GenCorp Inc. is expected to accuse Shearson Lehman Hutton Inc. today of improperly using confidential information in a hostile takeover bid for the company last year.
Shearson plans to deny this and other allegations concerning the takeover bid in testimony today before the House oversight and investigations subcommittee headed by Rep. John Dingell (D.-Mich.).
According to a copy of prepared testimony obtained by The Washington Post, Gencorp Chairman A. William Reynolds is also expected to accuse the Wall Street investment banking and stock brokerage house of significantly disrupting the operations of the company through an unsuccessful hostile takeover bid. Reynolds will cite the episode as evidence of the need for new federal laws governing corporate takeovers.
Tom Schick, executive vice president of Shearson, said yesterday that his firm complied with all federal laws and did not misuse confidential information when it represented Cyril Wagner and Jack Brown in their multibillion-dollar hostile takeover bid for GenCorp in 1987. Schick said Shearson Chairman Peter Cohen and J. Tomlinson Hill, coheads of the firm's merger department, will also testify at the hearing today, which is the latest in a series of Congressional efforts to highlight possible abuses in corporate takeovers.
To defeat the hostile takeover bid from Texas raiders Wagner and Brown last year, GenCorp adopted a costly takeover defense plan that led to layoffs, asset sales and a substantial increase in corporate debt to fund a stock buyback. While unsuccessful in their bid for control of GenCorp, Wagner and Brown made tens of millions of dollars in stock trading profits; Shearson and other financial and legal advisers involved in the battle garnered millions of dollars in fees.
In testimony prepared for the hearing and in related legal papers, Akron, Ohio-based GenCorp argued that the company was in the midst of carrying out an aggressive and successful restructuring plan when Shearson presented it as a ripe takeover candidate to Wagner and Brown. GenCorp's earnings had risen from $7 million in 1984 to $130 million in 1986; its stock price rose from $30.75 a share in February 1985 to a peak of $84.50 "before the market was disrupted by the raiders' purchases," Reynold said in his prepared testimony.
"GenCorp alleges that Shearson Lehman acted improperly by advising and assisting, in various capacities, the GenCorp raiders despite having also acted as investment and financial adviser to GenCorp," Reynolds said. According to GenCorp's description of the events, much of which Shearson disputes in a lawsuit in Ohio, Shearson officials learned confidential information while analyzing a possible management buyout of GenCorp's General Tire subsidiary in June 1986. In December 1986, Shearson officials met with GenCorp Chairman Reynolds to advise him on the possible purchase of Goodyear's aerospace business.
Less than two months later, on February 4, 1987, Shearson merger chief Hill went to Texas to propose a short list of possible takeover candidates, including GenCorp, to Wagner and Brown. Wagner and Brown decided to move forward with a bid for GenCorp, after Hill pointed out that its stock price had dropped recently after a deal to sell some broadcasting assets fell apart.
Shearson's Schick said there was nothing improper in his firm's behavior. He said his firm was not hired as GenCorp's financial adviser, and it did not receive a fee from the company for its work. He also said that no confidential information learned by Shearson in its work with GenCorp was used in preparing the hostile takeover bid.
While it may have benefited GenCorp stockholders in the short run, GenCorp's Reynolds will argue that the bid promoted by Shearson was a breach of the firm's duty as Gencorp's financial adviser that also damaged employees, customers and communities. Reynolds is also expected to argue that Shearson is interested in generating takeover and financing fees whenever it can identify a public company whose "break-up" value is worth more than its stock price.