Mergers, Acquisitions, and Corporate Restructurings. Gaughan Patrick А.
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Several companies had expressed an interest in acquiring ESB, but all these efforts were rebuffed. On July 18, 1974, INCO announced a tender offer to acquire all outstanding shares of ESB for $28 per share, for a total of $157 million. The Toronto-based INCO controlled approximately 40 % of the world's nickel market and was by far the largest firm in this industry. Competition in the nickel industry had increased in the previous 10 years while demand proved to be increasingly volatile. In an effort to smooth their cash flows, INCO sought an acquisition target that was less cyclical.
INCO ultimately selected ESB as the appropriate target for several reasons. As part of what INCO considered to be the “energy industry,” ESB was attractive in light of the high oil prices that prevailed at that time. While it featured name brands, ESB was also not in the forefront of innovation and was losing ground to competitors, such as Eveready and Duracell.
Because the takeover was an unfriendly acquisition, INCO did not have the benefit of a detailed financial analysis using internal data. Before INCO acquired ESB, major reputable corporations did not participate in unfriendly takeovers; only smaller firms and less respected speculators engaged in such activity. If a major firm's takeover overtures were rebuffed, the acquisition was discontinued. Moreover, most large investment banks refused to finance hostile takeovers.
At this time, the level of competition that existed in investment banking was putting pressure on the profits of Morgan Stanley, INCO's investment banker. Although it was seeking additional sources of profits, Morgan Stanley was also concerned that by refusing to aid INCO in its bid for ESB, it might lose a long-term client. Morgan Stanley, long known as a conservative investment bank, reluctantly began to change posture as it saw its market share erode because of the increasingly aggressive advance of its rivals in the investment banking business. Underwriting, which had constituted 95 % of its business until 1965, had become less profitable as other investment banks challenged the traditional relationships of the underwriting business by making competitive bids when securities were being underwritten.38
Many banks, seeking other areas of profitability, expanded their trading operations. By the 1980s, trading would displace underwriting as the investment bank's key profit center.39 This situation would change once again toward the end of the 1980s as fees related to M&As became an increasingly important part of some investment banks' revenues.
ESB found itself unprepared for a hostile takeover, given the novelty of this type of action. INCO gave it only a three-hour warning of its “take it or leave it.” ESB had installed some antitakeover defenses, but they were ineffective. It sought help from the investment bank of Goldman Sachs, which tried to arrange a friendly takeover by United Aircraft, but by September 1974, INCO's hostile takeover of ESB was completed.40 The takeover of ESB proved to be a poor investment, primarily because INCO, as a result of legal actions associated with antitrust considerations, was not given a free hand to manage the company. Not until 39 months after INCO had completed the acquisition did it attain the right to exercise free control over the company. Moreover, as noted previously, ESB's competitors were already aggressively marketing superior products. By 1981, ESB was reporting operating losses; INCO eventually sold it in four separate parts. INCO continued to be the world leader in the nickel business. Interestingly, it stepped into the role of white knight in 2006, when it made a bid for Canadian Falconbridge, a leading copper, nickel, and zinc producer, which was the target of an unwanted 2005 bid from the Swiss mining company Xstrata. This led to a long and complicated takeover battle involving several companies. Eventually, INCO was acquired for approximately $17 billion by the world's largest producer of iron ore, Brazilian company CVRD.
Although the ESB acquisition was not financially successful, it was precedent-setting. It set the stage for hostile takeovers by respected companies in the second half of the 1970s and through the fourth merger wave of the 1980s. This previously unacceptable action – the hostile takeover by a major industrial firm with the support of a leading investment banker – now gained legitimacy. The word hostile now became part of the vocabulary of M&As. “‘ESB is aware that a hostile tender offer is being made by a foreign company for all of ESB's shares,’ said F. J. Port, ESB's president. ‘Hostile’ thus entered the mergers and acquisitions lexicon.”41
While the Inco-ESB deal was precedent setting in the U.S. market as it was the first hostile takeover by a major corporation and supported by a major investment bank, it was not the first hostile takeover. As we have already noted, such deals were attempted in the United States in the 1800s. In Europe, the first major hostile deal appears to be the 1956 takeover of British Aluminum by Reynolds Metal and Tube Investments. This deal, known as the “aluminum war,” was engineered by the then up-and-coming investment bank S. G. Warburg.42
As suggested previously, following INCO's hostile takeover of ESB, other major corporations began to consider unfriendly acquisitions. Firms and their chief executives who were inclined to be raiders but inhibited by censure from the business community now became unrestrained. United Technologies was one such firm.
In 1975, United Technologies had recently changed its name from United Aircraft through the efforts of its chairman, Harry Gray, and president, Edward Hennessy, who were transforming the company into a growing conglomerate. They were familiar with the INCO-ESB acquisition, having participated in the bidding war for ESB as the unsuccessful white knight that Goldman Sachs had solicited on ESB's behalf. Up until the bid for Otis, United had never participated in a hostile acquisition.
At that time the growth of the elevator manufacturing business was slowing down and its sales patterns were cyclical inasmuch as it was heavily dependent on the construction industry. Nonetheless, this target was extremely attractive. One-third of Otis's revenues came from servicing elevators, revenues that tend to be much more stable than those from elevator construction. That Otis was a well-managed company made it all the more appealing to United Technologies. Moreover, 60 % of Otis's revenues were from international customers, a detail that fit well with United Technologies' plans to increase its international presence. By buying Otis Elevator, United could diversify internationally while buying an American firm and not assuming the normal risk that would be present with the acquisition of a foreign company.
United initially attempted friendly overtures toward Otis, which were not accepted. On October 15, 1975, United Technologies bid $42 per share for a controlling interest in Otis Elevator, an offer that precipitated a heated battle between the two firms. Otis sought the aid of a white knight, the Dana Corporation, an auto parts supplier, while filing several lawsuits to enjoin United from completing its takeover. A bidding war that ensued between United Technologies and the Dana Corporation ended with United winning with a bid of $44 per share. Unlike the INCO-ESB takeover, however, the takeover of Otis proved to be an excellent investment of United's excess cash. Otis went on to enjoy greater-than-expected success, particularly in international markets.
United's takeover of Otis was a ground-breaking acquisition; not only was it a hostile takeover by an established firm, but also it was a successful venture and Otis remains a valuable part of United today. This deal helped make hostile takeovers acceptable.
Colt Industries' takeover of Garlock Industries was yet another precedent-setting acquisition, moving hostile takeovers to a sharply higher level of hostility. The other two hostile takeovers by major firms had amounted to heated bidding wars but were mild in comparison to the aggressive tactics used in this takeover.
In 1964, the Fairbanks Whitney Company changed its name to Colt Industries, which was the firearms company it had acquired in 1955. During the 1970s, the company was almost totally restructured, with Chairman George Strichman and President David Margolis divesting the firm of many of its poorly performing businesses. The management wanted to use the cash from these sales to acquire higher-growth industrial businesses. As part of this acquisition program, in 1975, Colt initiated a hostile bid for Garlock Industries, which manufactured packing and sealing products. The deal was path-breaking due to the fact that Garlock fought back furiously and aggressively by using
John Brooks,
Ken Auletta,
For an excellent discussion of this merger, see Jeff Madrick,
“Hostility Breeds Contempt in Takeovers, 1974,”
Niall Ferguson,