Merger Disclosure Rules Are Eased: The New Ruling Has IR Professionals Scrambling to Manage the Information Flow

Revisions of the Securities and Exchange Commission’s merger disclosure rules that allow partner companies to say more about the deal have investor relations professionals scrambling to adapt to the quickened flow of information in the digital age. Effective January 24, the new rules virtually eliminate the “quiet period” in the wake of the initial deal announcement when merger makers could say little or nothing. The SEC’s new regulations allow companies to have more communications before the filing of a registration statement relating to either a stock merger or a stock tender offer. They can also say more before the filing of a proxy statement. Additionally, companies can now talk about proposed tender offers without “commencing” the offer and undergoing a filing of papers. More flexibility in telling a strategic deal story “The five-day (quiet) period is no more – we have moved to a more proactive stance. It is less a matter of regulation than it was,” said an SEC spokesman. He also noted that, as in recent SEC actions against “quiet period” abuses in IPO situations, the underlying concern of the Commission is to avoid selective disclosure. One IR professional, Andrew Edson of Andrew Edson & Associates, a New York City communications firm, said, “As long as people are making money, some companies have become careless about observing quiet periods.'” However, Edson counsels his clients to adhere to a strict interpretation of the rules. This calls for legal advice that conforms to a given company’s situation, because securities law can be obtuse. According to Mary Beth Kissane, senior vice president at the public relations firm of Abernathy MacGregor, New York, the changes mean that investor relations employees have fewer legal hoops to jump through before releasing information. “You can tell a strategic story and you can tell it more effectively,” she said. However, she cautioned that while the rule change represents an increased opportunity for companies to tell their stories, they must have a well thought-out story and it must be easy to understand. The latter consideration grows out of the fact that the investor community is much more diverse than it has been historically. “You have to reach institutions, individual investors, and day traders, altogether a much broader audience than in earlier years,” she said. While the exact specifics of the new SEC “quiet period” rules for mergers leave a fair amount of room for interpretation, Kissane said that in most situations they mean that merger partners can start talking as soon as they file the necessary papers with the Commission. Kissane, an attorney, tells her clients that companies still need to keep a clear eye on disclosure policy, but the liberalized rules offer an opportunity to educate the stock market about the proposed transaction more quickly. She notes that the recent rule changes don’t amount to a sea change in SEC oversight, nor do they change the importance of having a sound communications strategy. She suggested that prior to the announcement, and even after the announcement, acquirer and target companies should have a constant dialogue with their lawyers and the communications professionals to be able to tell the story behind the deal most effectively. Relaxation of the “quiet period” restrictions is a recognition of the growing importance of communications within the dealmaking process, including the ability to tell the transaction story to the stock market quickly and pointedly. The communications stakes have risen as deals have gotten larger, as more transactions involve public companies on both sides, as publicly traded stock is increasingly used as acquisition currency, and as stock market investors have advanced or hammered an acquirer’s shares with lightning speed, depending on whether they like or dislike the deal. Selling the deal more effectively to investors and traders Under the new timetable, companies have the opportunity to move more swiftly in getting the message to investors and traders about the strategic business rationales and business prospects that drove the transaction in the hopes that the target audience will look more favorably on the acquirer’s shares. Moreover, the ability to talk more freely affords the time to answer key questions from stock analysts and others who are concerned about the deal’s impact on the company’s future and to dispel any negative rumors that erupt in the wake of the first announcement. Combating rumors has become more crucial with the expansion of the Internet. IR professionals now regularly monitor chat rooms and find that major deals are repeatedly talked about. As a result, a lot of unfriendly and often untrue information can be put into circulation by anonymous persons. Merger partners now have a chance to fight the rumors before they do overt damage. Bethlehem Steel Board Okays Split-Level Pill Bethlehem Steel Corp., fearful that it might be the target of a hostile takeover attempt, pulled off a deft bit of antitakeover engineering in the form of a two-tier poison pill to create problems for a known would-be acquirer. The board of the nation’s second-largest steel producer sharply reduced the threshold for triggering a huge increase in outstanding shares, but only if an unsolicited bid is launched by the most visible suitor. Bethlehem directors acted after WHX Corp., a steel maker with a history of mounting hostile takeover bids, revealed in a Hart-Scott-Rodino (HSR) filing with federal regulators that it bought a 1.6% stake in the larger company. Antitakover maneuver reduces kick-in point for WHX Under the revision, the kick-in point – the point at which shareholders can buy stock at reduced prices – goes down to 5% if WHX launches a bid. The trigger point remains at 15% for all other unsolicited bidders. The amendments specifically stated that the lower threshold would apply if the unwanted bidder had done an HSR filing, which often is considered a prelude to purchasing more stock in the target. The pill is designed to expand a company’s equity capitalization so that an unwanted bidder would have to buy more shares and spend more money to complete a deal. Companies that installed poison pills in late 1999 and early 2000 included: ALZA Corp.; Ansurg Corp., Bell South; Bentley Pharmaceuticals; BI Inc.; Bradlees Inc.; Burlington Northern Santa Fe; Burns International Services; Catellus Development; Chicago Rivet & Machine; Cole National; Commercial Intertech; Consolidated Delivery & Logistics; Cooker Restaurants; Correctional Services; Delta Woodside Industries; and Digital Recorders. Also: Harmon International Industries, HEARx Ltd.; Kent Electronics; Mobile Mini; Navigant Consulting; Nedo Media Technologies; Newcor Inc.; Oregon Steel; Pacific Capital Bancorp; Seattle Film Works; Tri-Valley Corp.; Vestcom International; Viatel; and Wilshire Real Estate. Restructurings Revive Use Of Morris Trust The Morris Trust transaction featuring tax-free treatment of merger transactions not only lives but is thriving. A complex but rewarding format thought to have been snuffed out when Congress sharply limited its scope has snapped back, albeit in a modified guise, to serve as a useful tool for executing corporate restructurings. Robert Willens, senior vice president and corporate tax expert at Lehman Brothers, said the arrangements in vogue right now are called “reverse Morris Trust” transactions. Basically, a corporate parent spins off a business to its own shareholders – tax free – and the newly independent firm merges with still another company in a tax-shielded stock swap. Among recent examples are: *Schlumberger Ltd. spun off its Sedco Forex offshore contract oil drilling business, which was then merged with Transocean Offshore Inc. to create Transocean Sedco Forex. *Crane Co. spun off its Huttig building materials unit, which merged with the U.S. building products arm of Rugby PLC. *Unocal Inc. proposed a spin-off of its Texas and New Mexico oil and gas exploration and production operations, to be followed by a merger with Titan Energy to form Pure Energy. Earlier in 1999, Pennzoil United did a “reverse Morris Trust” by spinning off its consumer products business, which subsequently merged with Quaker State Co. In 1998, Marriott International spun off its lodging business and merged its surviving food service operations with the American unit of Sodexho Alliance SA to form Sodexho Marriott. Attempts to limit the use of the popular deal format Congress, eager to limit widespread use of a popular tax-avoidance device, voted to allow the Morris Trust format to be used only when the company created by the bang-bang spin-off/merger is majority-owned by stockholders of the former parent. Willens pointed out that all of the recent “reverse Morris Trust” deals fit that requirement. Schlumberger shareholders own 52% of Transocean Sedco Forex and Unocal holders are to own 65% of Pure Energy. Willens said that there was no specific tax reason for the bunching of “reverse Morris Trust” transactions in late 1999. He noted that it was likely that the participating companies hit on an opportunity to execute restructurings in the most timely and tax-efficient manner. In each case, the company emerging from the tax-skirting maze enjoys considerable heft and positioning within a consolidating industry while shielding its shareholders from paying taxes on their newly gained paper. The recent upturn in popularity suggests that “reverse Morris Trust” transactions could come into wider use as corporate restructuring and industry consolidations continue to wield heavy influences on all facets of corporate development.