"The Bendix-Allied-United Marietta affair was a disgrace to the United States and to the free enterprise system . . . American management has 'managed' us into murky, stormy waters, and then it has the nerve to shift the blame to the Japanese."
So writes the president of a Midwest high-technology company in response to my column of last week deploring the thirst for power that led to Bendix President William Agee's abortive -- and costly -- attempt to buy up the Martin Marietta company.
No one has to believe that all corporate presidents have bad judgment, or that all mergers are bad, or that all investment advisers and Wall Street lawyers are money-mad hucksters.
But when Martin Marietta, to Agee's surprise, resisted the takeover effort by purchasing Bendix stock, Agee had to agree to an Allied Corp. takeover of Bendix. Wall Street analysts almost without exception say that the net result has been a $2 billion waste of money, and that three viable corporations have been turned into two weak ones.
The Bendix effort to gobble up Martin Marietta has exposed a weakness in the American economic system: a company bent on an unfriendly takeover, if properly organized, can strike like a cobra and devour an otherwise healthy business enterprise. It can even do it with borrowed money. And if the target company resists the takeover, it might remain independent, but, like Marietta, be wounded seriously.
It's like a huge poker game, headquartered on Wall Street: the corporate managers play the hand, with investment bankers and lawyers as highly paid kibitzers having a big stake in the pot. Crowding the table are the risk arbitragers, who can make a killing by buying up the target company's stock and selling it to the takeover company.
Former Air Force secretary Eugene Zuckert, a board member at Martin Marietta, suggested to me that one way to make it tougher on the risk arbitragers would be to require a "90-day cooling off period" before an unfriendly takeover could become a fact. Right now, the law provides only 20 days for the targeted company to devise a defense, or perhaps to find a more willing partner.
"These decisions involving billions of dollars and thousands of jobs shouldn't be jammed through in such a short period," Zuckert says. "By freezing the process for 90 days, some common sense and some business sense might emerge." It's painfully clear that in the Bendix-Marietta-Allied case, a flock of decisions were made in too much of a hurry, with practically no study of the potential consequences. Ego, rather than calm business judgment, took over.
Felix Rohatyn, senior partner of Lazard Freres -- investment advisers to United Technologies, which late in the game considered buying Bendix -- remarked to this reporter that the whole affair "has left a very negative public perception of corporate conduct."
One of the worst aspects of this kind of merger is the "two-tiered" tender bid -- offers with higher prices for shareholders who pledge their stock at the start, and get a better price than late-comers. Naturally, the professionals on Wall Street get in on the higher price, while smaller stockholders, who catch up with the news later, get less. To Agee's credit, he has said now that two-tiered bids should be legislated out of existence.
Then, there is the so-called "golden parachute" issue: Agee is handsomely rewarded for life, whatever happens to Bendix. Rohatyn, among others, questions whether boards of directors should be protecting those who are already secure, while sending a message to the dozens of people farther down the corporate ladder that they're not so important.
There are still other problems: the fat fees for advisers in takeovers leaves a bad taste in the mouth. The level of compensation, Rohatyn points out, is higher if a merger is actually consummated. Thus, the incentive to drive it through, come hell or high water, is enormous. "There should be no difference in the fee, whether or not the deal is closed," Rohatyn says. "In some cases, it could be worth more to a company not to have made a deal." The actual results of a string of highly touted takeovers, including some involving copper and chemicals, testify to that.
Says a prominent Wall Street figure, who would not allow his name to be used: "This is the worst situation that has ever happened to the Street." What he has in mind is the sweeping condemnation that has been heaped on advisers -- financial and legal, presumably interested only in "the deal," not whether it is good or bad for the economy. Yet, in the Bendix case, it was probably Agee himself who made the basic decisions.
He admitted at a press conference last week that he had miscalculated Martin Marietta's willingness to fight the takeover, even at great cost. Agee condemned Martin Marietta's rejection of his effort, saying, "the penalty long-term is not worth the price."
A critical issue in these mergers is the use of credit, rather than equity, to acquire another corporate entity. In trying to buy each other's stock, Bendix and Martin Marietta drew down close to $2 billion of existing lines of credit at banks--greatly increasing their indebtedness in an already shaky economic environment.
A Joint Economic Committee document shows that $5.6 billion in lines of credit had been made available by 28 American and 11 foreign banks to the four companies involved in the "bizarre" Bendix-Marietta-Allied-United Technologies affair. Rep. Henry S. Reuss (D-Wis.) made the point that almost $4 billion not drawn down was "tied up for the entire month of September and was therefore not available to other companies."
Edgar M. Bronfman of Seagram Co. Ltd. -- despite his company's past involvement in large-scale acquisitions -- suggested in a New York Times article that interest on money borrowed for corporate acquisitions not be considered tax-deductible, thus making it more costly to borrow money for mergers than, for example, to finance additional productive capacity. Sen. Gary Hart (D-Colo.) says he will introduce legislation to implement this idea.
Rohatyn has a variation of Bronfman's idea: "I don't see why the Fed can't direct its members not to make acquisition loans beyond a certain level. They could say not more than 20 percent of the acquisition could be financed with short-term credit."
That would force the Agees of this world to issue stock, diluting existing shares -- but a much safer procedure. There are other ways that this ugly trend might be slowed down: advance approval by the shareholders of the acquiring company of a tender offer could be required. After all, recent history shows that these are the persons who have been hurt by the wildly inflated takeover prices their presidents and boards of directors have been willing to pay.
Whether any reforms actually will be made is doubtful. What is missing most at the moment is someone charismatic who can express and articulate a meaningful indignation over what I referred to last week as corporate incest. Mergers flourish in today's Washington environment: the Reagan administration doesn't have an antitrust policy worthy of the name. And in today's U.S. Senate, where are the Phil Harts and Estes Kefauvers of yesteryear?