RCA Corp. Chairman Thornton F. Bradshaw has acknowledged that he did not get the highest possible price for RCA when he agreed to sell the company to General Electric Co. last week.
Some Wall Street analysts and major RCA stockholders are now arguing that RCA may be worth more than the $66.50 a share -- or $6.28 billion -- that GE has agreed to pay. But Bradshaw said in an interview last week that, as chairman, he had other constituencies to consider besides RCA stockholders. Bradshaw said he believes that as RCA's chairman, his job was not to get the highest possible price for RCA, but to get a fair price for the company while also considering the impact of a merger on employes, communities and American industrial competitiveness.
Mesa Petroleum Co. Chairman T. Boone Pickens Jr., an outspoken advocate of shareholder rights, disagrees with Bradshaw. He said he believes that Bradshaw's sole responsibility in the takeover is to maximize value for RCA's shareholders.
"What has happened is General Electric is getting a cream-puff deal," Pickens said yesterday. "The RCA stockholders have got to understand what has happened to them. They have left, maybe, as much as 20 points [$20 a share] on the table. From the analysts' reports I've seen, I have not seen one that has given RCA a value of less than $70 a share, and I've seen them as high as $85 a share.
"One thing Mr. Bradshaw didn't speak to is that his No. 1 constituency here was the management of RCA," Pickens said. "It certainly wasn't the RCA stockholder. I'd be interested in seeing what the management of RCA is going to come out of this deal with. I think you will find the severance packages for RCA executives will knock your hat off. I would like to see Bradshaw making the same decision if he owned 300,000 or 400,000 shares of RCA stock."
RCA Senior Vice President Thomas B. Ross said yesterday that GE has agreed to provide severance benefits for RCA's 60 top executives. Bradshaw, who had salary and incentive awards of about $1.1 million last year, will make more than $7 million in pretax profits on the sale of stock and the exercise of stock options as a result of GE's $66.50-a-share offer, Ross said. GE also has agreed to employ Bradshaw for three years as a consultant after the deal is completed, although Bradshaw has said he will more or less retire once the GE-RCA deal closes next year.
Bradshaw and RCA's other directors chose to sell the company to GE without pursuing some of the other possible ways to maximize value for RCA stockholders. One possible way would be to break up the company and sell the various RCA subsidiaries to the highest bidders. Another would be to put RCA up for auction to the highest bidder.
Bradshaw said last week that he was determined not to see the company broken up by selling the various subsidiaries to the highest bidders. And RCA chose not to solicit other offers, after being approached by GE, primarily because RCA was concerned that GE might withdraw its bid if RCA talked with other potential merger partners, knowledgeable Wall Street sources said yesterday.
"The worst thing that could happen to RCA would be to be broken up," Bradshaw said last week. " . . . You have more constituencies than just the shareholders. You have communities, you have the United States as a whole in terms of whether or not we become competitive throughout the world.
"I think the grouping of businesses RCA finally came down to, in the last year or so, is a very important grouping of products, [in] so far as America's competitiveness throughout the world is concerned," Bradshaw said. "And just to break them up into little pieces and parcel them out to high bidders here and there, I think you lose the thrust, the real importance that RCA can contribute."
There are other reasons why RCA's directors decided not to break up the company and sell its various businesses, such as the NBC television network, to the highest individual bidders, knowledgeable Wall Street sources said.
The reasons, these sources said, include the uncertainty in determining how much RCA could get for each of those businesses; the difficulty in knowing how long it would take to sell each; the possible unforeseen tax consequences that could hurt RCA shareholder value if Congress passes a tax bill, and the loss of key personnel that could hurt the value of RCA subsidiaries, such as NBC, while the businesses were up for sale. All of these factors had to be compared with GE's all-cash offer of $66.50 a share, sources said.
At the heart of the debate between Bradshaw and Pickens is a disagreement over the responsibilities of a corporate chairman and a board of directors in a takeover. Are directors solely charged with getting the highest possible price for their stockholders, or should they select a merger partner only after considering the impact on other people and organizations?
One critical measure that is used to evaluate the takeover price is the ability of a Wall Street investment banker to issue a letter that says the price is "fair" to the target company's stockholders. That letter is called a "fairness opinion." In this merger, no one is suggesting that the price is not "fair," but some are suggesting that a higher price could have been obtained for RCA.
An investment banker will say that the price is "fair" only after considering the prices paid in similar deals; the takeover price compared with the target company's recent stock market price; and the takeover price relative to the value of the target company's underlying assets and earnings. RCA says the $66.50-a-share price is a good price because it is 23.5 times RCA earnings and a 40 percent premium over RCA's recent stock market price.
Underlying the debate over maximizing shareholder value is the legal question of what a chairman and board of directors are allowed to consider in evaluating options. In a recent decision involving an attempt by Pickens to acquire Unocal Corp., the influential Delaware Supreme Court said explicitly that directors can consider other factors besides price, according to Arthur Fleischer Jr., a lawyer with Fried, Frank, Shriver, Harris & Jacobson, who represented GE in the RCA deal. In the Unocal decision, the court said directors may review the impact of a merger on constituencies other than shareholders, including creditors, customers, employes and "perhaps, even the community generally."
"This was very significant," Fleischer said. "The court is saying a business person making this judgment can look at the impact on the environment, the community, employes and price, and take into account all these factors."
Despite the Delaware opinion, Securities and Exchange Commission chief economist Gregg A. Jarrell said he believes Bradshaw should not have considered other things besides getting the best deal for stockholders.
"If you're Bradshaw, the head of RCA," Jarrell said, "it's your duty to get the higher bid. You start fishing around with what an acquisition means to communities or unions, you're shying away from the job of maximizing shareholder values.
"You're asking for a tremendous leap of faith to ask a shareholder to stare at that premium and walk away." Managements say "trust us." Stockholders say, "No thanks, we'll take the money," he said.