Takeover Defenses: Siege Protections

Some companies that float public offerings for minority interests in their subsidiaries never seem to feel fully safe in relying only on their majority ownership as a barrier to hostile takeover. In 1998, 10 equity carve-outs added armor by coming to market with dual voting common stock that magnified the parent’s power, and one of them, Conoco Inc., had both multiple tiers of common and a poison pill. Although techniques to intensify parent control are not new to equity carve-outs, the number rose in 1998 because of several trends in the m&a and stock markets. The rising number of hostile takeover bids is one cause for concern, but the biggest factor may be that the parent ultimately intends to spin off its majority holdings some time after the IPO and set the former sub up as a stand-alone company. Thus, it already has the protections in place. The multiple classes also help meet requirements that the parent have complete control for the spin-off to be tax-free. Indeed, Conoco’s parent, Du Pont Co., has announced plans for a complete spin-off of the oil company. Other carve-outs with multiple voting common were Cognizant Technology Solutions, CompX International, Fox Entertainment Group, Heller Financial, Hyperion Telecommunications, IDG Books Worldwide, Republic Services, Unigraphics Solutions, and Waddell & Reed Financial. Multiple classes of common stock also were in the capital structures of stand-alone IPOs, including American Tower, Associated Materials, Broadcom, Capstar Broadcasting, Clarion Commercial Holdings, Cleveland Indians Baseball Club, Cumulus Media, Eclipsys, Federated Investors, Golden State Vintners, Hometown Auto Retailers, Integrated Electrical Services, Knight/Trimark Group, MicroStrategy, Pentacon, Petersen Cos., Republic Bancorp, Steelcase, US LEC, and Uniservice. Two spin-offs SFX Entertainment and Allergan Specialty Therapeutics also were cut loose with two classes of common. Besides Conoco, two high-profile IPOs inserted poison pills in their pre-public capital structures MONY Group and Young & Rubicam. Spun-off companies set up with pills in place included Crestline Capital, Dun & Bradstreet, Hussman International, Midas Group, Nielsen Media Research, and Octel Ltd. Deal Structuring Earn-Outs Get Into More Deals For some sellers of stand-alone companies and corporate divestors, the memory of the deal lingers long after it has closed. The memory can be sweetest if it’s kindled by a steady stream of postacquisition money. As hard as they are to work out and as much as m&a professional service consultants advise their clients to pass them up, earn-out arrangements atop down payments keep rising as merger and acquisition activity spirals. The number of 1998 deals with kickers remains a fraction of the total executed across the entire m&a market. But the number of deals with postacquisition pay-outs reached a record 153 and the total of potential post-deal expenditures neared a record $4 billion. The total value of the deals involved initial payment plus earn-outs was $12.6 billion. The companies that work out contingent arrangements are an eclectic mix ranging from prize properties that are divested to firms in growth industries which should bloom well into the future. People-intensive firms, which are both in a growth mode and hard to value, also are prominent in the earn-out column, with the promise of extra cash or stock doubling as a performance incentive for selling owners who stay with the combined firm. * Corporate Identity A Romantic Spin To an Acquisition In several major 1998 acquisitions the buyer not only liked the target’s operations but was enthralled by the name. As a result, such venerable names as BankAmerica, Wells Fargo, and Saks remain alive even though the companies bearing those names were acquired. BankAmerica merged with NationsBank under the BankAmerica name, Wells Fargo was acquired by Norwest Corp., which adopted the target’s name, and Saks joined the corporate fold of Proffitt’s Inc. and supplied its name to the combined retailing giant. In general, the acquirers take the target’s name if they like it better than their own – for strategic and competitive purposes. The name may simply be too famous to plow under and may have a cache that actually gives the combined organization a competitive edge. M&A Deals With Contingent Payments1994 to 1998 Earn-OutNo. of Value ValueYear Deals ($ bil) ($ mil)1994 60 $2.1 $471.41995 69 7.2 2,632.51996 74 10.1 2,587.31997 113 13.9 3,274.61998 153 12.6 3,983.5Source: SDC Merger & Corporate Transactions Database <\TBL>Major Name Changes Linked to M&A and Restructuring 1998New Name Former NameAmerican Medical Security Group United Wisconsin ServicesBancWest First HawaiianBankAmerica Corp. NationsBankBeckman Coulter Beckman InstrumentGeneral Instrument NextLevel SystemsHyperion Solutions Arbor SoftwareLandAmerica Financial Lawyers TitleMCI Worldcom WorldComMariner Post-Acute Network Paragon Health NetworkMediaOne US West New Media GroupMeriStar Hospitality Group CapStar HotelMetamor Worldwide CorestaffModis Professional Services AccuStaffNielsen Media Research CognizantPrecept Business Services U.S. Transportation SystemsR.R. Donnelley Corp. Dun & BradstreetSafety-Kleen Laidlaw Environmental ServicesSaks Inc. Proffitt’s Inc.Smurfit-Stone Container Jefferson SmurfitUS Foodservice JP FoodserviceUSA Networks Inc. HSN Inc.Waste Management USA WasteWells Fargo & Co. Norwest Corp.Source: SDC Merger & Corporate Transactions Database<\TBL>