A seemingly endless stream of hostile takeovers typically exemplify Wall Street's periodic merger mania. Conventional wisdom regards the takeover as just one more way to accomplish a corporate marriage. We disagree, believing the prime beneficiaries of hostile transactions to be groups, companies, and individuals not interested in anything but the transaction for its own sake. The typical strategy behind a hostile takeover is concerned with "market plays," arbitrage, and not values accruing to long-term shareholders, or the ultimate benefit to be gained by joining two or more corporate entities. Not generally in accord with "CW," we now find ourselves in the position of espousing the cause of least one hostile takeover.
Since its entry into the computer business following the 1984 breakup, American Telephone & Telegraph Co. has had difficulty "getting started." The company is still losing money in this market segment. Last November (1990), the financial media disclosed AT&T's interest in acquiring NCR Corp. In early December, after only two and a half weeks, talks between the companies "bogged down." On December 3rd, AT&T made an unsolicited bid of $90 a share, or $6.03 billion.
NCR's board was reported as reacting angrily (WSJ, December 3, 1990). AT&T made its offer on a Monday—after rejection of an $85 a share offer on Friday—and refusal by NCR's board to talk over the weekend. The $90 a share offer represented a premium of only 25% over NCR's peak price during the preceding six months. Since NCR's stock closed at $48 a share on November 7th, the day before merger talks were announced, we may safely presume that this "peak" was caused by the talks. AT&T's offer therefore represented an 88% premium over the pre-discussion price.
We were obviously not privy to the internal strategic planning of either corporation. We read that AT&T's offer represents its confessed failure in the computer business to date, that NCR's business could represent the necessary "critical mass" to make it successful, and that NCR would be permitted to take over and run AT&T's computer business—or scrap it as merged management saw fit. We also read that NCR just wants to be left alone to pursue its own product program.
AT&T launched its hostile takeover bid on December 17th. At the time of this writing no resolution had been achieved. We believed strongly that continued management talks could have prevented a process which would cost both companies significant amounts of money. Appearances indicate that both parties had been obdurate in their respective stances. AT&T may have been premature in making its bid but appeared to be justified in so doing.(To be continued.)
On March 20th (1991) we had the pleasant feeling of knowing that someone agreed with our opinion. In Dayton, Ohio, a federal judge rejected one of NCR's key takeover defenses when he "blasted" the company's adoption of an ESOP plan.
In his decision, the judge said that the NCR plan would "make a mockery of the upcoming election." He went on to say that the stock plan's primary purpose was "to entrench NCR management, in contravention of the principles of corporate democracy."(WSJ, March 20). While we wonder if the term "corporate democracy" is an oxymoron, it is nice to observe that the practice is alive and well in at least one federal court.
Even though AT&T managed to win four seats on the NCR board of directors on March 28th, the "battle" went on—with two very senior corporate managers apparently unable, or unwilling to talk with each other for more than 30 minutes at a time. As this issue is made ready for printing, the AT&T takeover price of $110 a share—in stock, as opposed to cash—has been announced as accepted by NCR. According to NCR's chairman, the merger is proceeding "better than expected."
NCR announced that it spent about $9 million fighting the takeover (inexpensive by today's standards), during the fourth quarter of 1990. This amount represented 25% of the drop in NCR's earnings, compared with the preceding year. No figures have yet been released for the current year. NCR's "just say no" defense resulted in a 22% increase in the price paid by AT&T.
By some reckoning, the price increase can be said to be as high as 29%. The real question is the ultimate effect of NCR management's obdurate attitude on the newly combined company, its organization, and its people. The answer to this question is still not absolutely known but it is safe to conjecture that the effect was not beneficial in the overall. It is likely that the acrimonious takeover contest added some meaningful period of time to the difficult process of integrating the two organizations successfully.
A number of Wall Street experts are crowing over the fact that NCR management "won" the battle. They were given employment contracts and allowed to "take over" AT&T's sluggish computer business. If this was a victory, it was certainly Pyrrhic—as AT&T indicated such a "take over" as being one of its key grounds for conceiving the transaction last year. Almost gleeful mention was also made of the fact that AT&T's computer business had not been doing as well as expected. This was also freely admitted last year (1990) by AT&T management, as one of the prime strategic reasons for its acquisition attempt.
We spoke with a number of high level managers in the computer industry during the course of the five month takeover fight. Without exception, they felt that NCR was engaged in a losing contest—its opposition to the takeover based more on personalities, than corporate judgement. AT&T's successful takeover has proven that a financially qualified buyer—with proper strategic motivation—cannot reasonably be stemmed in a takeover attempt.
One Wall Street expert has opined that the recently concluded battle is evidence of the success of NCR's carefully planned, and no doubt extremely costly takeover defenses. His proof lies in the fact that AT&T needed five months in which to complete its hostile bid successfully. Many other "experts" have supported the argument that NCR's apparent refusal to bargain for most of the five month period has resulted in significant benefits to shareholders in the realized purchase price.
We tend to agree wholeheartedly with the opposing school of thought. In our opinion, it is difficult to believe that two groups of reasonable professional managers could not have achieved very similar, if not identical results, by diligent and careful negotiation. We further believe that such results would have been achieved at significantly lower cost—both real and intangible.