States try to build court-proof takeover defenses. Federated, Stop & Shop push Massachusetts into merger news
A Maryland family makes a hostile takeover bid for the Stop & Shop Companies, a major New England grocery and retail company. A Canadian investor gets into a bruising fight to buy Federated Department Stores, the nation's largest department store chain. Yesterday, it appeared that that investor, Robert Campeau, had lost out to R. H. Macy & Co. of New York.
Another takeover specialist makes a run on the Gillette Company, the giant Boston-based shaving equipment and personal care company.
All of these actions have pushed Massachusetts into the takeover news in recent weeks, and pushed forward the question of what states can - or should - do to protect their local companies from hostile takeovers.
``In considering legislation last year, we tried to be careful about speculative takeover activity and not impede legitimate activity,'' says Joseph Alviani, secretary of economic affairs for Massachusetts. ``We didn't want to act impulsively - striking the balance is incredibly difficult. That's why we're looking at other states' laws.''
While Massachusetts wants to avoid impulsive actions, recent merger activity has turned the spotlight on what other states are doing - and have done. ``These are political people,'' says Martin Sikora, editor of Mergers & Acquisitions magazine in Philadelphia. ``They are quick to react when a fixture in the community is affected. They fear loss of jobs and business.''
As takeover activity increases, these laws will be more prevalent, predicts Allen Michel, an associate professor of finance at Boston University's School of Management. ``Politicians are having their day in the legislature; they believe they can protect the companies in their home states. But the threat of takeovers causes the corporations to become efficient.''
For some observers the issue is clear: Anti-takeover laws entrench management, protect the home-grown industry, and ignore world competition and shareholder opportunities. These laws, they claim, prohibit interstate commerce and may even be unconstitutional.
But supporters of anti-takeover laws say takeovers may harm business and a community, put people out of work, close plants and operations, and demand that managers keep looking over their shoulders, rather than focus on long-range plans.
Yesterday, Federated Department Stores, the owner of Filene's and Bloomingdale's, agreed to merge with R.H. Macy & Company, owner of Macy's department stores. Before this deal, Federated hadn't had time to focus on much of anything except Mr. Campeau, the Canadian developer whose $68-a-share offer was topped by an unexpected $74.50-a-share, or $6.7 billion, offer from Macy.
On Monday, Stop & Shop, which had been resisting a takeover attempt by the Haft family's Dart Group Corporation of Landover, Md., announced it would be taken private through a leveraged buyout with a subsidiary of Kohlberg, Kravis, Roberts & Co., the New York firm that pioneered leveraged buyouts.
The KKR subsidiary offered $44 a share, or $1.2 billion, for the grocery and department store chain, based in Braintree, Mass. The agreement is the latest step in the six-week battle to avoid the Hafts' clutches. Dart offered $37 a share. Stop & Shop shareholders must approve the deal, and the Hafts may counteroffer.
Before the KKR offer, the Massachusetts State House was the site for hearings on a bill designed to protect Stop & Shop from a hostile takeover. Only one of the 25 people who testified opposed the bill, which would allow the company's directors to consider the interests of employees, customers, and the local community before acting on a takeover offer. Hostile takeover attempts have played a part in the passage of anti-takeover laws in 28 states.
An earlier response from the Bay State's politicians was triggered last year when Revlon Chairman Ronald Perelman made a run for Gillette. Now Gillette is being pursued again: In mid-February Coniston Partners said it would request a proxy vote to bring about a change in Gillette's board.
In the law Massachusetts passed last year, a commission was established to look at the effectiveness of anti-takeover laws and rulings across the country to determine how Massachusetts should act.
``There has been a rash of activity, and if the activity continues, we want to provide soft landings for employees and other stakeholders who are affected,'' says Mr. Alviani, a cochairman of the commission.
Traditionally, however, shareholders' rights have gotten top priority when corporations responded to any proposed changes. Shareholders, after all, invested in the company and hold a stake in its performance. But in 1982 the United States Supreme Court struck down an Illinois takeover law, helping to create a second wave of anti-takeover laws that have tried to keep ahead of, or at least pace with, corporate raiders. These newer laws have attempted to balance - some would argue subordinate - shareholders' interests with other interests.
Furthermore, in light of a Supreme Court ruling last April that upheld Indiana's anti-takeover law, some of the remaining 22 states are expected to pass similar legislation. Some people are pressing for a federal law to replace the various state laws.
Last year, more than 12 states passed anti-takeover laws. ``The laws vary from state to state,'' says A.A. Sommer Jr., a corporate attorney in the Washington, D.C., firm of Morgan, Lewis & Bockius. California is the one state, as measured by the number of companies incorporated, without such a law.
``We're opposed to anti-takeover laws,'' says David Gitlitz, director of communications and research for the United Shareholders Association in Washington, of which T. Boone Pickens is chairman.
``What's best for shareholders turns out to be best for the country. There is more to this than stopping Pickens or Carl Icahn,'' Mr. Gitlitz adds. ``Protecting and shielding inefficient management takes away the motivation to perform for shareholders and to compete in highly competitive global markets.''
American companies are more lean, a result John Pound attributes in part to takeovers. ``There's only one reason that a company can be bought for less than the value of its assets: It's not managed efficiently,'' says Mr. Pound, a professor of public policy at Harvard's Kennedy School of Government. ``We see the most consistent economic expansion, post- or pre-war, and no inflation. This doesn't happen for no reason.''
Still, it's ``nonsense to talk about entrenched management that runs up debt,'' counters Mr. Sommer. He represents the Coalition to Stop the Raid on America, which supports corporate protection from takeovers. ``Takeovers are destabilizing and detrimental to American business, particularly hostile takeovers,'' he says.
States have passed two broad types of anti-takeover laws since 1985, according to Pound. The first category generally limits the actions of a shareholder who acquires a certain percentage interest in a firm without management's approval. Raiders can take no further action for a specified time after they reach that level. The laws in New York, New Jersey, and Delaware are examples of this.
The second category limits the voting rights of shareholders who buy big blocks of stock against management's wishes, Pound notes. When the shareholders pass a certain threshold of stock, voting rights are revoked. These rights will only be returned through a majority vote of the so-called disinterested shares - those not held by management or the acquiring shareholder. Laws in Indiana, Massachusetts, and Ohio fit into the second category.
``These laws do not impede friendly takeovers,'' Mr. Sikora says. ``In most cases they don't stop hostile takeovers, but they put roadblocks in the way, because hostile takeovers need speed. But the laws are untested.''
Ohio's anti-takeover law, however, was struck down last month, 10 days after being signed into law. A federal judge said the law discriminated against foreign companies; it had been passed to protect Federated from Campeau's far-reaching hostile bid.
Anti-takeover legislation made big headlines in January, when Delaware, home to more than half of the Fortune 500 companies, passed such a bill. ``Delaware was the other shoe dropping,'' Pound says. ``Now that Delaware has done it, other states will wonder if they'll lose incorporations to Delaware if they don't pass laws.''
E. Norman Veasey, a partner in Richards, Layton & Finger, in Wilmington, Del., helped draft the law. ``We were trying to address giving boards more ability to negotiate with potential bidders and carry out fiduciary responsibilities,'' explains the former president of the Delaware Bar Association.
The bill is a more moderate version of New York's law, with one provision requiring a shareholder to wait three years, instead of five, before moving to the second stage of an acquisition. Mr. Veasey says the state wanted to encourage fully financed takeovers and fight partial tender offers that can be coercive to stockholders.
``Some perceive this as an effort to keep management in office, but the bill is to prevent a bidder from getting control of a corporation and using its assets for his own purposes,'' he adds. Veasey and others hope Delaware's law will remove the need for federal legislation.
For all the attention they get and the laws they spawn, hostile takeovers account for a fraction of total takeover activity, the bulk of which is considered thoughtfully, says Mergers & Acquisitions editor Sikora.
``Hostile takeovers get the ink, because of the colorful personalities and the battles,'' Sikora says. ``But only roughly 5 percent of the deals result from a hostile acquirer succeeding in a bid or forcing a company into the hands of someone else.''
In Congress, bills in the House and Senate would make it harder for raiders to take over companies. Some observers say a federal law would pre-empt state laws, a move that Sommer, the Washington attorney, does not favor. ``We've had federalism for 200 years, and states have regulated internal business as they want,'' he says.