1984: takeovers hit the radar screen; The early days of hostile M & A set off alarms in boardrooms and on Capitol Hill.
THE BUSINESS WORLD continues awash in hostile takeovers. Gulf Oil, for example, was an $11 billion target before being pressured into a $13 billion deal with Socal. And Texaco, only weeks after its $10 billion buyout of Getty Oil, had to pay nearly $2 billion to save itself from attack from another potential raider.
The U.S.'s tolerance of hostile takeovers is distinct. They do not occur in Germany or Japan. Great Britain, although not outlawing them, subjects hostile takeovers to a public-interest review by a commission.
I am not sure why our attitude toward such takeovers has changed, but, until 20 years ago, they were unknown in the United States. I suspect, though, that most of these bids are engineered by a relatively few acquisition-minded companies and by investment bankers, a group that could hardly be said to be financially disinterested.
Are there benefits in these takeovers? Some argue that they are vehicles to dump inefficient management. But a Federal Trade Commission study in July 1980 found that one of the top 12 motives for acquisitions was a desire to obtain the good managers with the target firm, not to replace poor ones.
Takeover threats will keep target managers on their toes, others contend. If this is so, they are a spur only to short-term performance, one chief executive told our committee. A takeover threat, he said, gives management no incentive to look to the long-term future of a company, and the threat actually detracts from both short- and long-term performance because it is a frequent, time-consuming distraction.
Indeed, one business executive says that the costs of an unfriendly takeover are inevitably too high--"and we do not have an unused management pool to replace old management." Another says that making an acquisition is hard enough "without the added burden of conflict from the start." In sum, an acquisition-minded company looking for a good investment is likely to pick a well-run firm as a target.
All of this creates an enormous drain on our nation's intellectual and financial resources. It is time to consider legislation that eliminates the specter of the hostile takeover that hovers over American corporations. It is time that we allow America to get back to work.
A flat prohibition on unfriendly takeovers has a kind of appeal. It would eliminate elaborate and costly defensive schemes. It would encourage managers to lift their sights toward long-term planning for a firm's competitive health, rather than concentrating on short-term takeover defenses. It would aid in creating improved standards of professionalism among leaders that I think are needed if American firms are to retain their position of leadership in the world.
There is the risk, however remote, that such a ban might stifle the free flow of venture capital among corporations and keep in place inefficient executives whose self-interest motivates opposition to a takeover.
I would propose an alternative approach. Under this plan [H.R. 5137], a takeover would be unlawful if it were disapproved by a majority of the independent directors of the target company--that is, directors who have no substantial financial relationship with the company other than as shareholders.
I think this proposal has several advantages over a flat prohibition:
* First, if takeover threats do keep managers on their toes, at least in the short term, the legislation would preserve a positive influence. The independent directors, with their key role in a takeover defense, could apply leverage in other important management decisions for the longer haul.
* Second, it would prompt those firms that have none to name independent directors. Without them, this legal barrier to hostile takeovers would not operate.
* Finally, I am assuming here that most companies are well run and that the independent directors will, in most cases, support management. But if they determine that resistance to a tender offer is unwise, they could give the green light to the takeover. And by restricting management actions that might be inimical to a company's best interest, they could make a takeover more amicable for all parties involved.
Independent directors exercising their authority would probably be targets of suits by shareholders unhappy with their decisions. Some sort of immunity from such suits may be required if willing independent directors are to be found. On the other hand, the possibility of being sued may ensure the more careful consideration of the decision to be made.
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|Title Annotation:||FROM THE ARCHIVES|
|Author:||Rodino, Peter Wallace, Jr.|
|Publication:||Directors & Boards|
|Date:||Jun 22, 2005|
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