Rogue Missives - Flashback?

Rogue Missives

ROGUE ARCHIVES

Thursday, February 6, 1997

Flashback?
By Jim Surowiecki (Surowiecki)
A recent article in Fortune drew sharp contrasts between the wave of mergers that swept across American business in 1996 and those that made the 1980s the decade of the takeover. The simplest difference is that the mergers of 1996 tended to be between companies with similar core competencies, like Boeing and McDonell-Douglas or any of the telecommunications mergers. Instead of the imaginary benefits of synergy that drove the conglomerates of the Sixties and that served as at least rhetorical justification for the deals of the Eighties, the benefits of last year's mergers, at least for shareholders and executives, seemed obvious.
A more fundamental difference, though, may be the fact that the most prominent mergers of 1996 were all friendly, which is to say that they were, in truth, mergers and not takeovers. Although it's likely that behind every friendly offer of a merger lurks the threat of a hostile takeover, we do seem to have entered a world in which corporations look to unite not as a means of crushing or swallowing competitors, but of unifying with them. This, in turn, has contributed to the re-transformation of the American economy into one dominated by oligopolies. But for the moment the negative consequences for consumers that one would expect from the disappearance of competition have yet to rear their heads.
In light of the above, Hilton's $10.5 billion offer for ITT, which it unveiled on January 27, has something oddly anachronistic about it. To be sure, the deal makes perfect sense for Hilton. ITT owns Madison Square Garden, Cablevision, the New York Rangers and Knicks, and a 50% stake in TV station WBIS+, so the company also has strong assets in both the gaming and hotel industries, Hilton's two core businesses.
Adding the Sheraton name would strengthen Hilton enormously, while ITT's casinos would give Hilton four of the dozen largest in Las Vegas and three of the nine largest in Atlantic City. At a time when America's passion for gambling seems to be slackening, market share will likely take on added importance. An ITT acquisition, coming on top of last year's $3 billion purchase of Bally's, would help make Hilton the major player in gaming.
Though the deal makes sense for Hilton, it's not as clear what the benefits are for ITT, especially with a share offer of just $55. On its assets alone, the company is probably fairly valued at somewhere around $65. More importantly, perhaps, selling at this point, when the company finds itself in a market doldrum, wandering around with a depressed share price that may reflect nothing more than a couple of recent bad decisions, is hardly the best recipe for getting fair value. And this takeover will be a takeover. Unlike the Boeing-McDonnell Douglas merger, Hilton can be expected to reshape ITT in its own image, which likely means the disposal of non-core assets and the consolidation of workforces.
Unsurprisingly, perhaps, the ITT board met this week and rejected Hilton's offer, which most observers saw as a necessary and inevitable first step. In the week after the offer, ITT's shares have traded at well above 55, since investors expect Hilton to up its offer, and Hilton has in fact suggested that it would be willing to do so.
All indications, though, are that the ITT board's decision represents more than just a gambit. ITT chairman Rand Araskog never responded to an early overture from Hilton head Stephen Bollenbach about possible merger talks, and refused to meet with Hilton before the ITT board meeting. Araskog defeated a takeover bid in 1985, at the height of hostilities, and has hired Lazard Freres and Goldman Sachs as consultants. Some have even floated the possibiliy that Araskog may try to mount a counter-bid, though a more likely defense would be to find a "white knight." Analysts suggest that any successful response along these lines is far from likely.
Still, Araskog does have an ace in the hole, which is ITT's "poison pill" provision. Any time an investor acquires a 15% stake in the company, special voting rights are issued to existing shareholders, thus making it easier for them to beat back any attempt to acquire fifty percent of the shares. Provisions like these have been the special bugbears of the more extreme advocates of shareholder activism, like Al Dunlap, because they seem to insulate the company's management against the competitive pressures represented by a takeover. On the other hand, the essence of ITT's poison pill is to value existing shareholders over those seeking simply to dismantle the company, so from a long-term perspective there may be justification for it.
All the talk of white knights and poison pills does seem to arise from a very different era, when corporate raiders spent their time picking out likely targets who could be acquired and then broken apart. In today's world, shareholder activism is more likely to take the form of institutional pressure on corporate management to change its strategy or to restructure. But the very real possibility that Hilton's takeover efforts will succeed also illuminates the degree to which depressed stock prices provide an easy mechanism for existing management to be replaced. Had ITT been up at $70 or $80 a share, after all, Hilton would presumably not have thought of a hostile takeover (though in the Eighties it might very well have). But at $55, the company suddenly becomes a reasonable target.
Part of what that speaks to is the fact that Hilton will not be taking on an enormous amount of debt in order to finance its deal. Indeed, it will be assuming ITT's debt burden, which is larger than its own, if the takeover succeeds. To that extent, Hilton's offer doesn't conform to the leveraged-buyout model that wreaked such havoc on American corporations and American workers in the last decade. ITT's assets are not going to be sold off to pay off the interest on the bonds issued by Hilton to finance its purchase. The deal is being orchestrated by Bollenbach himself, not by investment bankers anxious for the action. And, it makes a certain amount of business sense.
Nonetheless, there's something curiously heartening about ITT's decision to fight the takeover, something heartening in the board's insistence that the company should continue to exist as a separate entity. And considering the fact that Hilton has suggested that a good deal of consolidation in the food, laundry, and service facets of the two companies would take place if the deal goes through, it's almost certainly better for the blue-collar workers of ITT and Hilton that the deal fail.
Of course, the ultimate decision rests with ITT's shareholders, and given the overpriced acquisitions the company has made in recent years, and its failure to generate any real momentum around gaming or to capitalize on Sheraton's recent success, they may not be in the mood to look beyond Hilton's dollars. Araskog will undoubtedly do his best to convince them that the future will be brighter as an independent corporation, but if Hilton ups its offer another ten dollars, which it could do and still receive fair value, it's difficult to imagine the shareholders saying no. Hilton, too, has a long-term future, after all, and it may be even brighter than ITT's.
-- Jim Surowiecki (Surowiecki)

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

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ROGUE ARCHIVES

Thursday, February 6, 1997
Flashback? By Jim Surowiecki (Surowiecki) A recent article in Fortune drew sharp contrasts between the wave of mergers that swept across American business in 1996 and those that made the 1980s the decade of the takeover. The simplest difference is that the mergers of 1996 tended to be between companies with similar core competencies, like Boeing and McDonell-Douglas or any of the telecommunications mergers. Instead of the imaginary benefits of synergy that drove the conglomerates of the Sixties and that served as at least rhetorical justification for the deals of the Eighties, the benefits of last year's mergers, at least for shareholders and executives, seemed obvious. A more fundamental difference, though, may be the fact that the most prominent mergers of 1996 were all friendly, which is to say that they were, in truth, mergers and not takeovers. Although it's likely that behind every friendly offer of a merger lurks the threat of a hostile takeover, we do seem to have entered a world in which corporations look to unite not as a means of crushing or swallowing competitors, but of unifying with them. This, in turn, has contributed to the re-transformation of the American economy into one dominated by oligopolies. But for the moment the negative consequences for consumers that one would expect from the disappearance of competition have yet to rear their heads. In light of the above, Hilton's $10.5 billion offer for ITT, which it unveiled on January 27, has something oddly anachronistic about it. To be sure, the deal makes perfect sense for Hilton. ITT owns Madison Square Garden, Cablevision, the New York Rangers and Knicks, and a 50% stake in TV station WBIS+, so the company also has strong assets in both the gaming and hotel industries, Hilton's two core businesses. Adding the Sheraton name would strengthen Hilton enormously, while ITT's casinos would give Hilton four of the dozen largest in Las Vegas and three of the nine largest in Atlantic City. At a time when America's passion for gambling seems to be slackening, market share will likely take on added importance. An ITT acquisition, coming on top of last year's $3 billion purchase of Bally's, would help make Hilton the major player in gaming. Though the deal makes sense for Hilton, it's not as clear what the benefits are for ITT, especially with a share offer of just $55. On its assets alone, the company is probably fairly valued at somewhere around $65. More importantly, perhaps, selling at this point, when the company finds itself in a market doldrum, wandering around with a depressed share price that may reflect nothing more than a couple of recent bad decisions, is hardly the best recipe for getting fair value. And this takeover will be a takeover. Unlike the Boeing-McDonnell Douglas merger, Hilton can be expected to reshape ITT in its own image, which likely means the disposal of non-core assets and the consolidation of workforces. Unsurprisingly, perhaps, the ITT board met this week and rejected Hilton's offer, which most observers saw as a necessary and inevitable first step. In the week after the offer, ITT's shares have traded at well above 55, since investors expect Hilton to up its offer, and Hilton has in fact suggested that it would be willing to do so. All indications, though, are that the ITT board's decision represents more than just a gambit. ITT chairman Rand Araskog never responded to an early overture from Hilton head Stephen Bollenbach about possible merger talks, and refused to meet with Hilton before the ITT board meeting. Araskog defeated a takeover bid in 1985, at the height of hostilities, and has hired Lazard Freres and Goldman Sachs as consultants. Some have even floated the possibiliy that Araskog may try to mount a counter-bid, though a more likely defense would be to find a "white knight." Analysts suggest that any successful response along these lines is far from likely. Still, Araskog does have an ace in the hole, which is ITT's "poison pill" provision. Any time an investor acquires a 15% stake in the company, special voting rights are issued to existing shareholders, thus making it easier for them to beat back any attempt to acquire fifty percent of the shares. Provisions like these have been the special bugbears of the more extreme advocates of shareholder activism, like Al Dunlap, because they seem to insulate the company's management against the competitive pressures represented by a takeover. On the other hand, the essence of ITT's poison pill is to value existing shareholders over those seeking simply to dismantle the company, so from a long-term perspective there may be justification for it. All the talk of white knights and poison pills does seem to arise from a very different era, when corporate raiders spent their time picking out likely targets who could be acquired and then broken apart. In today's world, shareholder activism is more likely to take the form of institutional pressure on corporate management to change its strategy or to restructure. But the very real possibility that Hilton's takeover efforts will succeed also illuminates the degree to which depressed stock prices provide an easy mechanism for existing management to be replaced. Had ITT been up at $70 or $80 a share, after all, Hilton would presumably not have thought of a hostile takeover (though in the Eighties it might very well have). But at $55, the company suddenly becomes a reasonable target. Part of what that speaks to is the fact that Hilton will not be taking on an enormous amount of debt in order to finance its deal. Indeed, it will be assuming ITT's debt burden, which is larger than its own, if the takeover succeeds. To that extent, Hilton's offer doesn't conform to the leveraged-buyout model that wreaked such havoc on American corporations and American workers in the last decade. ITT's assets are not going to be sold off to pay off the interest on the bonds issued by Hilton to finance its purchase. The deal is being orchestrated by Bollenbach himself, not by investment bankers anxious for the action. And, it makes a certain amount of business sense. Nonetheless, there's something curiously heartening about ITT's decision to fight the takeover, something heartening in the board's insistence that the company should continue to exist as a separate entity. And considering the fact that Hilton has suggested that a good deal of consolidation in the food, laundry, and service facets of the two companies would take place if the deal goes through, it's almost certainly better for the blue-collar workers of ITT and Hilton that the deal fail. Of course, the ultimate decision rests with ITT's shareholders, and given the overpriced acquisitions the company has made in recent years, and its failure to generate any real momentum around gaming or to capitalize on Sheraton's recent success, they may not be in the mood to look beyond Hilton's dollars. Araskog will undoubtedly do his best to convince them that the future will be brighter as an independent corporation, but if Hilton ups its offer another ten dollars, which it could do and still receive fair value, it's difficult to imagine the shareholders saying no. Hilton, too, has a long-term future, after all, and it may be even brighter than ITT's. -- Jim Surowiecki (Surowiecki) (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.