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

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      After an unsuccessful takeover of the Youngstown Sheet and Tube Company, Ling set his sights on the fourth-largest steel producer in the United States, Jones & Laughlin Steel. Ling-Temco-Vought bought Jones & Laughlin in an $85 tender offer for a company with a preannouncement price of $50. This $425 million bid was the largest cash tender offer as of that date and represented a 70 % premium for a company in a low-growth industry. Unfortunately, the takeover of Jones & Laughlin drew the ire of Assistant Attorney General Richard McLaren, who saw it as another anticompetitive conglomerate acquisition. The Justice Department filed an antitrust lawsuit, which was bad news for any defendant because the government won a very high percentage of such cases. The market seemed to concur with this legal assessment because the stock price declined after the announcement. Because of the lawsuit, LTV was prevented from playing an active role in the management of Jones & Laughlin and taking steps to turn around the poorly performing steel company that had just announced its worst earnings performance in a decade. With the addition of Jones & Laughlin, LTV now had two major components of its empire – Braniff Airlines being the other one – reporting sizable losses. A settlement of the lawsuit was reached in which LTV agreed to sell off Braniff and the Okonite Company, a cable and wire manufacturer.

      Although LTV was able to achieve a favorable settlement, its stock suffered, partly as a result of the lawsuit, the poor performance of its subsidiaries, and the overall decline in the market. These factors gave rise to pressures from dissident shareholders and bondholders to remove Ling from control of LTV. Ling was not able to survive these pressures; he was demoted from his position as chief executive and eventually left LTV. The story of Jimmy Ling and the huge conglomerate that he built is one of a man who was ahead of his time. He was probably the most renowned of the great conglomerate builders of the third merger wave. Whereas the 1980s featured such raiders as Carl Icahn and Boone Pickens, Ling was joined in the third wave by other “conglomerators,” such as Lawrence Tisch of Loews, Charles Bluhdorn of Gulf & Western, and Ben Heineman of Northwest Industries. Long before the 1980s, Ling had mastered the art of the LBO and hostile takeover. Unlike many of the raiders of the 1980s, however, Ling was opposed to trying to turn a quick profit on acquisitions by selling off assets. He bought companies with a more long-term strategy in mind, which, nonetheless, many criticized.

      What was once LTV has undergone many changes since the 1960s. The company experienced financial troubles in the 1980s, as did many companies in the U.S. steel industry. It was acquired in 2002 by Wilber Ross, who rolled the company into the International Steel Group. This company was then sold by Ross to Mittal in 2004.

      Fourth Wave, 1984–1989

The downward trend that characterized M&As in the 1970s through 1980 reversed sharply in 1981. Although the pace of mergers slowed again in 1982 as the economy weakened, a strong merger wave had taken hold by 1984. Figure 2.4 shows the number of M&A announcements for the period from 1970 to 2013. The unique characteristic of the fourth wave is the significant role of hostile mergers. As noted previously, hostile mergers had become an acceptable form of corporate expansion by the 1980s, and the corporate raid had gained status as a highly profitable speculative activity. Consequently, corporations and speculative partnerships played the takeover game as a means of enjoying very high profits in a short time. Whether takeovers are considered friendly or hostile generally is determined by the reaction of the target company's board of directors. If the board approves the takeover, it is considered friendly; if the board is opposed, the takeover is deemed hostile.

Figure 2.4 Net Merger and Acquisition Announcements 1970–2013. Source: Mergerstat Review, 2014.

      Although the absolute number of hostile takeovers in the fourth merger wave was not high with respect to the total number of takeovers, the relative percentage of hostile takeovers in the total value of takeovers rose during the fourth wave.

The fourth merger period may also be distinguished from the other three waves by the size and prominence of the M&A targets. Some of the nation's largest firms became targets of acquisition during the 1980s. The fourth wave became the wave of the megamerger. The total dollar value paid in acquisitions rose sharply during this decade. Figure 2.5 shows how the average and median prices paid have risen since 1970. In addition to the rise in the dollar value of mergers, the average size of the typical transaction increased significantly. The number of $100 million transactions increased more than 23 times from 1974 to 1986. This was a major difference from the conglomerate era of the 1960s, in which the acquisition of small and medium-sized businesses predominated. The 1980s became the period of the billion-dollar M&As. The leading megamergers of the fourth wave are shown in Table 2.3.

Figure 2.5 Average and Median Purchase Price, 1970–2013. Source: Mergerstat Review, 2014; Table 1-4.

Table 2.3 Ten Largest Acquisitions, 1981–1989

      Source: Wall Street Journal, November 1988. Reprinted by permission of the Wall Street Journal, copyright Dow Jones & Company, Inc. All rights reserved.

      M&A volume was clearly greater in certain industries. The oil industry, for example, experienced more than its share of mergers, which resulted in a greater degree of concentration within that industry. The oil and gas industry accounted for 21.6 % of the total dollar value of M&As from 1981 to 1985. During the second half of the 1980s, drugs and medical equipment deals were the most common. One reason some industries experienced a disproportionate number of M&As as compared with other industries was deregulation. When the airline industry was deregulated, for example, airfares became subject to greater competition, causing the competitive position of some air carriers to deteriorate. The result was numerous acquisitions and a consolidation of this industry. The banking and petroleum industries experienced a similar pattern of competitively inspired M&As.

Role of the Corporate Raider

      In the fourth wave, the term corporate raider made its appearance in the vernacular of corporate finance. The corporate raider's main source of income is the proceeds from takeover attempts. The word attempt is the curious part of this definition because the raider frequently earned handsome profits from acquisition attempts without ever taking ownership of the targeted corporation. The corporate raider Paul Bilzerian, for example, participated in numerous raids before his acquisition of the Singer Corporation in 1988. Although he earned significant profits from these raids, he did not complete a single major acquisition until Singer.

      Many of the takeover attempts by raiders were ultimately designed to sell the target shares at a higher price than that which the raider originally paid. The ability of raiders to receive greenmail payments (or some of the target's valued assets) in exchange for the stock that the raider has already acquired made many hostile takeover attempts quite profitable. Even if a target refuses to participate in such transactions, the raider may succeed in putting the company “in play.” When a target goes into play, the stock tends to be concentrated in the hands of arbitragers, who readily sell to the highest bidder. This process often results in a company eventually being taken over, although not necessarily by the original bidder.

      Although arbitrage is a well-established practice, the role of arbitragers in the takeover process did not become highly refined until the fourth merger wave. Arbitragers such as the infamous Ivan Boesky gambled on the likelihood of a merger being consummated. They would buy the stock of the target in anticipation of a bid being made for the company.

      Arbitragers became a very important part of the takeover process during the 1980s. Their involvement СКАЧАТЬ