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	REMARKS TO U.S. CHAMBER OF COMMERCE GOVERNMENT & REGULATORY AFFAIRS COMMITTEE “MERGERS & ACQUISITIONS: A NATURAL FUNCTION OF THE FREE MARKET” WASHINGTON, D.C. JANUARY 25, 1985

12:00 P.M.

(TIME: 9 MIN.)

THANK YOU, ED (COLODNY).

IT’S A PLEASURE TO BE HERE TODAY, AND I AM HONORED THAT YOU HAVE ASKED ME TO PRESENT MY VIEWS ON MERGER AND ACQUISITION ACTIVITY.

YOUR INQUIRY INTO THIS ISSUE IS COMMENDABLE, AND I HOPE THAT I CAN HELP PUT IT INTO PERSPECTIVE FOR YOU.

M & A ACTIVITY IS UNDER CRITICAL REVIEW CURRENTLY FOR NUMEROUS REASONS.

THE BASIC ASSUMPTION ON THE CRITICS’ PART IS THAT IT IS BAD.

BUT AFTER MY PRESENTATION TODAY, I THINK YOU’LL SEE THAT M & A ACTIVITY IS ACTUALLY GOOD FOR THE ECONOMY, SHAREHOLDERS AND CONSUMERS.

THIS ACTIVITY IS NOT ITSELF A PROBLEM, BUT THE RESPONSE TO A PROBLEM.

IT IS A RESPONSE TO FUNDAMENTAL SHIFTS IN OUR ECONOMY.

IN OTHER WORDS, THIS IS A NATURAL FUNCTION OF THE FREE MARKET, AND LEFT UNTAMPERED WITH, IT WILL PRODUCE GREAT BENEFITS.

I’D LIKE TO BEGIN MY TALK BY REFUTING SOME OF THE FALSE CLAIMS MADE [Text stricken: IN THE PRESS] AGAINST M & As.

AND ONE OF THE FIRST ASSUMPTIONS AMONG THE CRITICS IS THAT ANY ACTIVITY DEALING WITH SO MUCH MONEY MUST BE BAD.

THERE’S NO DOUBT THAT WE ARE TALKING ABOUT HUGE SUMS OF MONEY.

THE CHEVRON-GULf [Text stricken: AGREEMENT,] [Handwritten addition: merger] ALONE, AMOUNTED TO $13 BILLION.

BUT THE ACTUAL NUMBER OF MERGERS OCCURRING RECENTLY IN NO WAY COMPARES TO THE RECORD OF YEARS PAST.

ALTHOUGH 1984 DATA IS NOT YET AVAILABLE, IN 1983, W. T. GRIMM & CO. REPORTS THAT 2,553 MERGERS WERE ANNOUNCED; IN 1969, THE RECORD YEAR, THE TOTAL WAS 6,107.

THE DOLLAR VALUES OF THESE TWO YEARS ARE [Text stricken: ALSO] SIMILAR.

ADJUSTED FOR INFLATION, THE TOTAL VALUE OF ALL M & As IN 1969 WAS ABOUT $72 BILLION; IN 1983, THE TOTAL VALUE WAS $73.1 BILLION.

SO WE’RE ACTUALLY NOT SEEING A SIGNIFICANT INCREASE IN TERMS OF DOLLARS, BUT WE ARE SEEING FEWER DEALS OF GREATER VALUE.

AN OFFSHOOT TO THE “TOO MUCH MONEY” ARGUMENT IS THE ASSUMPTION THAT THIS ACTIVITY CONSTITUTES A DRAIN ON THE CREDIT MARKET.

HOWEVER, SEVERAL STUDIES HAVE SHOWN THIS TO BE FALSE.

THE 1983 REPORT OF THE SEC ADVISORY COMMITTEE ON TENDER OFFERS CONCLUDED THAT “TAKEOVER TRANSACTIONS FUNDAMENTALLY INVOLVE AA TRANSFER OF ASSETS, NOT THE ABSORPTION OF NEW SAVINGS, AND BECAUSE THE SELLERS OF STOCK TO AN ACQUIRING FIRM REINVEST THE PROCEEDS, THE CAPITAL IS MADE AVAILABLE TO OTHERS.”

THE SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES ALSO STUDIED THIS ISSUE QUITE EXTENSIVELY FOR ITS JULY 1984 REPORT TO THE SENATE ON OIL COMPANY MERGERS.

AND THE COMMITTEE SAID THAT THESE ACTIONS ARE PURELY A FINANCIAL TRANSACTION.

THERE ARE NO NEW CREDIT DEMANDS BECAUSE THE TRANSACTION IS NO DIFFERENT FROM AN ORDINARY EQUITY MARKET TRANSACTION OCCURRING EVERY DAY ON THE STOCK MARKET.

MICHAEL JENSEN, WHO IS A PROFESSOR OF FINANCE AND BUSINESS ADMINISTRATION AT THE UNIVERSITY OF ROCHESTER AND WHO IS ONE OF THE FOREMOST ACADEMICIANS STUDYING M & As, AGREES WITH THESE POINTS OF VIEW.

HE ARGUES IN A HARVARD BUSINESS REVIEW ARTICLE, WHICH WE HAVE PROVIDED IN YOUR INFORMATION PACKETS, THAT TAKEOVER ACTIVITIES ARE ACTUALLY PRODUCTIVE INVESTMENTS.

NO WEALTH IS CONSUMED IN M & As; IT IS TRANSFERRED FROM ONE GROUP OF INDIVIDUALS TO ANOTHER.

THE RESOURCES RECEIVED BY THE TARGET SHAREHOLDERS CAN BE USED FOR PRODUCTIVE REINVESTMENT IN NEW PLANTS, EQUIPMENT OR R&D.

AND EVEN IF THEY ARE NOT USED FOR THOSE PURPOSES, BUT ARE USED TO INCREASE CASH BALANCES OR REDUCE DEBT, THE RESOURCES ARE STILL VERY MUCH A PART OF THE ECONOMY.

IN SHORT, THE MONEY DOESN’T DISAPPEAR.

IT IS REINVESTED AND CHANNELED RIGHT BACK INTO THE ECONOMY, SO THERE IS NO IMPACT ON CREDIT WHATSOEVER.

RECENTLY, THE NATIONAL ASSOCIATION OF MANUFACTURERS HAS TAKEN A STANCE AGAINST M & A ACTIVITY ON THE GROUNDS THAT IT TAKES AWAY CAPITAL FROM NEW INVESTMENT IN PLANTS AND MANUFACTURING FACILITIES.

HOWEVER, THERE IS JUST NO EVIDENCE TO SUPPORT THIS.

IN FACT, INCREASED OPERATING EFFICIENCY IS EXPECTED TO COME FROM M & A ACTIVITY, AND IN MANY GASES, THIS MAY INVOLVE AN EXPANSION OF FACILITIES.

SO THE QUESTION YOU COME DOWN TO, ONCE YOU’VE ESTABLISHED THAT THERE IS NO HARM TO THE ECONOMY, IS WHO DOES THIS ACTIVITY BENEFIT?

A [Text stricken: LOT] [Handwritten addition: number] OF CRITICS SAY THAT IT ONLY BENEFITS THE SO-CALLED RAIDERS.

NOTHING COULD BE MORE ABSURD.

GRANTED, THE BIDDER COMPANIES IN TAKEOVER PROPOSALS NORMALLY GAIN.

BUT IT’S IMPORTANT TO REMEMBER THAT IF 3% OF THE GAINS, FOR EXAMPLE, GO TO THE BIDDER, 97% OF THE GAINS GO TO THE TARGET COMPANY SHAREHOLDERS.

[Handwritten addition: (Jensen’s report)]

AND THAT CAN BE A SIGNIFICANT INCREASE IN VALUE.

AGAIN, MICHAEL JENSEN POINTS OUT THAT TARGET COMPANY SHAREHOLDERS GAIN 30% FROM TENDER OFFERS AND 20% FROM MERGERS. [Handwritten addition: And shareholders are the owners]

THE SHAREHOLDERS OF BIDDING COMPANIES, ON THE OTHER HAND, EARN ONLY ABOUT 4%.

OF COURSE, THE NEXT QUESTION IS, WHAT ABOUT THE GAINS OF THE M & A LAWYERS AND INVESTMENT BANKERS?

THERE’S NO DOUBT THAT SOME HEFTY FEES ARE MADE FROM THESE DEALS.

BUT JENSEN CITES THAT THESE ARE BUT A FRACTION OF THE TOTAL VALUE OF THE ACQUISITION.

AS JENSEN PUTS IT, “TOTAL FINANCIAL AND LEGAL FEES USUALLY AMOUNT TO ONLY ABOUT .7%. MORE SIGNIFICANTLY, THEY HELP SHAREHOLDERS ACHIEVE THEIR MUCH LARGER GAINS OF UP TO 30%.”

SO IT IS THE SHAREHOLDERS WHO ULTIMATELY BENEFIT.

AS A RESULT, WE ALL BENEFIT.

ASSETS MOVE INTO STRONGER HANDS, AND INCREASED EFFICIENCIES RESULT.

THERE ARE NO LOSERS.

IT SEEMS RATHER ODD, THEN, THAT SUCH A FUSS HAS BEEN RAISED WHEN THE EVIDENCE IS SO HEAVILY IN FAVOR OF M & A ACTIVITY.

MY THEORY ON THAT, HOWEVER, IS THAT THE HIGH LEVEL OF DISCORD IS NOT COMING FROM WORRIED SHAREHOLDERS BUT FROM WORRIED EXECUTIVES.

A LOUIS HARRIS POLL PUBLISHED IN THE AUGUST 27, 1984 ISSUE OF BUSINESSWEEK SHOWED THAT, BY A HUGE MARGIN, THE 602 SENIOR EXECUTIVES SURVEYED BELIEVED TAKEOVERS WERE BAD FOR THE ECONOMY.

45% ALSO THOUGHT THAT EXISTING LAWS GOVERNING TAKEOVERS WERE SOMEWHAT OR VERY INADEQUATE.

70% THOUGHT THAT THE BIDDER COMPANY HAD THE ADVANTAGE IN THE FIGHT.

LOUIS HARRIS SUMMED UP THE GENERAL FEELING OF THESE EXECUTIVES QUITE NICELY WHEN HE SAID, “WHAT EXECUTIVES REALLY WANT IS FOR THE ACQUIRER TO BE HEMMED IN, BUT NOT THEMSELVES.”

HE POINTED OUT THAT 80% OF THEM FELT THE STOCKHOLDERS DID MODERATELY OR VERY WELL IN MOST TAKEOVERS.

SO, HARRIS CONCLUDED, “THEIR HEARTS DON’T BLEED FOR SHAREHOLDERS.”

THAT’S EXACTLY THE POINT.

MANY OF THESE MANAGEMENTS AREN’T CONCERNED FOR THEIR SHAREHOLDERS—THEY’RE WORRIED ABOUT THEIR OWN JOBS.

[Handwritten addition: Gordon C. How do I get Sidney on board?]

THEY DON’T HAVE SIGNIFICANT OWNERSHIP IN THEIR OWN COMPANIES, SO THEY DON’T SEE THE BENEFIT IN A PREMIUM TO MARKET OFFER.

[Handwritten addition: This week, the business roundtable has surfaced as planning to press Congress for legislation against hostile takeovers and greenmail.]

[Handwritten addition: This is a group, as many of you know, composed of CEOs and top executives of America’s blue chip companies.]

[Handwritten addition: Andrew Sigler, the CEO of Champion International, was quoted in the Jan. 23 Wall Street Journal as proposing two things:]

[Handwritten addition: First, a requirement that anyone holding about 5% to 10% of a company’s stock submit a proposal to buy all of the company’s stock. If the board disapproved the plan, it would go to a proxy contest. This would eliminate greenmail, says Sigler.]

[Handwritten addition: Ridiculous! The way t stop Greenmail is to. . .aren’t stupid. . .The Greenmail issue is hot—use it to get the protection for management. . .This is a cover-up. Be careful stockholders.]

[Handwritten addition: And second, legislation to prohibit golden parachutes, although Mr. Sigler is quick to point out that he doesn’t want government officials setting executive remuneration.]

[Handwritten addition: It is interesting to me that while Mr. Sigler is out Lobbying against takeovers, his company is taking a fourth-quarter write-off of $120-150 million.]

[Handwritten addition: He should have been taking care of his shareholders rather than looking out for his own job.]

[Handwritten addition: After learning about the business roundtable’s intentions, we decided to do some research.]

[Handwritten addition: But their membership list is rather secretive—it took our law firm two weeks to get the names of companies represented on the roundtable.]

[Handwritten addition: The actual names of members aren’t available.]

[Handwritten addition: We were able, however, to get the names of their 50-member policy committee.]

[Handwritten addition: And we discovered some very interesting facts about the ownership of these people.]

[Handwritten addition: The average stock ownership of these individuals in the companies they represent is 3/100 of 1% of the outstanding shares.]

[Handwritten addition: And by the way their average cash compensation in 1983, however, was over $800,000.]

[Handwritten addition: More interesting, yet, is that the average total ownership of the boards these people represent is 6/10 of 1% of the outstanding shares.]

[Handwritten addition: It’s easy to see why the roundtable feels uncomfortable with takeovers.]

[Handwritten addition: They can’t relate to shareholders.]

[Handwritten addition: They can’t see the benefit in a premium to market offer.]

WHY DO THESE MANAGEMENTS THINK SHAREHOLDERS BUY STOCK?

IVAN BOESKY, THE NOTABLE ARBITRAGUER, ANSWERED THAT IN THE NOVEMBER 26, 1984, CHRISTIAN SCIENCE MONITOR.

BOESKY SAID, “THESE OWNERS BUY STOCK NOT OUT OF A WARM FEELING FOR THE COMPANY BUT BECAUSE THEY WANT THE STOCK TO GO UP. IF THE STOCKHOLDER HAS TO WAIT FOREVER FOR THIS TO HAPPEN, HE MAY BE A DISGRUNTLED OWNER.”

TOO MANY MANAGEMENTS DON’T SEE THAT.

THEY VIEW THEMSELVES AS OWNING THE COMPANY, AND THEY’RE WILLING TO LET SHAREHOLDERS SUFFER TO RID THEMSELVES OF A PERCEIVED PROBLEM—THE CHANCE OF BEING TAKEN OVER.

WE CAN’T AFFORD TO LET THAT PERCEPTION PREVAIL.

AND WE CAN’T AFFORD TO HAVE MERGER AND ACQUISITION ACTIVITY TAMPERED WITH.

BY CHANGING THE RULES, WE’RE MORE LIKELY TO CAUSE THE ULTIMATE HOLDERS OF CONTROL—THE SHAREHOLDERS—TO LOSE THAT CONTROL.

AND WE’LL INSTEAD PLACE CONTROL IN THE HANDS OF A FEW MANAGERS.

WHO GETS PROTECTED WITH ANTI-TAKEOVER LEGISLATION?

IT’S NOT THE SHAREHOLDERS.

AND THOSE ARE THE PEOPLE I’M MOST CONCERNED ABOUT.

THERE ARE 42 MILLION AMERICANS WHO OWN STOCK IN PUBLICLY-TRADED COMPANIES.

ABOUT HALF OF THOSE PEOPLE HAVE PORTFOLIOS OF LESS THAN $5,000.

IN MANY CASES, WE’RE TALKING ABOUT THEIR LIFE SAVINGS.

IF THEY CAN MAKE A 30% GAIN, I THINK THEY’LL TAKE IT.

AND I DON’T WANT TO SEE ANY KIND OF LEGISLATION THAT WOULD PREVENT THEM FROM MAKING THAT KIND OF GAIN.

SHAREHOLDERS ARE THE CORNERSTONE OF OUR FREE ENTERPRISE SYSTEM.

WITHOUT THEIR CAPITAL, AMERICAN ENTERPRISE WOULDN’T EXIST.

AND WITHOUT THEIR CONFIDENCE, OUR FREE ENTERPRISE SYSTEM WOULD CRUMBLE.

WE NEED TO PRESERVE THEIR RIGHTS AND, AT THE SAME TIME, PRESERVE THE FREE MARKET.

THANK YOU.

(WAIT FOR APPLAUSE)