New York Times
March 19, 1997

The Civilized Hostile Takeover: New Breed of Wolf at Corporate Door


Donald C. Cambre, chairman of Newmont Mining Corp., was prepared for the looming takeover battle. Newmont had survived an assault once before, at the height of the 1980s hostile takeover frenzy, fending off one of the most aggressive corporate raiders, none other than the Texas oilman T. Boone Pickens.

And now Cambre had at his side Steven McArthur Heller of Goldman, Sachs & Co., the investment bank that has long portrayed itself as the defense adviser of choice for targets of hostile bids.

But this was the 1990s, the era of globalization and finding the right business "fit." Corporate America's view of hostile takeovers had evolved from outraged to indulgent, and so had Cambre's -- so much so that this time around, he was the predator instead of the prey. At first, his secret merger talks last year with the company he coveted, the Santa Fe Pacific Gold Corporation, were friendly. But when he realized shortly after Thanksgiving that his would-be partner was planning to break off the engagement and tie the knot with Newmont's rival, the Homestake Mining Company, he turned on Santa Fe with a fury.

Three months later, he emerged victorious, acquiring Santa Fe for $2.43 billion and creating the biggest gold-mining company in North America.

"The hostile deals of the 1980s were made by people viewed as bust-up artists and speculators looking for short-term profit," said Robert Kindler, a partner at the law firm of Cravath, Swaine & Moore who specializes in takeovers. "The deals today are strategically driven. Companies believe that if they can only achieve their goals through a hostile bid, they're willing to do it."

What a difference a decade makes. In the 1980s, takeover battles were like Wild West shootouts, and descriptions of the strife relied on the imagery of violence: greenmailers and raiders with their bear hugs and Saturday night specials were pitted against white knights and corporate managers who fended off their attackers with poison pills and shark repellent. There was even a famous "Predators Ball" to celebrate the mayhem.

Today, a new respectability reigns in the takeover game. No longer do the likes of Pickens, Ronald O. Perelman and Carl C. Icahn begin raids with high-risk junk bonds only to carve up their acquisitions and sell off the pieces for a quick profit. Instead, corporations seek to forge "strategic alliances" that will enable them to grow and prosper in an increasingly competitive marketplace. And the lexicon of even the most hostile endeavors is filled with sober phrases like synergy, the global marketplace and accretion to earnings.

And almost everybody, it seems, is doing it. Mainstays of the Fortune 500 like Johnson & Johnson and IBM began their first hostile takeovers in 1995. In January, the Hilton Hotels Corp. made a $10.5 billion hostile bid for the ITT Corporation, and a month later H.F. Ahmanson & Ahmanson Co., a large savings and loan company on the West Coast, made a $5.9 billion hostile offer for the Great Western Financial Corp. in an attempt to shift toward retail banking. This week, Ahmanson sweetened the bid to $6.6 billion. So far this year, there have been 12 hostile or unsolicited bids, totaling $25 billion.

The lexicon of even the most hostile takeover offers is filled with sober phrases like synergy, the global marketplace and accretion to earnings.

Once content to tend their regulated monopoly franchises, utilities and railroads are suddenly conducting their own raucous hostile battles in the wake of deregulation and consolidation. Western Resources Inc. not only won the first hostile takeover in the utility industry last month, but the company hired David C. Wittig, a takeover specialist from Salomon Brothers, to be its president. Felix G. Rohatyn, the investment banker at Lazard Freres & Co. who once likened Perelman to "the Huns and the Visigoths" for his hostile raid on Revlon in 1986, now works with the financier.

The truth is, American corporations today have been so thoroughly downsized and restructured that there is little fat left for an 1980s-style raider to squeeze out. And junk bonds have mostly dried up as a source of corporate financing. In the 1990s, the driving force behind takeovers is the scramble to stay big and strong enough to withstand the twin currents of globalization and deregulation.

As a result of the more businesslike environment, even the losers in the current crop of takeover battles display a gentility that would have been unthinkable in the 1980s. Jack E. Thompson, chairman of Homestake, for example, took his failure to gain control of Santa Fe with equanimity.

"In order to compete, there is a critical mass you have to have today," Thompson said matter-of-factly. "It was a reasonable reaction for Newmont to try and grab Santa Fe by any means. I was a little set back by some of the subsequent comments. All in all, I thought it was pretty professional, but not a pleasant thing to go through." In fact, he added, "I can see circumstances where we might end up in a hostile bid."

Wayne W. Murdy, executive vice president of Newmont, had no hard feelings, either. "We felt that the synergies between our companies were so strong that we wanted the opportunity to take our story to the Santa Fe shareholders," he said.

With a rising stock market, corporations are well financed for such deals. At the same time, investors are playing one of the raiders' old roles -- prodding chief executives to increase earnings. When revenues are flat, many corporate chiefs now look to combine with similar businesses in order to dominate markets and cut costs by eliminating overlapping operations.

No industry is immune from the new merger fervor. Last year, Dayton Hudson Corp. withdrew from an attempted $6.9 billion takeover of J.C. Penney Co. after Penney rejected the offer, but both companies, as well as the the Kmart Corporation, remain prime targets of other expansion-minded retailers, in the view of some investment bankers. With convergence in vogue in the rapidly deregulating utility industry, nearly any natural-gas company is a potential target for an electric utility hoping to grow and survive into the next century.

In finance, banks and insurance companies that want to invade Wall Street have increasingly been looking at companies from Paine Webber Group Inc. to the American Express Co. as potential takeover targets, friendly or otherwise. In a possible prelude to a takeover attempt, Bank of New York Co. announced earlier this year that it would try to increase its stake in State Street Boston Corp. after merger talks between the two companies had failed.

And Newmont Mining's conquest of Santa Fe has only fueled speculation that more takeover activity may be at hand in the gold-mining industry, with both Battle Mountain Gold Co. in Houston and Getchell Gold Corp. in Englewood, Colo., considered as prime candidates.

Yet all this activity draws little of the outrage vented at the swashbuckling raiders of a decade ago. John E. Hayes Jr., chairman of Western Resources, drew little criticism for breaking a vow he made five years ago not to be "involved in hostile takeover activity" when he started not one but two takeover bids last year -- one for the Kansas City Power and Light Co. and the other for ADT Inc., the giant home-security company. Has corporate America been worn down -- or co-opted? "The new respectability is really a product of the shift from financial transactions to strategic transactions and a shift in the nature of the bidders," said Martin Lipton, a partner with the law firm of Wachtell, Lipton, Rosen & Katz, which that specializes in corporate takeovers and invented the poison pill defense. "When you have IBM and Johnson & Johnson doing it, you're hard pressed to say it's not respectable."

Certainly, executives at IBM Corp. thought they had no other choice in 1995 but to begin their first hostile raid on Lotus Development Corp., an event that also marked the first hostile takeover in the software industry. With consolidation afoot in the industry, it had become increasingly important for computer manufacturers to forge direct links with software companies or risk being held captive to a competitor.

Lawrence Ricciardi, general counsel to IBM, acknowledged that the company had some trepidation about a takeover attempt, particularly when Lotus's greatest asset -- its employees -- might flee from an ugly dogfight. So, the company issued a $10.3 billion bid, high enough to be taken seriously on Wall Street and at Lotus, and honed a story of how well matched the two companies were to assuage the fears of Lotus employees.

"We had had conversations with Lotus and weren't able to persuade them to make a deal with us," said Ricciardi, a veteran, like Louis V. Gerstner Jr., IBM's chief executive, of RJR Nabisco in its shell-shocked, post-takeover days. "We were concerned that if we kept pushing them on a friendly basis, we might drive them into the arms of a third party. The only surprise in the end was that it was the shortest hostile deal to turn into a negotiated transaction, only seven days."

The recent bidding war for Conrail Inc., the Philadelphia-based railroad that had a virtual monopoly over rail freight in the Northeast, by CSX Corp. of Richmond, Va., and Norfolk Southern Corp. of Norfolk, Va., was also driven by a fear of being left behind in an expanding market. Conrail agreed this month to a $10.3 billion deal that would split the railroad between the two suitors.

To be sure, hostile takeover attempts still represent a minority of the record-breaking number of mergers today. According to the Securities Data Co., there were 73 hostile or unsolicited bids announced in 1996 and '97 in 1995, with a combined value of $155 billion. In 1988, however, there were 168 hostile bids valued at a total of $222 billion.

"It's still very hard to accomplish a hostile deal, even though it's clear there is no longer a stigma attached to doing one," Kindler of Cravath Swaine said. "The courts have become more favorable to target companies, and you have to be certain when you start a hostile bid that there is no other company in the world that is willing to pay more."

John Gutfreund, former chairman of Salomon Brothers, offers a rare voice of caution, suggesting that mergers that appear to make sense today because of rising stock prices could backfire if the economy turns sour. "Shareholders, particularly institutional shareholders, want to get the fastest possible large return and that, in effect, endorses behavior that was previously considered unclub-like," Gutfreund said. "The deal makers cut the cloth to fit the fashion."

And Rohatyn notes that for all the difference in style between the current spate of mergers and those of the 1980s, both tend to result in mass layoffs. "It is a social issue," he said, that is still festering."


  1. What is the difference the article notes between hostile takeovers in the 1980s and the 1990s? What are the implications for hostile takeovers as a mechanism of corporate governance?
  2. Does the change in financing mode (from junk bonds to stock offerings) in hostile takeovers have any implications for the way in which the acquired firms will be managed after the acquisition?
  3. Now assume that the state passes a law prohibiting hostile takeovers. What firms are the primary beneficiaries of such a law (poorly managed or well managed)?