Takeover Tugs-of-War

By George Russell

From Manhattan's Wall Street to San Francisco's California Street and back, the sounds of heavyweight pushing and pulling echoed across the U.S. last week. Takeover tug-of-war, the contest of corporate wiles and financial muscle that has affected almost every major U.S. industry in the past two years, was back as a premier event in the business world. In the nation's top challenge matches, the largest U.S. steelmaker and the No. 2 banking company, already laden with problems, faced off with some ambitious would-be prizewinners.

For Pittsburgh-based USX, the steel and energy giant (1985 sales: $19.2 billion), the threat was only the latest in a series of battles. Amid a lengthy steel strike, its first since 1959, and menaced for weeks by speculative stock buying and takeover rumors, the company headed by Chairman David Roderick, 62, faced an $8 billion buyout offer from Carl Icahn, 50, chairman of Trans World Airlines. At week's end it was unclear whether Icahn sought control of USX or merely wanted to pocket a hefty profit for his efforts.

There was less ambiguity in the $2.8 billion merger offer made to limping BankAmerica (assets: $117 billion), headed by President and Chief Executive Officer Samuel Armacost, 47. The proposal from Joseph Pinola, 61, chairman of California's First Interstate Bancorp (No. 9 in the U.S., with assets of $50 billion), was to forge a firm that would rival Citicorp ($176 billion) as the country's No.1 banking institution. Late last week, as BankAmerica board members considered Pinola's offer, Armacost abruptly resigned. The reason, as he put it, was "to help restore confidence in this organization's capabilities and future." Rumors immediately spread that his successor would be former World Bank President A.W. Clausen, 63, the man whom Armacost replaced at BankAmerica in December 1980.

The rapid-moving chain of events kept brokers busy. BankAmerica stock, which began the week at 11 3/8, hopped to a 14 7/8 close. USX shares, which have been among the most active New York Stock Exchange issues for weeks, climbed from 26 1/8 to 28 1/8, eventually closing at 27 1/4.

The latest megatakeover offers broke a relative lull in the merger spree--a lull, that is, only by recent standards. Last year more than 3,380 mergers and buyouts worth $1 million or more were completed in the U.S., with a total value in excess of $144 billion. In the first half of 1986 there were 1,639 similar transactions, worth more than $81 billion. But then the pace slowed a bit. In the past three months only 714 deals took place, involving more than $21 billion. Now, however, the merger game definitely seems to be heating up again. Allied Stores, owner of Brooks Brothers and Bonwit Teller, last week announced a $3.56 billion merger with the Edward DeBartolo Corp., the largest U.S. developer of shopping malls. The aim of the Allied marriage: to avoid a $3.5 billion offer from a Canadian developer, Campeau, which promptly sued to block the Allied-DeBartolo union.

Before TWA's Icahn made his advance, USX had been considered a probable takeover target for some time. Wall Street analysts considered the diversified company, formerly known as U.S. Steel, to be drastically undervalued: its stock price in no way reflects its $21 billion in assets, which include $13.2 billion worth of oil and gas holdings. Many of those energy ventures, like the $6 billion acquisition of Marathon Oil in 1982, were engineered by strong-willed Chairman Roderick precisely to raise the ante for would-be raiders. With the steel and energy businesses reeling, Roderick last August decided to pick a fight with the United Steelworkers over pay-and-benefit concessions. The resulting 16-plant walkout, involving some 22,000 U.S.W. members, has been ugly at times; strikers have blocked railway spurs at mills to prevent the sale of steel from the company's stockpile.

The lack of a formal labor contract at USX may be one reason why corporate buccaneers, sensing the potential for wage cuts and an eventual increase in corporate earnings, soon began to sniff around. Another attraction for raiders is a USX pension fund with an estimated $2.5 billion in excess assets. Last month the company's stock began moving into some well-known hands. Among the buyers: Robert Holmes `a Court, an Australian investor; T. Boone Pickens, the Texas oilman-raider; Irwin Jacobs, the Minneapolis entrepreneur and speculator. Pickens reportedly cashed in his chips two weeks ago for a big profit. Icahn, on the other hand, continued to buy. Last week he announced that his holdings had reached 11.4% of USX and were still climbing. Said Icahn: "We have made a serious offer."

Icahn, who may have already earned a paper profit of up to $400 million on his stock, insisted that his purchase offer of $31 a share was not intended to force USX to buy back his holdings at a hefty premium. Instead, he claimed, his objective was a takeover followed by a cost-cutting program and a deal with the striking Steelworkers that would boost the company's profitability and its share price. Icahn challenged management to come up with its own restructuring plan to boost the value of its stock.

Corporate officials are already doing that. In a bid to fend off the previous raider challenges, USX commissioned investment bankers Goldman, Sachs and First Boston to come up with such a plan by the end of this month. Among other things, the company is reportedly ready to sell off an industrial-chemical subsidiary worth an estimated $400 million.

What gave Icahn's offer most of its credibility, though, was his surprising success at TWA. The New York City-born businessman took the helm of the floundering carrier 14 months ago after a bitter takeover battle. Few thought Icahn would ever be able to turn around the airline, which lost $193 million in 1985 and $257 million in the first half of this year. But after a series of hard-nosed measures, including victory in a three-month strike by TWA's 6,500 flight attendants, Icahn was able to announce earnings of $72 million for the third quarter of 1986. He has promised an unspecified profit for the fourth quarter. If he delivers, it will be the first time TWA has finished that period in the black since 1966. Even so, says J. Clarence Morrison, a senior analyst at the Dean Witter Reynolds investment firm, the "question is whether Icahn's plate is now getting too full."

Similar questions were being asked on the West Coast concerning First Interstate's offer to merge with BankAmerica. Chairman Pinola's bid to swap common and preferred shares of First Interstate's stock for BankAmerica holdings was valued by the smaller bank's officials at $18 a share. More skeptical financial analysts put the offer at $13 or $14 a share. The problem, said Paul Baastad, a vice president of the S.G. Warburg investment bank, is that "no one seems to know what BankAmerica is worth. It's a situation where a bunch of vultures are hovering around a wounded animal."

BankAmerica's wounds, the result of bad loans to everyone from Western farmers to Latin American borrowers to ailing energy companies, would make almost anyone queasy. In the second quarter of 1986, the company announced a $640 million loss, the second worst in U.S. banking history.[*] Losses in the third quarter could reach $75 million. Last year the bank began a cost-cutting program that has involved the sale of $1.3 billion in assets and has led to some 5,000 layoffs among its 80,000 employees; 5,000 additional job losses are expected next year. BankAmerica officials predict earnings could be running at an annual rate of as much as $1 billion by the end of 1987, but many analysts are uncertain.

That skepticism played a key part in Armacost's resignation. As he said last week, a management change was necessary because "external perceptions about the bank have been so eroded by rumor and speculation." Indeed, only a month ago, Armacost bought airtime on California radio stations to discount rumors that the bank was about to ask for federal protection from its creditors. After the executive's resignation announcement, the rumor that former BankAmerica President A.W. Clausen would return circulated along with the news of a weekend meeting of the bank's 15 directors. In Washington, Clausen issued only a firm "no comment" about his possible new role.

Officially, BankAmerica has taken no position on First Interstate's merger bid. It was not the first time that such a marriage proposal had been made. First Interstate's Pinola, who built the regional bank to its current size through a series of daring takeover moves, reportedly approached BankAmerica with an informal merger offer last March, but the bigger bank preferred to retain its independence. Privately, many West Coast financial analysts do not think First Interstate can offer enough money to sway BankAmerica's management and board.

Such doubts are unlikely to cloud Pinola's vision. He spent 25 years at BankAmerica, eventually rising to executive vice president in charge of North American operations before moving to First Interstate in 1976. He was promoted to chairman of First Interstate's bank holding company in 1978. Pinola is well aware that from 1927 to 1956 his bank was part of the Bank of America empire founded by A.P. Giannini and eventually was spun off as an independent after Congress passed a law that mandated the divestiture. Pinola's dream is to rejoin his twelve-state regional firm with BankAmerica's single-state, 895-branch sprawl to become what one First Interstate executive calls the "premier retail bank in America." Pinola's idea of the new company's competition, as he told TIME last week, includes not only other banks, but "Sears, General Motors and everybody else who will be involved in the lending business."

Such a mammoth institution, in Pinola's view, will be necessary to face the banking challenge after July 1, 1991, when a sweeping California deregulation measure will allow unrestricted interstate competition. California financial institutions also face an invasion by the Japanese, who control four of the state's ten largest banks, with combined assets of $47 billion. Pinola has said that in the future, "banking services will ultimately be delivered by only a handful of very strong, nationwide financial firms." His creed, in short, is survival of the fittest. These days, that is a lesson even the nation's mightiest corporations must take to heart. --By George Russell. Reported by Raji Samghabadi/New York and Paul A. Witteman/San Francisco

With reporting by Raji Samghabadi/New York, Paul A. Witteman/San Francisco