the-counter market.

By 1958, this master dealmaker sold an offering of convertible debentures in a private placement that was arranged by the Wall Street investment bank of White Weld & Company. This type of securities offering was particularly popular with the dealmakers of the third wave because it did not have an immediate adverse impact on earnings per share, thus leaving the company in a good position to play the “profits/earnings game.” With its stock price trading in the $40s, Ling started the process of buying targets that were much bigger than the acquiring company with the 1958 stock-for-stock acquisition of Altec Companies, a manufacturer of sound systems.

After some other small acquisitions, Ling initiated his largest acquisition when he merged his company with the Texas Engineering and Manufacturing Company, Temco. This deal enabled Ling to accomplish a long-term goal when the merged company, Ling-Temco Electronics, became part of the Fortune 500. Shortly thereafter, Ling prevailed in a hostile takeover of the Vought Aircraft Company to form Ling-Temco-Vought.

Ling-Temco-Vought went through a period of lackluster financial performance, which forced Ling to restructure the company by selling off poorly performing divisions. In 1967, Ling successfully completed a tender offer for Wilson & Company, a firm twice the size of LTV. This deal vaulted LTV to number 38 on the Fortune 500 list. Wilson was composed of three subsidiaries: Wilson & Company, the meat-packing business; Wilson Sporting Goods; and the Wilson Pharmaceutical and Chemical Corporation. Traders sometimes referred to these divisions as “meatball, golf ball, and goof ball.” The next step Ling took in assembling this massive conglomerate was to buy the Great America Corporation, which was a holding company with investments in a variety of businesses, such as Braniff Airlines and National Car Rental, as well as banks and insurance companies. Although few beneficial commonalities appeared to be associated with this acquisition, Ling was able to exploit several, such as the insurance companies' writing insurance for a variety of LTV units and employees.

After an unsuccessful takeover of the Youngstown Sheet and Tube Company, Ling set his sights on the fourth-largest steel producer in the United States, Jones & Laughlin Steel. Ling-Temco-Vought bought Jones & Laughlin in an $85 tender offer for a company with a preannouncement price of $50. This $425 million bid was the largest cash tender offer as of that date and represented a 70 % premium for a company in a low-growth industry. Unfortunately, the takeover of Jones & Laughlin drew the ire of Assistant Attorney General Richard McLaren, who saw it as another anticompetitive conglomerate acquisition. The Justice Department filed an antitrust lawsuit, which was bad news for any defendant because the government won a very high percentage of such cases. The market seemed to concur with this legal assessment because the stock price declined after the announcement. Because of the lawsuit, LTV was prevented from playing an active role in the management of Jones & Laughlin and taking steps to turn around the poorly performing steel company that had just announced its worst earnings performance in a decade. With the addition of Jones & Laughlin, LTV now had two major components of its empire – Braniff Airlines being the other one – reporting sizable losses. A settlement of the lawsuit was reached in which LTV agreed to sell off Braniff and the Okonite Company, a cable and wire manufacturer.

Although LTV was able to achieve a favorable settlement, its stock suffered, partly as a result of the lawsuit, the poor performance of its subsidiaries, and the overall decline in the market. These factors gave rise to pressures from dissident shareholders and bondholders to remove Ling from control of LTV. Ling was not able to survive these pressures; he was demoted from his position as chief executive and eventually left LTV. The story of Jimmy Ling and the huge conglomerate that he built is one of a man who was ahead of his time. He was probably the most renowned of the great conglomerate builders of the third merger wave. Whereas the 1980s featured such raiders as Carl Icahn and Boone Pickens, Ling was joined in the third wave by other “conglomerators,” such as Lawrence Tisch of Loews, Charles Bluhdorn of Gulf & Western, and Ben Heineman of Northwest Industries. Long before the 1980s, Ling had mastered the art of the LBO and hostile takeover. Unlike many of the raiders of the 1980s, however, Ling was opposed to trying to turn a quick profit on acquisitions by selling off assets. He bought companies with a more long-term strategy in mind, which, nonetheless, many criticized.

What was once LTV has undergone many changes since the 1960s. The company experienced financial troubles in the 1980s, as did many companies in the U.S. steel industry. It was acquired in 2002 by Wilber Ross, who rolled the company into the International Steel Group. This company was then sold by Ross to Mittal in 2004.

38

John Brooks, The Takeover Game (New York: Dutton, 1987), 4.

39

Ken Auletta, Greed and Glory on Wall Street: The Fall of the House of Lehman (New York: Random House, 1986). Auletta provides a good discussion of how the traders, led by Lewis Glucksman, usurped the power of the investment bankers, led by Pete Peterson, and forced Peterson out of the firm. Peterson, however, went on to thrive as one of the founders of the very successful Blackstone private equity firm. For a good discussion of how Glucksman's protégé and successor, Richard Fuld, ended up leading Lehman Brothers right into the largest bankruptcy in history, see Lawrence G. McDonald and Patrick Robinson, A Colossal Failure of Common Sense: The Insider Story of the Collapse of Lehman Brothers (New York: Crown Business, 2009).

40

For an excellent discussion of this merger, see Jeff Madrick, Taking America (New York: Bantam Books, 1987), 1–59.

41

“Hostility Breeds Contempt in Takeovers, 1974,” Wall Street Journal, October 25, 1989.

42

Niall Ferguson, High Financier: The Lives and Times of Siegmund Warburg (New York: Penguin Press, 2010), 183–199.

43

For an excellent discussion of the history of this company during the conglomerate era, see Stanley H. Brown, Ling: The Rise and Fall of a Texas Titan (New York: Atheneum, 1972).

Mergers, Acquisitions, and Corporate Restructurings

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