Left Holding the Bag

By Mark Thompson/Washington

The eruption last week of a high-stakes bidding war for control of Grumman, - the military-aircraft manufacturer, looked like a good deal for nearly everyone involved. Two defense giants, Martin Marietta and Northrop, said they were willing to pay some $2 billion to buy the company, based on Long Island, New York. Whichever bidder prevails, a merger would preserve Grumman's expertise in developing electronics to update aging aircraft. It should also preserve defense jobs at the venerable fighter-plane manufacturer, whose tradition dates back to the days of the World War II F6F Hellcat.

However, while industry analysts cheered last Monday when Martin Marietta disclosed plans to buy Grumman at $55 a share, the Securities and Exchange Commission began looking into allegations that some individuals, yet unknown, profited illegally from the trade of Grumman stock options prior to the announcement. Far more upset than the SEC, though, were David Spinney and Stephen Taylor.

As the primary Grumman traders at the Chicago Board Options Exchange, where investors risk pennies a share for the right to purchase 100 shares of stock at a set price in the future, Spinney and Taylor handle about 30 Grumman options contracts daily. Almost a week before the merger plans were announced, however, volume grew to 300 contracts a day. By the Friday before Martin Marietta's announcement, says Taylor, "it was close to 1,200." Because there weren't enough Grumman sellers, Taylor and Spinney pledged, as is common, to buy the needed shares themselves.

By then, Spinney, 48, and Taylor, 27, were worried. They telephoned Grumman, but their calls went unreturned. Both men spent an anxious weekend awaiting word of Grumman's fate, not to mention their own. Taylor's stomach sank when he heard last Monday that Martin Marietta's offer was fully $18 over Grumman's recent $37 price -- and $10 more than most of the contracts the two traders had written. That huge gap left them with the bulk of a $2 million shortfall. "I was depressed," says Taylor with a wry laugh.

Martin Marietta and Grumman officials insist that only a handful of top officials knew of the impending deal before the weekend. They hint that outside financial and legal advisers were the most likely culprits. The SEC probably will begin its probe by examining an options order for the right to buy 25,000 shares of Grumman stock before April 15 at $45 a share. The buyer paid 25 cents a share for the right, or $6,250. In the wake of the deal, the stock soared to nearly $55, meaning the value of the $6,250 stake had soared . to $231,250 in five days.

The entry by Northrop with a competing offer of $60 a share virtually ensures a bidding war that will enrich Grumman shareholders but will do nothing for the Chicago traders, who will have to pay "the lion's share" of the deficit. Only if the insiders are convicted will the pair have even a chance of escaping their obligation.