Say it isn't so, Prox.
For years, Sen. William Proxmire (D-Wis.), has been a pillar of common sense and political courage. Aside from fighting to hold down federal spending, he's consistently opposed government bailouts of big business. He has argued -- quite correctly -- that the possibility of failure keeps managers and workers competitive. How strange it is, then, that Proxmire is now proposing legislation that might aptly be termed "The Management Protection Act of 1987."
Proxmire has swallowed the corporate propaganda that hostile takeovers are bad for America. Actually, hostile takeovers are simply a new form of competition. They provide a way of replacing top corporate executives. We don't prohibit competition involving new products and technologies. Generally speaking, we don't prevent companies from failing. Competition sometimes creates hardships, but (as Proxmire has said) it's a necessary discipline that encourages efficiency and innovation. Why should we prohibit competition for top corporate jobs?
But that's what Proxmire, chairman of the Senate Banking Committee, would inadvertently do. He would create a divine right of management. His proposal would -- if it worked as intended -- frustrate hostile takeovers. Bankruptcy would become virtually the only way top executives could lose their jobs. The fact that Proxmire is acting through the federal securities laws, which are supposed to protect investors, is a further travesty. His proposal would hurt investors, including pension funds, by limiting their ability to sell their stock at the best price.
In effect, it would become more difficult for someone to offer $40 a share for stock selling at $30. The proposal would do that indirectly. Rather than barring hostile takeovers, it would sanction state laws designed to do that. The state laws are the latest tactic embraced by corporate managers to protect themselves. Last spring, the Supreme Court ruled that an Indiana takeover law is constitutional. In 1987, at least 11 states have enacted new takeover laws, according to Sharon Pamepinto, an analyst for the Investor Responsibility Research Center in Washington.
These laws abound in absurdities. Suppose you wanted to buy an Indiana-chartered corporation. The managers and directors object. Nevertheless, youHostile takeovers represent a modest, but desirable, check on the immense independence of top executives. purchase 70 percent of the company stock by paying shareholders, say, a 35 percent premium over the prevailing market price for the company's stock. You own 70 percent of the company. However, the Indiana law prevents you from voting your shares -- that is, you can't change the directors or managers -- unless the other 30 percent of the shareholders agree.
No one doubts that legislatures pass these laws to protect locally headquartered companies. Nor is there any doubt that Congress could override the state laws. Companies that are takeover candidates are usually in interstate commerce. So are the stock exchanges where takeover contests are waged. In 1968, Congress did set disclosure requirements for takeover offers. For example, buyers of 5 percent of a company's stock must make a public announcement. What the Supreme Court has said is that, without more detailed federal regulations, the states can set rules that don't directly conflict with federal law.
The prospect now looms of a patchwork of restrictive state takeover laws. Proxmire accepts them because he embraces two popular arguments against hostile takeovers. Both sound plausible -- and both are wrong.
First, corporate managers contend that the threat of being taken over distracts them from running their businesses and, thereby, subverts U.S. competitiveness. There's no evidence that it's true. Hostile takeovers have flourished in the 1980s. Meanwhile, manufacturing productivity has increased more than any time since the 1960s. Business investment (as a proportion of gross national product) is at its highest level since World War II. And corporate research and development spending is rising far faster than in the 1970s.
Second, it's said that paper profits made in takeover battles don't involve productive gains for the economy. True, the potential for speculative profits is vast. Illegal insider trading is an obvious abuse. The typical premium paid to buy takeover stocks exceeds 30 percent; advanced knowledge guarantees quick riches. But once the takeover occurs, the buyer must make the company worth more than the purchase price. That's the ultimate source of profits and the pressure to break up unwieldy conglomerates, cut costs and operate more efficiently.
Contrary to popular myth, hostile takeovers are not common. In 1986, 40 were attempted and only 15 succeeded, according to W.T. Grimm & Co., a consulting company. The greatest value of hostile takeovers does not come from companies that actually get taken over. Rather, the mere threat of being taken over pressures managers to operate more efficiently. Hostile takeovers represent a modest, but desirable, check on the immense independence of top executives. There's now a way they can lose their jobs, short of running their companies into the ground.
Ironically, one area in which managers have abused their independence is takeovers. Most takeovers are "friendly" -- that is, negotiated by the managements of the two companies. Many of these have failed. But until now, companies have had little reason to undo wasteful mergers. The possibility of being taken over is an inducement to act. If managers don't dismantle cumbersome conglomerates, corporate "raiders" will.
Competition is messy. Not all hostile takeovers are good, just as not all new products are good. But the competitive process of trial and error is good. Proxmire ought to heed the advice of David Ruder, the new chairman of the Securities and Exchange Commission, who wants Congress to override state takeover laws. The chances of this seem slight. Proxmire won't run for reelection in 1988. His has been a distinguished career, but it's ending in an uncharacteristic way. He's been hoodwinked by corporate lobbyists and apologists