The Bendix-Martin Marietta-Allied Corp. takeover battle is hardly an amusing exercise, a sort of Pac-Man game for the financial pages, as depicted by some. The shoot-out precipitated by Bendix Chairman William Agee's lust for power is more like corporate incest, in which Agee tried to gobble up the Martin Marietta Corp.
Instead, he lost his own company in a merger with Allied that finally evolved out of the mess. And in the process, nearly $2 billion has been wasted, $2 billion that could have been spent on productive investment -- of the kind, for example, that might help any one of these companies compete with Japan.
"Where," asks economist Daniel H. Brill, "were the directors?" The end result, Brill says, "is that you've got two cripples (Bendix and Martin Marietta) and one company (Allied) that probably doesn't know how to run the business it acquired."
Brill, a former senior adviser to the Federal Reserve Board, and himself an outside director of some leading corporations, makes a good point: the Bendix directors did nothing to stop Agee's ill-conceived effort to swallow Martin Marietta.
But for the most part in American corporate society, corporate boards of directors merely ratify the decisions of the real power structure, the presidents of companies, chief executive officers, and other hired managers. Similarly, annual meetings are a mostly useless ritual at which stockholders can do little to counter management decisions.
In his own unmatchable style, John Kennneth Galbraith, in "Economics & The Public Purpose," explains how management disguises rather than flaunts its power:
"A universally observed ritual requires obeisance to the nominal sources of authority. Elderly boards of directors, selected by the management and meeting infrequently to ratify actions on which they are not informed, are said to be a valuable source of wisdom and guidance. Thus their power. The natural respect accorded to age or incipient senility assists the illusion."
The passage of control of the modern corporation from the owners to the managers was first outlined in a landmark study by Adolf A. Berle and Gardiner C. Means way back in 1932 in their "Modern Corporation and Private Property." The techniques have been refined, but nothing basic has changed.
Why would a William Agee try to pick off Martin Marietta, happily minding its own business, and why would an Edward Hennessy Jr., already managing a bloated conglomerate (whose future prospects are questioned by some Wall Street analysts), want to take on Bendix?
The thirst for raw power, that's why. Mergers of this kind are not motivated by a desire to generate a better rate of return, Galbraith says, but to gain power, influence in relation to the government, and an advantage in "using (or milking) the capital resources of one unit for the needs of another.
"Much of the drive to agglomeration reflects the interest in size qua size -- it is the purest example of the effort of the corporate leadership to reach for the rewards of bigness itself."
Hennessy is quoted in The Boston Globe as saying that "a good executive can run any type of company." This arrogant philosophy -- straight out of the American business school mystique -- is a real danger. "It just ain't so," says the experienced Brill. "We are witnessing an epidemic of predatory behavior that diverts people from doing what they really know how to do." Harvard Business School professor John Kotter says in his book "The General Manager" that the go-go conglomerate syndrome of the '60s helps explain the weak performance of American industry in the '70s.
What can be done to prevent this obscene game? How can companies -- particularly those that have attractive assets -- protect themselves from a corporate-style gang rape? Justice Department attorneys say that a Bendix-Marietta merger (which apparently would have self-destructed) would not have violated any guidelines for concentration under existing antitrust law.
Somehow or other, this corporate acquisition idiocy has to stop. There could be a constructive role here for the Federal Reserve System, which should discourage banks from lending money for acquisitions for essentially nonproductive purposes.
Free-market ideologues will argue that the Fed shouldn't "ration" credit -- that this would allow the Fed to decide among social objectives. But is it better to allow board room free-wheelers like Agee to devastate an otherwise productive company?
Martin Marietta's chief executive, Thomas G. Pownall, having saved his company from Agee's grab, admits that the price he paid for independence is enormous: the company's financial outlook is now grim, reflected in last week's tumbling stock price. Martin Marietta borrowed $900 million during the takeover fight -- a debt that will cut its earnings for years to come.
Allied shelled out another $900 million to buy Bendix, generating a neat profit for Bendix stockholders. But neither the merged Allied-Bendix company, nor the "independent" Martin Marietta company is any longer financially strong. Talk about shooting yourself in the foot! These corporate hot-shots were using a cannon.