On Aug. 10 at the Mead Corp. tower in downtown Dayton, Dr. Armand Hammer, the 80-year-old godfather of Los Angeles-based Occidental Petroleum Corp., gave the Ohio executives an offer for their pulp and paper company that he thought they couldn't refuse.
But they did. And in the two months since, Mead has answered the Oxy takeover bid with a massive counterattack. The weapons of this corporate battle have been propaganda and legal legerdemain. Right after Hammer and his top executives visited Dayton, Mead hired a passel of high-priced accountants, investment bankers, lawyers and public relations men who immediately began to dig for dirt in Oxy's balance sheet - and they came up slinging.
As a result, the Justice Department has concluded that an Oxy-Mead merger would be anti-competitive and has gone to court to block it. Meanwhile, the Securities and Exchange Commission is scrutinizing Oxy's offering prospectus for Mead to determine if there is any truth to Mead's allegations of questionable accounting by Oxy.
In public documents, the Mead forces have accused Oxy executives of misdeeds ranging from "blackmail" to "fraud" in operating the international energy conglomerate. The record of civil fraud suits brought in recent years by the SEC against Hammer and Oxy have been exhumed, as well as his criminal conviction for making illegal contributions to President Nixon's 1972 re-election campaign.
Oxy's president and heir apparent to chairmen of the board Hammer, Joseph Baird, is described in unflattering terms. The basis for this is that Baird allegedly delivered a $25 million non-interest-earning loan to the Government of Peru, where Oxy has valuable oil and gas concessions. As for Oxy's executive vice president for finance, John Dorgan, who helped fashion the Oxy offer for Mead, he is dismissed simply as go-for. "Were loyalty to one's superiors the essential virtues of a corporate fiduciary, Dorgan would rank high," the Mead group says of Dougan in a public document.
Indeed, Mead's top executives are fighting like men who fear for their very livelihoods - which they probably do. For it seems unlikely that Hammer, who has never been known as a sentimentalist where business is concerned, will choose to retain them if his takeover attempt is successful. But a lot more than a few high-paying jobs is at stake here.
In 1977, Mead had sales of $2.8 billion, net income in excess of $98 million and assets of $1.4 billion, making it the 146th largest industrial corporation in the U.S. Besides pulp and paper, Mead's products include coal, iron castings, chemicals and molded rubber products. What is particularly galling to Mead's chief executive officer, J.W. McSwiney, is that, for the past half-dozen years or so, he has been trying to update the company's old-line operations. More recently, paper company stocks have been performing well after a period in the doldroms. Mead's earnings - and its stock price - were beginning to reflect these developments when Oxy suddenly stepped in.
Oxy is offering Mead shareholders preferred stock in exchange for their commonshares. Mead has urged its shareholders to reject the Oxy preferred, which if converted would be worth about $35 a share (Mead common hit a high of about $24 before Oxy's offer). One argument is that Oxy is already too highly leveraged, and preferred effectively adds to that debt. Moreover, argues Mead, preferred stockholders are subordinated to many of Oxy's other creditors.
For Oxy, financing the acquisition by issuing preferred stock is far more expensive than using other debt financing, mainly because the preferred dividends are not tax deductible to the company. But Oxy apparently has exhausted its less costly lines of credit. But it may needs a domestic company like Mead because it has accumulated about $100 million in domestic tax credits. Since most of its current holdings are overseas, it will lose these credits without an acquisition.
In 1977, Oxy ranked 27th among industrial corporations with sales exceeding $6 billion, net income of $138 million and assets of $4.13 billion. Acquiring Mead would push up Oxy's standing to 19th among industrial companies. This makes Oxy's bid for Mead one of the biggest unfriendly tender offers in history.
Ironically, it was just four years ago that Standard Oil (Indiana) tried to take over Oxy, and Hammer, then the victim, managed to get his friends in the Senate to call a nearly instant hearing so he could argue against bigness. "It Standard suceeds," predicted Hammer, ". . . a message will reverberate through every competitive zone of American business: Free enterprise and independence are dead."
Like so many other companies caught up in a merger affair, practically the first act by Mead's management when Oxy revealed its intensions was to place a call to the New York office of the merger maven, Joseph Flom, of the law firm Skadden, Arps, Slate, Meagher & Flom.
Joe Flom is to mergers what Mickey Mantle was to baseball: a powerful switch hitter who is as adept in blocking an unfriendly takeover attempt as he is in managing an unfriendly takeover. Either way, Flom and his associates know all the tricks of the merger game. Because time is always of the essence in tender offer battles, the lawyers in Flom's firm work at a sizzling pace, regardless of which side they happen to represent.
The firm also charges clients - especially rich ones like Mead - with equal intensity.
In an attempt to discredit the Oxy forces, Flom took Mead's case before the Ohio Division of Securities. A number of states have created laws to protect locally based companies from takeovers. The legislation is of questionable constitutionally because interstate takeover fights are federal issues. Moreover, the SEC has argued that many of laws were pushed through state legislatures by corporate executives seeking job security.
After 36 hours of testimony filling 2,400 pages, the hearing officer in Ohio issued a scratching attack on Oxy that, in many details, reflected the findings of the Flom team. The officer, Nodine Miller, recommended that the Oxy offer be halted until the "industrial leviatham" complies with federal securities requirements of fair and full disclosure. She punctuated her conclusions with criticism of Oxy's "rubber stamp" board of directors and the "arbitrary handling of this corporation" by senior management.
On Friday, the full Ohio commission upheld Miller's refusal to let the offer go forward until Oxy "provides fair and full disclosure" to Mead shareholders about such potential costly hangups as Hooker Chemical Co.'s environmental problems in Michigan and some of its foreign dealings. Attorneys for Oxy, who have refused comment about their client's plans, could not be reached after Friday's decision.
Naturally, the Flom team has also spread the bad word about Oxy to Washington. On Oct. 11, the Justice Department's Antitrust Division filed suit in U.S. district court in Dayton. Justice charged that if Oxy were allowed to take over Mead, the merged company could monopolize the market for several products each now produces, such as sodium chlorate, carbonless paper and a form of bituminous coal.
As for the SEC, it is reviewing Oxy's registration statement on the Mead offering to determine whether the oil company has failed disclose material facts about its operations. For example, the SEC's enforcement division must determine whether Oxy has defrauded its shareholders by not revealing a $25 million, interest-free loan it made to the nearly bankrupt. Peruvian government for a few months earlier this year. Among the questions raised by this transaction: Did Oxy which already has major oil concessions there, get anything from the government in return of use of Oxy's money?
The Flom group has also raised questions about the way Oxy delayed writing off its loss on its disastrous project to build a huge refinery at Canvey Island in England. Construction began in 1970, but before it ever was completed the international oil picture changed dramatically, rendering the refinery uneconomical. Oxy finally took a $122 million write-off on the project this year, but Flom - looking to raise questions about Oxy's bookkeeping - his charged that Oxy delayed the write-off for years through questionable accounting.