Magazine article Management Review

Raiding American Wealth

Magazine article Management Review

Raiding American Wealth

Article excerpt


American business finds itself in the teeth of a vicious group in the 1980s. The sobriquets are many: financial strip miners, buccaneers, raiders, and cabals. By any name, they threaten the vitality of the nation's economy.

In response, Congress has launched a counterattack, beginning last September when the Senate Banking Committee approaved an important measure designed to curb abuses in our capital markets.

Takeover mania can be traced to the 1974 raid on ESB Inc. in Philadelphia. In the first half-dozen years, many of the targets were medium-sized companies. When the Reagan administration took control of the Justice Department and threw antitrust to the winds, the deals grew larger. From 1979 to 1982 alone, 21 of the 25 largest deals in history were forged. Last year, we witnessed nine of the ten largest deals ever.

Even more perverse, the money spent on takeovers in 1986 totaled a staggering $177 billion. For the first time in American history, that was more than was invested in new plants and equipment. In fact, 17 deals in 1986, involving $41 billion, resulted from hostile bids. That figure is twice the sum spent on all initial public offerings, and was 1,300 percent higher than all venture capital commitments during the year.

The economic cost of takeover mania is severe. American corporations sold $263 billion worth of debt in 1986 -- double the 1985 figure and five times the level in 1982. This mania has led to the mortgaging of America's future business and potential. The trend worries economist such as John Kenneth Galbraith. In a recent article alarmingly titled "The 1929 Parallel," he writes: "The end for those in the present play will come when either recession or a tight-money crunch to arrest inflation makes the debt load they have so confidently created no longer tolerable. Then, there will be threats of default and bankruptcy, a drastic contraction in operation."


Even before we witness any such collapse, takeover mania has st ricken American management with myopia. The threat of takeovers has forced managers to focus exclusively on the short term. Any weakness in stock prices is immediately exploited by the raiders. This means plans for growth that may require investment, and a reduction in immediate quarterly profits, are shelved or scrapped.

Take the case of Borg-Warner Corporation, a Chicago company that was raided by a group aided by Merrill Lynch. A highly profitable firm, Borg-Warner was meeting the challenge of changing times by diversifying its chemical manufacturing base with service divisions. Its balance sheet shone, with a low debt-equity ratio; its interest payments were small. It was also an excellent corporate citizen in Chicago, making large charitable, educational, and cultural contributions to the city. But because of its fight to fend off the Merrill mob, Borg-Warner will be forced to sell its previously successful chemical division, reduce its research budget, and cut back on jobs. After the fray, which the company won, its debt increased nearly tenfold, from some $440 million in 1986 to some $4.2 billion this year. Borg-Warner has become an economic basket case encircled by the loan sharks.

Or take the case of Goodyear Tire & Rubber Company. This thriving firm was forced to close its new Cumberland, Maryland, plant after its match with James goldsmith. That city now faces dire straights. The wake of the financial buccaneer is always the same. Phillips Petroleum laid off 3,400 workers after its fight with T. Boone Pickens. The Chevron/Gulf merger, another deal stemming from Pickens' efforts, cost 18,000 people their jobs. The Burroughs/Sperry merger cost another 10,000.

Pickens claims to represent the people's interest. Yet, when he fought for Phillips Petroleum, Phillips employees and other townspeople in Bartlesville, Oklahoma, held vigils to pray for his defeat. …

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