If it were a game of bridge, it might be called a pre-emptive grand slam bid.
Kennecott Copper Corp. - with money burning a hole in its pocket since the forced divestiture sale of Peabody Coal Co, for $1.2 billion earlier this year - today said it will willing to pay $66 a share for 7.9 million shares of Carborundum Corp., or a total of $521 million.
This topped the previous $47-a-year offer by the Eaton Corp. of Carborundum by a spectacular $19 a share.
W. H. Wendel, president of the Carborundum Corp., in a joint announcement with Kennecott Copper Corp.'s president, Frank R. MIlliken, said that each would recommend to their respective boards of directors that the Kennecott offer be approved, virtually assuring that it will be. The two boards have set special meetings for Wednesday.
Eaton, whose offer had been opposed unanimously by Carborundum directors, said late in the day that it would drop out of the bidding if Kennecotts tender goes forward.
Carborundum, the object of all of this attention, is an upstate New York producer of industrial abrasives with a firm place in the manufacture of high-technology ceramics and a spectacular earnings and sales growth record over the last five years that exceeded 15 per cent annually. In 1976, it earned $32.8 million of $614 million in sales.
Carborundum, however, was trading at only $33 a share less than two weeks ago - close to its low for the year - when the Eaton tender offer was made public. So the Kennecott offer of $66 represents a 100 per cent increase to Carborundum shareholders who held onto their stock.
"This is another very interesting situation where an undervalued security, through the capitalistic system, has found its value," commented leading Wall Street arbitrageur Ivan F. Boesky, managing partner of Ivan F. Boesky & Co., who stands to make a pretty sum on the shares gathered in on the initial Eaton tender.
A trend toward takeovers has been growing over the past two years as corporations have been willing to pay substantial cash premiums over depressed stock market prices to acquire established - though frequently unfamiliar - companies as a more-sure-fire way to increase profits than through internal expansion by capital investment.
"Companies with unique characteristics can demand pre-emptive prices because of their general non-availability," said Boesky. "After all, Kennecott is not just buying another widget manufacturer, and the price is not as wildly unreasonable as it might seen for those who have taken the time to study Carborundum, which is fascinatingly unique - primarily because of its technology.
"In order to determine what Carborundum is worth, one has to determine the ultimate market-ability of their technology, which is awesome," he added.
Besides its technology, Carborundum's appeal to Kennecott is that its represents a clear diversification and a solid floor under the earnings of this leading copper manufacturer. Kennecott, with 1976 sales of nearly $1 billion, now derives almost all of its earnings from copper, which is subject to sharp up-and-down cylces such as the present slump in present worldwide demand. That has thrown the earning of Kennecott and most other copper companies into the red. Kennecott reported it lost $22 million in the third quarter of 1977.
Kennecott sold Peabody Coal earlier this year by order of the Federal Trade Commission, receiving $1.2 billion in cash and in short and long-term notes. With an $800 million kitty of cash and marketable securities, Kennecott itself was considered a potential takeover candidate and therefore has been on the prowl for the last several months to pounce first. Most guessing, however, is that it would come in the paper or oil industries.
Officials at Coborundum and Kennecott were both tight-lipped today, awaiting the outcome of the two shareholder meetings. But sources at First Boston said they anticipated no antitrust problems, and predicted than the acquisition could be consummated before the end of this year.