Mergers, Acquisitions, and Corporate Restructurings. Gaughan Patrick А.

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      After the third merger wave, a historic merger paved the way for a type that would be pervasive in the fourth wave: the hostile takeover by major established companies.

      In 1974, Philadelphia-based ESB was the largest battery maker in the world, specializing in automobile batteries under the Willard and Exide brand names as well as other consumer batteries under the Ray-O-Vac brand name. Although the firm's profits had been rising, its stock price had fallen in response to a generally declining stock market. Several companies had expressed an interest in acquiring ESB, but all these efforts were rebuffed. On July 18, 1974, INCO announced a tender offer to acquire all outstanding shares of ESB for $28 per share, for a total of $157 million. The Toronto-based INCO controlled approximately 40 % of the world's nickel market and was by far the largest firm in this industry. Competition in the nickel industry had increased in the previous 10 years while demand proved to be increasingly volatile. In an effort to smooth their cash flows, INCO sought an acquisition target that was less cyclical.

      INCO ultimately selected ESB as the appropriate target for several reasons. As part of what INCO considered to be the “energy industry,” ESB was attractive in light of the high oil prices that prevailed at that time. While it featured name brands, ESB was also not in the forefront of innovation and was losing ground to competitors, such as Eveready and Duracell.

      Because the takeover was an unfriendly acquisition, INCO did not have the benefit of a detailed financial analysis using internal data. Before INCO acquired ESB, major reputable corporations did not participate in unfriendly takeovers; only smaller firms and less respected speculators engaged in such activity. If a major firm's takeover overtures were rebuffed, the acquisition was discontinued. Moreover, most large investment banks refused to finance hostile takeovers.

      At this time, the level of competition that existed in investment banking was putting pressure on the profits of Morgan Stanley, INCO's investment banker. Although it was seeking additional sources of profits, Morgan Stanley was also concerned that by refusing to aid INCO in its bid for ESB, it might lose a long-term client. Morgan Stanley, long known as a conservative investment bank, reluctantly began to change posture as it saw its market share erode because of the increasingly aggressive advance of its rivals in the investment banking business. Underwriting, which had constituted 95 % of its business until 1965, had become less profitable as other investment banks challenged the traditional relationships of the underwriting business by making competitive bids when securities were being underwritten.38

      Many banks, seeking other areas of profitability, expanded their trading operations. By the 1980s, trading would displace underwriting as the investment bank's key profit center.39 This situation would change once again toward the end of the 1980s as fees related to M&As became an increasingly important part of some investment banks' revenues.

      ESB found itself unprepared for a hostile takeover, given the novelty of this type of action. INCO gave it only a three-hour warning of its “take it or leave it.” ESB had installed some antitakeover defenses, but they were ineffective. It sought help from the investment bank of Goldman Sachs, which tried to arrange a friendly takeover by United Aircraft, but by September 1974, INCO's hostile takeover of ESB was completed.40 The takeover of ESB proved to be a poor investment, primarily because INCO, as a result of legal actions associated with antitrust considerations, was not given a free hand to manage the company. Not until 39 months after INCO had completed the acquisition did it attain the right to exercise free control over the company. Moreover, as noted previously, ESB's competitors were already aggressively marketing superior products. By 1981, ESB was reporting operating losses; INCO eventually sold it in four separate parts. INCO continued to be the world leader in the nickel business. Interestingly, it stepped into the role of white knight in 2006, when it made a bid for Canadian Falconbridge, a leading copper, nickel, and zinc producer, which was the target of an unwanted 2005 bid from the Swiss mining company Xstrata. This led to a long and complicated takeover battle involving several companies. Eventually, INCO was acquired for approximately $17 billion by the world's largest producer of iron ore, Brazilian company CVRD.

      Although the ESB acquisition was not financially successful, СКАЧАТЬ