Mergers: The Tender War

In their relentless pursuit of growth through merger, U.S. businessmen are increasingly resorting to a blitzlike form of corporate warfare. It is the tender offer—a public solicitation to buy stock of another company—and it has clearly replaced the old-fashioned proxy fight as the favorite weapon for forcible corporate takeovers.

Last year, no less than 107 companies were swallowed up through the tender route as against a mere eight in 1960. That was only a small portion of the 1,746 corporate mergers and acquisitions in 1966, but the tender total is heading much higher this year. "The ingenuity in this area is unlimited," says Chairman Manuel Cohen of the Securities and Exchange Commission.

Categorized Corporations. Indeed, acrimonious battles for company control have grown so common that Richard S. Nye, partner in the Manhattan proxy-soliciting firm of Georgeson & Co., says that "almost all corporations can be categorized as 'attackers,' 'attacked' or 'angels.' " To Indiana's Dodge Mfg. Corp., maker of power-transmission equipment, Cleveland's Reliance Electric & Engineering Co. has just become an angel. Confronted by an unwanted tender offer from Emerson Electric Co., Dodge two weeks ago worked out a stock-swap merger with Reliance.

Tender offers—predominantly for cash in an affluent age—have grown popular because they can be sprung swiftly at comparatively small risk and cost for the attacker, are less likely than ordinary mergers to run afoul of Government antitrust obstacles. Ordinarily, the cost of a tender offer runs no higher than 3% of the deal—for legal fees, a splurge of advertising to woo stockholders, and interest charges on temporary financing, if it is needed. While proxy fights often turn into marathons (Realty Developer Philip Levin's battle with MGM is now more than a year old and far from over), tender offers generally click or flop within a fortnight. One reason: stockbrokers find them particularly profitable since under New York Stock Exchange rules they get a double commission, once on the sale by the investor and again on the purchase by the bidder.

Masking the Ambush. Having ferreted out a likely target, often a firm with somnolent management, surplus cash, unused debt capacity or a low return on its capital, attackers go to great lengths to mask their ambush. While Pennzoil planned its takeover of United Gas Corp. a year and a half ago, says Pennzoil Financial Vice President J. H. Young, "my own secretary didn't know what was going on. If there had been any leak, the price of United's stock would have gone so high that we might not have wanted to monkey with it." Even the board of directors was kept in the dark.