The Tender War

In their relentless pursuit of growth through merger, U.S. businessmen are increasingly resorting to a blitzlike form of corporate warfare. It is the tender offer--a public solicitation to buy stock of another company--and it has clearly replaced the old-fashioned proxy fight as the favorite weapon for forcible corporate takeovers.

Last year, no less than 107 companies were swallowed up through the tender route as against a mere eight in 1960. That was only a small portion of the 1,746 corporate mergers and acquisitions in 1966, but the tender total is heading much higher this year. "The ingenuity in this area is unlimited," says Chairman Manuel Cohen of the Securities and Exchange Commission.

Categorized Corporations. Indeed, acrimonious battles for company control have grown so common that Richard S. Nye, partner in the Manhattan proxy-soliciting firm of Georgeson & Co., says that "almost all corporations can be categorized as 'attackers,' 'attacked' or 'angels.' " To Indiana's Dodge Mfg. Corp., maker of power-transmission equipment, Cleveland's Reliance Electric & Engineering Co. has just become an angel. Confronted by an unwanted tender offer from Emerson Electric Co., Dodge two weeks ago worked out a stock-swap merger with Reliance.

Tender offers--predominantly for cash in an affluent age--have grown popular because they can be sprung swiftly at comparatively small risk and cost for the attacker, are less likely than ordinary mergers to run afoul of Government antitrust obstacles. Ordinarily, the cost of a tender offer runs no higher than 3% of the deal--for legal fees, a splurge of advertising to woo stockholders, and interest charges on temporary financing, if it is needed. While proxy fights often turn into marathons (Realty Developer Philip Levin's battle with MGM is now more than a year old and far from over), tender offers generally click or flop within a fortnight. One reason: stockbrokers find them particularly profitable since under New York Stock Exchange rules they get a double commission, once on the sale by the investor and again on the purchase by the bidder.

Masking the Ambush. Having ferreted out a likely target, often a firm with somnolent management, surplus cash, unused debt capacity or a low return on its capital, attackers go to great lengths to mask their ambush. While Pennzoil planned its takeover of United Gas Corp. a year and a half ago, says Pennzoil Financial Vice President J. H. Young, "my own secretary didn't know what was going on. If there had been any leak, the price of United's stock would have gone so high that we might not have wanted to monkey with it." Even the board of directors was kept in the dark.

To keep the advantage of surprise, bidders like to pounce on Sundays (all it takes is a press release and an order for an ad in the next day's paper), when the management of the attacked company is unready to hit back. "The first I heard of this raid was at my golf club," spluttered President Dwight M. Cochran of Kern County Land Co. after Occidental Petroleum's bitterly contested two-step offer last month to buy 23% of his asset-laden oil and farming firm. With such tactics, a group of Detroit financiers led by Donald H. Parsons, 36, has taken over five Michigan banks in the past year and forced American Metal Products into a merger with Lear-Siegler. Last week the Parsons group snared a sixth bank, the Monroe (Mich.) State Savings Bank, whose directors approved a tender offer for all its shares.

The most difficult decision for attackers is how much above the going market price to offer for stock they covet. In a study of 50 contested tender offers, Columbia University Professors Samuel L. Hayes III and Russell A. Taussig recently found that the average premium was 16%, though lower-priced stocks ($10 to $20) often required an extra sweetener.

Strategy for Defense. Though resisting tender offers is difficult, Hayes and Taussig figure that the odds nevertheless favor the defense by a 2.86-to-l margin. Defenses are many. Racine Hydraulics & Machinery fought off a takeover bid by Bucyrus-Erie Co. not long ago by writing and telephoning some 3,000 stockholders, joining a hastily formed committee of Racine citizens in buying up its own shares in the market. Sharon Steel Corp. boosted its annual dividend from 60-c- to 80-c- a share to help fend off a tender offer by Honolulu Industrialist George W. Murphy. Julius Garfinckel & Co., the Washington-based retail chain that controls Manhattan's Brooks Bros., last year rebuffed a tender takeover attempt by Genesco, Maxey Jarman's shoe-and-clothing combine, after two court fights and a bitter exchange of public recriminations. Most often, the best defense is to reach for a friendlier hand. Battling a tender takeover by Texan Troy V. Post's Greatamerica Corp., an insurance-banking-airline combine, Cleveland's chemical and paint-making Glidden Co. last month hurriedly negotiated a merger with SCM Corp. On top of that, Glidden won a temporary court order blocking the tender, withdrawing that suit only after Greatamerica agreed to let Glidden buy back most of its own shares.

Protecting the Stockholder. Despite their swift ascendancy, cash tender bids remain beyond the scrutiny of the SEC--a fact that enhances their popularity. But the SEC feels that "the unwary public" needs protection, notably more information to help stockholders evaluate confusing claims of rival tender offers. Accordingly, the commission is backing a bill by New Jersey's Democratic Senator Harrison Williams that would require a tender bidder to disclose his name, financing arrangements, and any plans he has for the firm. Though most brokerage firms and investment bankers favor regulation, many disagree with one part of the bill, which would force tender makers to divulge their plans to the SEC five days in advance of the actual offer. That, they argue, would tend to discourage all tender offers--and so help to entrench existing managements, good or bad.

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