The $3 billion bid by broadcaster Ted Turner for control of CBS Inc. may soon demonstrate the tremendous power of institutional money mangers in determining who wins corporate takeover battles.
Institutions, including pension funds, college endowments and mutual funds, own more than 60 percent of CBS stock. If Turner can clear the regulatory hurdles he faces and the institutions decide his bid is financially viable, they control enough stock to force CBS management either to accept Turner's offer, which is considered highly unlikely by Wall Street experts, or to come up with some other proposal that will significantly increase the value of CBS stock.
On the other hand, these institutions could ease the pressure on CBS by rejecting Turner's bid. While most money managers said yesterday they do not yet have enough information to make a final decision, it appears the principal factor that could cause them to reject Turner's offer is its risk. Turner's offer includes no cash and consists of a complex package of securities, including "junk bonds," that carry interest rates as high as 16 1/2 percent to compensate for their high level of risk.
CBS is about to launch a campaign to convince Wall Street that Turner's bid is too risky. Sources said CBS's investment banker, Morgan Stanley & Co., is planning to review Turner's bid with Wall Street analysts early next week.
A relatively high percentage of CBS stock is owned by institutions, according to Spero Kripotos, executive vice president of CDA Investment Technolgies Inc. in Silver Spring. Kripotos said that while institutions owned 61.8 percent of CBS stock as of Dec. 31, 1984, they held an average of 51.8 percent of the stock of all companies in the broadcasting industry and about 36 percent of public companies overall.
Institutional money managers dominate trading on the New York Stock Exchange, accounting for an estimated 70 percent of volume. Several managers said yesterday they operate under strict rules that force them to support whatever offer maximizes the value of their investment, regardless of the source.
Several institutional money managers explained yesterday how they would go about evaluating Turner's proposal.
"The heart of the matter is understanding the package of securities Turner is offering in exchange for CBS stock," said Alan Strassman, executive vice president of Batterymarch Financial Management, a Boston firm that manages about $12 billion in assets. "He is offering a package of securities which at the present time is not traded anywhere, and these securities will be attached to a company whose nature will be changing if the transaction ever takes place." [Turner said he would help finance his buyout bid by selling all of CBS's radio stations, publications and the CBS Records Division.]
"The professional investor is faced with trying to understand the nature of the new company on the assumption this deal is concluded, and based on that, make some forecast as to what the market price would be of these securities," Strassman continued. "If you go through that exercise and determine the package of securities is worth around $140 a share and CBS stock is selling for $105, as a fiduciary you would not have much choice in my opinion. You would have to accept Turner's exchange offer to get that premium in value.
"I would assume there are going to be estimates of the value of those securities that vary over a wide range," Strassman said. "Some people will conclude that . . . Turner could sell valuable CBS assets and then reduce the debt substantially with the proceeds. There will be others who will say Turner's proposal would create a company saddled with too much debt."
While institutional money managers were only beginning to study the offer yesterday, the credit-rating agencies indicated they thought Turner's proposal would have negative implications for both CBS and Turner Broadcasting Systems. Standard & Poor's Corp. placed both companies on "creditwatch," and noted that in addition to the risk posed by the high level of debt in Turner's buyout bid, CBS may take antitakeover steps that could negatively affect the company.
"I hope CBS does not do anything which will impair the basic underlying value of the company in an effort to slip out of Ted's grasp," said Gordon Crawford, senior vice president of Capital Guardian Research Co., a Los Angeles-based money management firm that acquired a significant block of CBS stock earlier this year. "I support CBS. . . . But what I don't want them to do is go out and do something like buy U.S. Steel. . . .
"I think [those] who 'pooh-pooh' Turner's bid are incorrect," Crawford added. "I believe the paper he is offering is worth $160 a share or better, and for a company recently selling in the 80s or 90s, that is an offer stockholders ought to consider.
"I think the company will fight him to the end and ultimately sell out to another company, or sell enough stock to a third party General Electric Co. has been rumored to be a friendly third party to make it impossible to take them over," Crawford said.