TIME: Almanac 1993/TIME Almanac 1993.iso/time/041690/0416208.000

Text File | 1992-08-28 | 8.7 KB | 196 lines

                                                                                BUSINESS, Page 40

The Proxy Punch-Out


Corporate raiders are using some old-fashioned tactics to spar
with management

By CHRISTINE GORMAN -- Thomas McCarroll/New York and William
McWhirter/Chicago


    Canny corporate raiders know there is more than one way to
fell an obstinate opponent. Throughout the 1980s the knockout
blow was typically delivered in a high-stakes takeover battle,
with much fancy legal footwork and powerhouse debt financing.
But in recent months the collapse of the junk-bond market and
the passage of anti-takeover laws in more than 30 states have
forced a switch in tactics. Now the savviest challengers are
clambering back into the ring with an old-fashioned approach
to kayoing corporate management. The new arena: the annual
stockholders' meeting. The main event: the proxy fight.

    In such a battle, the raider, instead of trying to buy up
a majority of the company's stock, holds a smaller stake and
seeks to engineer a coup by enlisting the support of other
stockholders. Unlike more routine shareholder proposals, which
try to persuade management to change its stance on, say,
investment in South Africa, the goal of a proxy fight is to
urge stock owners to throw management out altogether. They may
do so by casting their votes, in the form of variously hued
proxy cards, for the dissident raider and his own roster of
director nominees, who promise to do a better job than the
incumbents.

    The power of the proxy was evident last week when the
directors of UAL agreed to sell the parent company of United
Airlines to its employees for $4.5 billion, or $201 a share.
They had little choice. Coniston Partners of New York, which
owns 11.8% of the company, had threatened a proxy campaign at
the shareholders' meeting on April 26, which would have
replaced the directors with another board more amenable to a
buyout.

    Unlike most proxy showdowns of the past, many of the current
fights are being waged at Fortune 500 companies. In March,
Dallas investor Harold Simmons tried to convince shareholders
at Lockheed's annual meeting that he could do better than the
present management to rescue the defense contractor from its
financial troubles. And on May 7, shareholders of USX (formerly
U.S. Steel) will vote on raider Carl Icahn's proposal to get
out of the steel business once and for all. Icahn had
threatened an all-out proxy fight if the matter were not put
to a vote. Already 18 major proxy battles have been launched so
far this year, up from only a handful last year.

    Experts on corporate history point out that over the years
the buyout and the more democratic proxy fight have alternated
as the favored means of shaking up management, depending
largely on the availability of capital. "When you can't buy,
you have to persuade and compromise," observes Harry DeAngelo,
director of the J. Ira Harris Center at the University of
Michigan. While the proxy fight is a less certain instrument
than the buyout, notes Harvard finance professor John Pound,
"it is much more consistent with the American political system,
in which officials should be held accountable to their
constituents."

    What do raiders find appealing about proxy fights? They are
cheaper to run than a 1980s-style takeover battle. Investment
bankers calculate that the fees and other expenses from an
employee buyout add up to between 3% and 4% of the total value
of a deal, while hostile takeovers are waged for about 2% of
the total. Proxy fights, on the other hand, can be financed for
less than 1% because the object is not to buy shares but to
garner votes. Furthermore, unlike leveraged buyouts, successful
proxy fights can be waged without saddling a company with
takeover debt. And even if the dissident shareholders lose the
battle, they often win the war. In a 1989 study of 60 major
proxy contests, DeAngelo found that while managers prevailed
against challengers 70% of the time, they had usually been
booted out within three years of the fight.

    Institutional investors, who have come to dominate the stock
market, are increasingly flexing their muscle in proxy
contests. Pension-fund giants find they can no longer afford
to sit on the sidelines or simply sell their stock if they
disagree with a firm's policies. Reason: their positions have
grown so large that they would depress market prices, and their
own profits, by selling out. As a result, more of these
investors are becoming actively involved in determining company
policies, often concentrating on long-term growth instead of
short-term gains.

    Shareholder democracy has become one of the biggest rallying
cries for institutional investors. In 1989 they sponsored or
supported shareholder proposals at 62 corporations. At last
count this year, that figure was up to 112. Almost half the
measures call for secret balloting -- which would make it
easier for shareholders, particularly from a company's own
employee stockholder groups, to vote against management.
Another third of the proposals seek the repeal of so-called
poison pills, financial ploys that make hostile takeovers
prohibitively expensive.

    While proxy battles have all the admirable, democratic
qualities of a free-election campaign, they also have many of
the drawbacks, including mudslinging and dirty tricks. After
Lockheed discovered that Harold Simmons planned to wage a proxy
battle, the aerospace company announced that it would hold its
shareholders' meeting in March instead of on its traditional
May date. That gave Simmons, who owns $530 million worth of
shares (or 18.9%) of the California company, just a few weeks
to wage his campaign.

    Lockheed had posted $430 million in losses on two major
defense contracts last year and had seen its share price drop
from $54 3/4 to $33 5/8. Simmons said he could do better.
Drawing on a war chest of $8 million, Simmons made his
arguments in videotape presentations to employees, in letters
and personal visits to shareholders and in full-page ads in
major newspapers. Lockheed retaliated with its own ads, letters
and presentations, which seemed to attack Simmons' patriotism
and charged him with a "record of pension-law violations."
Though the outcome of the vote will not be known for a few
weeks, Lockheed management is clearly feeling the heat. Last
week it promised several concessions aimed at appeasing
institutional investors, including the creation of three board
seats for representatives of major shareholders.

    The threat of a proxy battle was also behind USX's move to
appease Carl Icahn, who controls 13% of the company. For years,
Icahn has been trying to get the Pittsburgh firm to spin off
its steel business, which now makes up 30% of its operations.
He claims that dividing USX into two separate companies would
result in share prices that total $48, instead of the current
$36. USX disagrees, but consented  to a nonbinding shareholder
vote on the matter. Most industry watchers believe that Icahn
will lose.

    As in politics, incumbent officials have certain advantages
in proxy contests. They know how the company works and how best
to get in touch with shareholders. They can spend as much as
they want from the corporate treasury on their campaign. And,
in contrast to political candidates, corporate officials are
permitted to persuade someone who has voted against them to
change his ballot. It is only the proxy with the latest date
that counts.

    Managers are also finding allies in state legislatures. A
controversial anti-takeover measure that passed the
Pennsylvania statehouse last week could make proxy fights
harder to wage. The bill, which Governor Robert Casey is
expected to sign later this month, would limit the voting
rights of potential raiders. Furthermore, it would enable
target companies to lay claim to the short-term profits earned
by a successful raider. Because the bill effectively makes
takeovers impossible without management's consent, Richard
Breeden, the chairman of the Securities and Exchange
Commission, charges that it could leave incompetent managers
"free to run a company into the ground."

    Such measures are clearly an overreaction to the takeover
craze of the '80s, and the newly activist institutional
investors are unlikely to stand for them. Some large investors
are already pressuring companies incorporated in Pennsylvania
to repudiate the legislation. Now that shareholders are testing
their strength, they are unlikely to be pushed out of the ring
anytime soon. And corporate managers may come to fear them
every bit as much as they feared the hostile raider.