GOODYEAR TIRE & RUBBER COMPANY

TAKEOVERS IN THE 1980s

The United States has been in the throes of a merger wave m the last few years. Newspapers are replete with stories of billion-douar companies changing hands overnight, mostly through friendly mergers and management buyouts, but quite often through unfriendly acquisitions or hostile takeovers. For example, in 1986 the number of tender offers stood at 197, up from 97 in 1982. Their value was $65.1 billion, a 17% decrease from 1985 but well above the 1982 figure of $25.8 biuion. On the whole, 76.6% of takeovers initiated were successful. The failuretate for uncontested bids averaged 2.45% from 1978 to 1986. The failure rate for contested bids, however, stood at 48.8%; from 1983 to 1985 the average failure rate for contested bids was 68.9%.' The number of hostfle offers declined from a high of 42% in 1982 to 26% in 1986. On an average, control of the company (rather than a mere stake) was the objective in 73% of tender offers. Of the offers, 89.2% were cash. In 1987, the top 200 deals ranged from a value of $7.6 billion (Standard Oil of Ohio, acquired by British Petroleum) to $152 million. Of all deals, 15% were for over SI billion, while 35% exceeded $500 million. The median of the top 200 deals was for $365 million. (See Table 1.)

PUBLIC CONTROVERSY

This is not the first merger wave, and it it certainly not likely to be the last one. Or4 only has to go back 25 years to remember corporate dealings of the 1960s that gave rise to the term conglomerate. Mergers aquisitions are a rather constant feature of the market economy. What makes mergers different is that they arise disparity between financial markets and real

Goodyear Tire & Rubber Compatiy

TABLE 1. Tender Offers: 1992 - 1986

	1982	1983	1984	1985	1986
# of offers	97	74	147	142	186
# of targets	76	60	125	116	181
Target $ value (bil)	25.8	17.3	58.6	78.3	65.1
%completed offers	73	78	80	76	76
% hostile offers	42	35	24	30	26
% of offers where control was at stake	73	70	68	72	82
Status %
Completed	73	78	80	76	64
Not Completed	27	22	20	24	20
Open	0	0	0	0	16
Target Response %
Friendly	43	57	63	62	69
Hostile	42	35	24	30	26
Neurtal	15	8	13	8	5
Form of offer %
Any-or-all	42	64	74	73	85
Partial	37	16	17	23	12
Two-tier	21	20	9	4	3
Control Sought %
Stakehold	19	10	6	9	2
Control	73	70	68	72	82
Lock-up	4	8	14	13	11
Mop-up	4	12	12	6	5
Cash/ exchange %
Cash	88	91	91	85	91
Exchange/ mixed	12	9	9	15	9
MARKET NYSE	37	32	33	41	38
AMEX	16	8	12	8	21
OTC	43	50	49	40	33
Other	4	10	6	11	8

SOURCE: Securities and Exchange Commision, Monthly Statistics, vol. 64, no. 2 (1987) pp. 6-9.

product markets. They are undertaken primarily out of financial motives, not production and marketing.

All this frenzy of takeovers has made celebrities of many raiders. The names of T. Boone Pickens, Sir James Goldsmith, Carl Icahn, and Ronald Perhnan have become household words. The riew entrepreneurs involved in these activities have become multimfllionaires many times over. They have also created a new class of millionaires among those who provide support services for these ventures, namely, the arbitrageurs, investment bankers, lawyers, merger specialists, brokers, and others. Many a fortune has been made almost overnight-although not all of them have been legal or ethical. This is not surprising. In the frenzy of highly pressured activity involving millions of dollars and stock transactions, it is understandable that some shady dealings and unsavory characters will slip through. What is surprising, however, is the evidence that unethical and illegal practices were engaged in by some of the most venerable and blue-chip organizations in the financial community. Witness the prosecution of Ivan Boesky and others on charges of insider trading. Among the Wall Street brokerage, investment, and law firms involved are Kidder Peabody, Drexel Burnham Lambert, as well as numerous lesser luminaries.

The latest merger movement, however, is significant in another important perspective in that both sides, i.e., the acquirers and the acquirees, claim to have similar objectives: to improve America's competitiveness, make companies more efficient and, managers more responsive, and increase shareholder values. On the face of it, there cannot be such a thing as a hostile takeover from the viewpoint of the shareholders. The acquirer must offer a premium over the prevailing market price in order to induce the current shareholders to sell their stock. And these premiums, especially where there has been a bidding war, can be quite handsome.

The issue, therefore, is 'not merely that of a change in ownership from one group of individuals to another. Instead, it is intertwined with three other equally important issues: first, the role of the private corporations as the primary vehicles of economic activity in free market-oriented societies; second, the relative roles plaved by different groups in the survival and growth of the corporation and their rights in having a sav in the running of the corporation; and third, the changing nature of stockholders and stockholdings and how these might affect the welfare of the corporation and the interests of other stakeholders.

The increased globalization of competition, movement of capital, and almost instant transfer of ownership have created a wide gap between the legal theory of the corporation and its reality and have challenged the myth of shareholder control. In the process, they have raised a number of questions pertaining to the organization of economic activity, the rights and obligations of various stakeholders, and the maintenance of a competitive economy for the benefit of society at large. Nowhere have these issues come to the fore so sharply as in the case of hostile mergers. They place in sharp relief the various perspectives articulated by highly sophisticated advocates. The debate has only begun and is likely to intensify greatly in the coming months and years until such time that a new social consensus emerges concerning the manner in which large corporations should be organized, managed, and held accountable for their activities.

A BRIEF SUMMARY OF THE GOODYEAR TAKEOVER

The following case study of Goodyear Tire & Rubber Company is typical of many such cases that have come to light. It also provides good insights into the arguments that are made both for and against such hostile takeover attempts.

In November 1986, Sir James Goldsmith proposed to pay $49 a share for the 88.5% of Goodyear that he did not already own. The deal came to about $4.7 billion. Sir James is the chairman of General Oriental Investments Limited-a company based in England. He is among the handful of wellknown corporate raiders whose very name strikes terror in the hearts of CEOs of target companies and delights the imagination of those groupies, called arbitrageurs, who follow suit in the hope of making a killing in the stock market by buying and selling the stock of the target company.

Goodyear countered the Goldsmith threat by unveiling an ambitious restructuring plan. The plan included repurchasing as many as 20 million of the companv's cornmon shares outstanding and also selling off three major units. The chairman of Goodyear, Robert Mercer, attacked Sir James as a greedy predator who was indifferent to the welfare of the company and its many stakeholders. In addition to using all the usual legal defense strategies against hostile offers, Goodyear also launched a public relations and political pressure offensive bv enlisting the support of political leaders and labor unions, among others. When all the dust was settled, Goodyear was still independent. But it had to pay a very heavy price. Sir James was "persuaded" to sell his stock to Goodyear in the process and made a profit of nearly $100 million in greenmail. It is not known how much profit the Goldsmith gr . cup actually made. Their original offer was to acquire the 88.5% of the company that they did not already control for $49 a share, or $4.7 billion. According to Mercer, they did acquired 12.5 million shares (while arbitrageurs acquired some million). That would amount to an actual outlay of some $613 million. For that stock, plus what the group already owned, they received about $56 a share. For every $49 share purchased they made $7, over a period of about four months.

The saga of Goodyear escaping the clutches of Sir James Goldsmith enraged many observers because of the alleged greenmail payments. This, along with certain other hostile takeovers, provided the catalyst that led to serious legislative discussion about the need for changes in federal and state laws governing stock transactions and takeover activity. However, to date, no significant legislation has been enacted at the federal level.

ISSUES FOR ANALYSIS

The Goodyear case raises a variety of issues pertaining to corporate governance, stock-holder interests, management accountabilitN,, and the interests of other important stakeholders, notably the employees and the communities where these corporations are located. At the macro level, they are concerned with the long-term economic viability of these institutions because, more often than not, they take on a heavy debt burden either to fight such takeovers or to pay for them. An additional concern is for the impact of these mergers on the strength and competitiveness of the U.S. economy. Among some of the specific issues are:

1. What are some of the benefits and costs of maintaining an environment of relatively un restrained merger and acquisition activity in the United States?

2. How effective are the current rules and regulations in maintaining an open environment for investments leading to mergers and acquisitions on a fair and equitable basis so as to n,dnimize illegal activity, e.g., insider trading? If the current regulations are not effective or are insufficient, what additional regulation might be imposed?

3. Should we make a distinction between friendly and unfriendly mergers? Which groups stand to gain the most from friendly mergers, and should protecting these interests have a higher priority?

4. How do the current tax laws and accounting procedures help or hurt friendly and unfriendly mergers? What changes, if any, are needed in these laws and procedures?

5. What are the differences between the financial market value of a transaction and the real product market value, and how do they influ. ence different types of merger activity?

6. How do various groups benefit or suffer from mergers and takeovers, e.g., stockholders, managers (upper, middle, and lower level), workers, lenders, unities where plants and corporate headquarters are located?

7. What are the rights of local communities and workers who are affected by a takeover?

8. What are the rights of shareholders of the target company? Are there significant differences between classes of shareholders? Are shareholders really dedicated to the wellbeing of a company? Alternately, why should shareholders be concerned with the welfare of a company when selling it would yield them better returns and thereby maximize their self-interest?

9. How should one evaluate the role of corporate raiders? I'Vhat service do they provide to current stockholders, other corporate constituencies, and society at large? Are their rewards justified by their services?

10. What are some of the ethical and moral arguments that should be made both for and against friendlv and unfriendly mergers?

11. What are some of the recent measures taken by various state legislatures and U.S. courts affecting mergers and takeovers? What do you feel is their impact on the economic activity and rights of various stakeholders affected by mergers and takeovers?

DETAILS OF THE GOODYEAR TAKEOVER

How Goodyear Become Vulnerable

In October 1986, after a month of speculation that it could be a takeover candidate, the Goodyear Tire and Rubber Company (the world's largest tire maker) said it was considering a restructuring.' The company retained the investment banking firms of Goldman Sachs & Co. and Drexel Burnham Lambert to assist it with a study aimed at developing a program for maxin-dzing shareholder values over the short-run. This would protect Goodyear's stockholders in the' event that a suitor emerged. By October 27, 1986, Goodyear's stock closed at $".125 a share, up from $32.75 a month earlier.

In the years preceding 1986, Goodyear's chairman and chief executive officer, Robert E. Mercer, and his management group had been attempting to diversify Goodyear through energy and aerospace. Tires accounted for 80% of operating profit. Analysts had speculated that if Goodyear were restructured, shareholders might receive as much as$45 t0 $52 a share. Goodyear's approximately $109.3 million shares outstanding had a book value of about $34 a share. Most analysts also thought that a restructuring would involve the sale of of the company's oil and gas reserves. Goodyear had adopted a portfolio structure-type strategy. In examining what attracted the attack, Mercer found that because the market value of the company was left very vulnerable. This was true of energy and aerospace holdings. Another area of Goodyear's vulnerability was its good cash flow, which could be converted by cutting back in areas of advertising, and research and development.

The Raid

It soon became apparent that Sir James Goldsmith, an Anglo-French financier and corporate raider, was interested in taking over Goodyear. He owned more than 15% of Goodyear's shares, a stake valued at $781 million based on a price of $47.73 a share. Sir Goldsmith was understood to have amassed the necessary financial resources required to launch a bid for the company if he @hose to. Merrill Lynch & Co., Sir Goldsmith's financial adviser, was also rumored to become a principal in any bid for Goodyear.
Although no tender offer had been made, Goodyear's chairman, Robert Mercer, said in a letter to employees that Goodyear was a takeover target. Mercer also told employees that Goodyear was taking every step to avoid a takeover. In a filing with the Securities and Exchange Commission (SEC), Sir Goldsmith said that he would not immediately make a tender offer because the stock price was too high due to market overreaction. In addition, in a letter to Mercer, Sir Goldsmith wrote that he was not interested in receiving any greenmail. A further twist was that Merrill Lynch could collect fees of ceeded in his quest for Goodyear. In return, Merrill Lynch agreed to provide a $1.9 billion in financing if Sir Goldsmith decided to launch a tender offer for Goodyear. The potential fees and financing commitment were disclosed in SEC filings by Sir Goldsmith. Finally, in November 1986, Sir Goldsmith proposed to buy Goodyear for $49 a share. The fate of Goodyear t@us depended on the company's ability to boost its stock price above the $49 offered by Sir Goldsmith.

Goodyear's Defense

In his 1986 testimony before the Senate, Mercer insisted that "Goodyear resisted a takeover in the best interest of the Company" and its "real or long term shareholders, our employees, and plant town communities, suppliers, creditors and, of course, our customers, without whom there would be no business in which to invest."

Stock Repurchase and Restructuring.To do this, Goodyear's restructuring plan called for repurchasing as much as $20 million of its shares outstanding and selling off units of the company. Sir Goldsmith then said that he would not launch a hostile tender offer until the company had a chance to pursue its restructuring. If the stock price got above the offering price, then no deal would occur. Goodyear still refused to accept any offer because it felt that it could do a better job of enhancing shareholder value with its restructuring.

Rallying, Shareholders. At the same time, Goodyear's management and its unionized employees tried to rally public opinion and state and federal Government leaders to prevent a takeover by Sir Goldsmith. Mercer advised union officials to make elected officials aware of the consequences of foreign takeovers of U.S. companies. In addition, Goodyear announced that as part of its restructuring program, it would offer early retirement to some of the 4,900 salaried employees at its headquarters. Due to the pressure from Goodyear and its employees, congressional hearings were quickly called to investigate this matter. Mercer indicated that he was pessimistic about fighting any acquisition bid by Sir Goldsmith. The question then became whether Sir Goldsmith would be willing to go ahead with a hostile takeover in the face of widespread opposition within Goodyear and political pressure from the communities in which Goodyear had plants.

Mercer warned employees that a rigorous cost-cutting effort would result in layoffs, early retirements, and other curtailments. Goodvear announced that it would close two plants. These closings would result in terminations of about 3,200 hourly and salaried employees. In addition, capital expenditures for the continuing business of tires and related products had to be slashed by $275 million. AU of these steps were necessary to provide cash for the debt service and early retirement costs incurred in the takeover battle.

In addition to commenting on the longterm health of the company, Mercer made a strong distinction between Goodyear's "true," " real," and "classic," shareholders who had an interest in the health of the company, and the "elite band of raiders, speculators and financiers [who are) perverting the free market system and dynamic capitalism into a quick money game with America's competitive position, economy and jobs as the chips."' It is not clear why Mercer would place a higher degree of trust in "true," "real," and "classic" shareholders who had an interest in the health of the company, and the "elite band of raiders, speculators and financiers [who are] perverting the free market system and dynamic capitalism into a quick money game with America's competetive position, economy and jobs as the chips." The so called "elite bond of raiders" were able to become shareholders precisely because the other loyal shareholders were willing to sell their loyalty and long-term interest in the company for immediate profits, reflected in the higher prices the raiders offered for their stock. Mercer considered the shareholders who sold 12.5 million shares to the takeover groups without knowing who they were or What they were up to, as well as those who sold another 22 million shares to the arbitrageurs, as duped, for they did not have the skills to read the signs and skills of an impending move on the company. It is not clear that these sellers were indeed simpletons who were duped by the raiders. Studies show that raiders acquire their early positions in targeted company stock generally through the purchase of large blocks of stocks from institutional investors, i.e., insurance companies, pension funds, and mutual funds. These stockholders are quite sophisticated and make decisions with full knowledge and understanding of the consequences of their actions.

Mercer contended that raiders were not true investors. He also saw Goodyear's other constituencies-mainly labor and local communities-as in-served by the raiders. He felt that the raiders' focus on shareholder rights failed to address the legitimate concems of these other groups, who had a definite stake in the business and whose destinies were interwoven in the corporation -with those of the shareholders.

Aftermath

Sir Goldsmith's track record at Crown Zellerbach led people to believe that restructuring would be harsh. Three issues came together: a socially responsible layoff policv, plant closing and relocation policies, and management prerogatives.

In the end, the local community-labormanagement coalition prevailed, but the amount of greenmail paid was staggering and made Sir Goldsmith much richer than he would have been otherwise. It also weakened Goodyear considerably. Ironicauy, Goodyear ended up doing many of the things Sir Goldsmith threatened to do. Management would add that the long-term productive capacity and competitive ability of the United States economy-is held hostage to the "efficient financial trading principle" as opposed to efficient production. Thus, there are two sets of consequences which greenmail is allegedly adopted to avoid: (1) whatever adversity might befall the local corporation, community, and labor; and (2) a weakening of the competitive .,iabflity of the economy as a whole. For the most part, stockholders who are not included in the corporation-community-labor group resent the practice of greenmail. They contend that soaring debt, falling investment, and curtafled research do not augur well for profits.

In the case of Goodyear, debt rose from $2.6 billion to $5.3 billion. Planned investment feR from $300 million to $270 million, and research from $1.6 billion to $1 billion. Over $2 billion in assets were to be sold off. Sir James Goldsmith walked away with $93 million profit. Stockholders have a hard time seeing themselves as winners. Their only real choice is to stick with management or sell their stock. Management blames Goldsmith's greed for their plight and claims to have done the best it could for shareholders and communities.

Many shareholders question the quality of Goodyear management in the first place. They also object that, in the event that greerunail seems necessary, they should at least have a say in such an important decision. They are demanding shareholder approval for greenmail, poison pills, and parachutes." Furthermore, they object to takeover groups being offered premium pnces not available to ordinary shareholders.' Shareholders are prevented from cashmg m on the premium pnce takeover groups receive for their shares. They can either stick with the restructured company or sell their stock at the current market price. This apparent disparity between stockholder interests and those of management, labor, and the community have raised a larger issue-corporate governance.

Due to all the political pressure and opposition, as well as opposition from Goodyear, Sir Goldsmith was forced to stop his bid for the company. However, Goodyear had to buy out Sir Goldsmith's stake for $618 million (549.50 a share) and also make a tender offer for an additional 40 million of its shares at $50 a share, or $2 billion. The two purchases would total about 48% of the company's shares outstanding. They also planned to sell off their oil and gas units, their aerospace unit, and their wheel manufacturing unit. This plan left the company heavily burdened with debt. Sir Goldsmith felt that he had no alternative but to be bought out once he decided against a hostile takeover. He did not feel that this was equivalent to receiving greenmail. Goodyear had to sell 25% of its assets to settle this. After the restructuring, Goodyear's annual sales dropped to just over $8 billion, from $9.6 billion in 1985.

The takeover attempt accelerated restructuring at Goodyear: a 12% downsizing, 4,000 layoffs, R & D and capital expenditures focused on projects with a short-term payoff, and a $.4 billion debt which leveraged the company to 80% of debt to total capitalization. Mercer directly countered the argument that takeovers are good for America:

In 1977, at a time when the tire business was at a low ebb, we invested $260 million in a new state-of-the-art radial auto tire plant in Lawton, to assure our future competitive position in world markets. With the same objective, in the 1970's and early 1980's, we modemized tire plants in Alabama and Tennessee and built up a highly competitive wire plant in North Carolina to provide top quality steel wire for use in our tire products. Then in 1983 we converted a Texas bias-tire plant to radial tires with costs that will meet Korean competition head-on when the startup phase is completed later this month. Because of those investments, Goodvear's U.S. plants can hold their own toda@ in global competition. In many foreign countries, for instance, it takes 25 to 50 man-minutes to manufacture a 13-inch tire. our modern U.S. plants do it in less than 10. Our advanced equipment and technology make it possible to support higher American wages and benefits-more than $20 an hour versus as low as $1.60 in Korea. Now had we been the target of a takeover attempt in the mid 1970's, had ,%-e been forced then into the short term planning . . . none of tf,ese investments would have been made.

THE BATTLE RAGES

Why Takeovers are Good

Proponents rationalize takeovers in terms of increasing economic efficiency. They focus on management errors in strategic planning.
Financially Efficient Asset Use. The classic exponent of takeover benefits and the one to whom everyone defers has been Michael C. Jensen. Jensen summarizes the scientific evidence of research as follows:

1. Takeovers of companies by outsiders do not harm shareholders of the target company; in fact, they gain substantial wealth.
2. Coporate takeovers do not waste resources; rather, they use assets productively.

3. Takeovers do not siphon commercial credit from its uses in funding new plants and equipment.

4. Takeovers do not create gains for sharehold-ers through creation of monopoly power.

5. Prohibition of plant closings, layoffs, and dis-missals following takeovers would reduce market efficiency and lower aggregate living standards.

6. Although managers are self-interested, the environment in which they operate gives them relatively little leeway to feather their nests at shareholders' expense. Corporate control-related actions of managers do not generally harm shareholders, but actions that eliminate actual or potential takeover bids are most suspect as exceptions to this rule.

7. Golden parachutes for top-level executives are, in principle, in the interests of shareholders. Although the practice can be abused, the evidence indicates that sharehold ! rs gain when golden parachutes are adopted.

Jensen concludes that, in general, the activities of takeover specialists benefit shareholders.

To understand this rationale, it is important to review the main characteristics of corporate strategic planning in the preceding decades. The 1960s and 1970s mar@ed a time of tremendous corporate structural change. Corporations grew through diversification and became conglomerates. In a sense, it was also a takeover period; but, in general, it was the large, established companies that were acquiring the smaller specialty corn ap nies. Many companies expanded into unrelated businesses. The underlying logic for such conglomerate diversification was based on a portfolio model of analysis. The corporation was interested in maintaining steady earnings. Diversification provided it with a hedge against losses when one sector or industry had a downturn. But the reverse was also true. Higher profit levels were sometimes foregone in favor of maintaining, a steady and safe level of growth and income. To oversimplify, if a conglomerate had 10 divisions, it was most likely at any given time that some would do well while others
lagged behind or even incurred a loss. As long as a majority did well, steady profits could be assured. Some might even prove to be cash cows. Only rarely would all do well or fail at the same time. Contemporary takever entrepreneurs focus on what the call management's strategic mistakes in acquiring unrelated businesses which ended up as underperforming and/ or undervalued. Takeover proponents claim that they can improve overall performance by getting rid of such assets and concentrating the business in a few well-chosen lines that promise high efficiency and return.

Interestingly enough, an SEC study which was published in 1988 contended that present takeovers are simply attempts to undo acquisitions that have fafled. The conglomerate movement of the 1960s was essentially flawed.

In appearing before Congress in 1985 (in connection with his takeover of Crown Zellerbach), Sir James Goldsmith decried both socialism and state corporatism and praised the free market." Modern business, he asserted, has a pyramid structure. At the base is big business and big unions; at the peak is government. Sir Goldsmith sees those parties as both needing and takinl, care of each other, to the exclusion of smalland medium-sized business. He credits the latter with providing 35 million new jobs in the U.S. between 1965 and 1985 and praises their innovativeness and entrepreneurial spirit.

Sir Goldsmith says the debate about takeovers is really about the "new entrepreneurial revolutions and freedoms that have engineered it." Speaking of his experience of companies in France, he added, "the best thing that could happen . . . would be that they should be taken over and that their constituent parts be liberated from the dead hands of established bureaucrats." Sir Goldsmith adds, "Free market forces either force management to get to work or alternately allow new managers and new owners to take over. Axtificial devices which inhibit such changes do no more than protect the unsatisfactory. They lead to ossification and decline."

A second point that almost all takeover proponents focus on is organizational inefficiency. They claim that corporate staffs are becon-dng bloated and inefficient bureaucracies. The term corpocracy has been coined to describe the bureaucratization of private enterprise. In their study of corpocracy, Mark Green and John Berry estimate that corporate organizational inefficiency costs $862 billion a year, six times the amount of govemment waste estimated by the Grace Cornmission. However tendentious such estimates may be, the traits of corpocracy are more telling: the prevalence of insensitiveness to employees, the encouragement of office politics over productivity the fostering of secrecy over communication, the diffusion of responsibility through endless meetings, the production of paperwork paralysis, the neglect of potential markets, the encouragement of short-term thinking, the isolation of management from workers, the discouragement of innovation, and the avoidance of emp]on,ees who rock the boat. If any of the foregoing is accurate, it is clear that capitalism has moved a long way from the ideals of Adam Smith. In such a situition, overhead costs soar while innovativeness and the ability to move quickly suffer. It is not surprising, then, that proponents of takeovers propose large-scale reorganization with reductions in management and staff along with the selling of unproductive assets.

A third area on which takeover advocates focus is the large amount of cash which is devoted to senior management compensation and perquisites. This has opened managers to the charge that they are primarily out for themselves at the shareholders' expense. Raiders such as T. Boone Pickens and Carl Icahn have remarked many times that top management no longer thinks like shareholders. Their interests and the shareholders' interests no longer coincide.
In his testimony before the House, Pickens put it this way:

The growing gap between ownership and control has distorted the traditional econon-dc incentives that drive our free enterprise system, and many of our largest businesses have languishes as a result. As our largest corporations matured, managers experienced more and more dffficulty-finding sound investment opportunities within their core businesses. But, rather than distributing returns to the shareholders who had put their money at risk, they frantically diversified into unfamiliar businesses. Slow growth combined with strong cash flows tempted managers to use discretionary income to buy whatever was for sale. The urge to conglomerate overwhelmed any inclination to return cash to owners because managers' careers and financial futures depended more on size than results. Mediocre results pacified shareholders, while an ever-increasing empire justified higher salaries, more perks, and bigger bonuses. Consequently, performance took a backseat to size.

Long-Term Efficiency of the U.S. Economy. Another issue on which takeover
proponents focus is international competitive advantage. Here, they see American industry heading downhill. The former undersecretary of the Treasury and present budget director, Richard Darman, as well as former commerce secretary Malcolm Baldridge, joined the criticism of much of contemporary management for failing to apply and follow through on technology that they invented.' The nature of competitive advantage has changed dramatically in the past years due to deregulation of manv domestic industries as well as sharply increased foreign competition. This increased competition is due to a number of factors: new costcutting technologies, lower labor costs, and intensity of sales efforts. Foreign competitors are not free of allegations of dumping.' In most industries, however, it would be difficult to maintain that their competitive advantage was due solely to dumping. To restore the competitive edge of U.S. industry,
takeover proponents propose restructuring of production operations. Most often, this means a leaner workforce. Takeover proponents drive a hard economic logic of cost controls and input-output ratios. In addition, they call f6r tighter financial management and more efficacious sales efforts.

A related reason for takeovers is to expand capacity for production, distribution, and sales. At present it is frequently cheaper to buy than to build. This seems to be the logic operative in Chrysler's $3.5 billion takeover of American Motors, as A,ell as in Emerv Air Freight's bid for Purolator." The takeover in this context is based on synergies between related businesses and has good historical prospects for success. A final reason advanced for takeovers is that comparatively low interest rates make takeovers as well as leveraged buyouts more attractive than ever. When low interest is coupled with undervalued assets, the real costs for
acquirers are greatly diminished.

G. Chris Anderson made the case for Drexel Burnham Lambert in Senate hearings:

Further legislation of acquisition activity is unwarranted [because]

Merger and acquisition activity results in a shifting of asseis to more productive uses,

more efficient forms of distribution and technology transfers which promote new research and development.

Acquisitions expedite restructuring of unsuccessful conglomerates into more efficient and more highly valued entities.

Acquisition activity serves to spur management to strengthen company performance and may result in the replacement of ineffective management. The chief executive officers of Walt Disney Productions, Martin Marietta Corp., and Phillips Petroleum Company have all declared that acquisition attempts on their companies have forced management to become more disciplined.

Tender offers result in substantial gains to

shareholders of target firms and benefit shareholders of bidding companies.

Many defensive strategies available to target management increase shareholder wealth by evoking higher competing offers or deterring inadequate bids.

Acquisitions result in transfers of wealth to shareholders who normally reinvest the proceeds in the capital markets or purchase goods and services, thereby in either case stimulating econon-dc growth and making money available for investment.

Acquisition activity has not reduced corporate expenditures for long-term investment.

Further regulations of acquisitions is unnecessary because the Williams Act strikes an equitable balance betaeen targets and acquirers that allows the market to operate efficiently. The overall balance between acquirer and target has not been upset in recent acquisition activity. Isolated cases of abuse should not be addressed with broad legislative measures, but rather redressed on a case-by-case basis in the courts.

Anderson concluded:

In sum, Drexel Burnham believes that mergers and acquisitions are a valid business strategy which spurs economic growth and productivity. Acquisitions are motivated by legitimate business objectives such as achieving a better allocation of resources, substituting new management teams, and maximizing other business and economic opportunities. These advantages result, even if the objective of the challenge of the control is to divest part of the target's assets. These transactions almost invariably result in such assets being transferred to stronger or more aggressive managements which more efficiently and effectively deplove the divested assets.

Moral Justification: Self-Interest and the Common Good. The economic reasons for takeovers have a corollary in moral reasoning, which is rooted in free market ideology. Defenders of takeovers propose three dominant values: individual liberty, fiduciary duties to shareholders, and social utility.

Viewing takeovers in general proponents argue that they can have good consequences for society. The fundamental rationale of this argument reiterates the basic free market premise that individual liberty in economic decision making both protects the rights of the individual to seek his or her self-interest and is in the long-term interest of society. With respect to contemporary takeover activity, proponents argue that the long-term results are in the best interests of society, for the U.S. economy A,ill be healthier. Shareholders are also said to be better served by such a free market. During a takeover, they may divest at a premium. If they hold their stocks, they will benefit in the long run by the improved economic performance of the company. Those taking over the company, it is argued, are themselves shareholders, their interests coincide with the other shareholders. In the end, it is asserted that a number of operating, financial, and tax benefits for both individuals and so. ciety may follow from a corporate takeover.
T. Boone Pickens put it this way:

In the wake of the recent insider trading scandal, the business establishment has raised a hue and cry that unsolicited corporate takeovers must be stopped. Business Roundtable has seized the opportunity to trot out its tired anti-shareholder, pro-man. agement agenda one more time, and Congress has been inundated with pleas for reform.

When the good old boys of corporate America appear before you, look closely at where their interests lie. When they say they are long-termers, ask how much stock they own in the companies they manage. Ask them what percentage of their total personal assets that ownership represents. In other words, ask them ff they have made a long-term commitment to their stockholders and employees.

Those in favor of takeovers argue a hard (and theoretical) market logic, primarily in terms of efficiency, competition, and shareholder profits. Their argument is both macro and long term. It is macro because their focus is on the competitiveness of U.S. industry in an increasingly tough international environment. They argue that companies which are the object of takeovers are sick and mismanaged. In the long run, they are headed down the slope to extinction unless drastic measures are taken. The raiders come in, perform surgery, and help bring U. S. industry back to health. It is important to note that the promise is not to bring this or that company back to health exactly as it was. There is a process of restructuring involved. New management may dismantle parts or all of a company while simultaneously building up others. Assets do not vanish, but they take different forms and are managed in new ways.

AntitakeoverForces

At the same time, there is no doubt that takeovers can be like corporate earthquakes that frequently leave formerly standing companies as a pfle of rubble. Only very strong institutions withstand the initial tremor and subsequent readjustments.

Taking Care of Shareholders. Often takeovers are justified as being in the shareholders' interests. Andrew Sigler, who is the head of the Business Roundtable, a business lobby, countered with the following argument.

Now, I think we have to take a quick look at these shareholders we are all talking about protecting. The shareholders today are principafly firms, professionally. Some twothirds of the equity in the New York Stock Exchange is owned by these funds, and in a company like Champion, over three-quarters of our stock falls into that category.

These are very sophisticated people. They value a company's stock based on its current earnings or its current prospects. They weigh that investment opportunity against their other alternatives. There are no speculative run-ups anymore. The end result of this kind of ownership has been reducing the P/ E ratios of companies substantially in the last 4 or 5 years. Of course, that has been greatly pushed along by the high interest rates that we have had.

I think the other part of the shareholders we have to look at is our ownership. We have an ownership today of the economic system of this country that feels that its principal responsibility is to the people whose money it manages, with very little feeling about what its real ownership is. In fact, ff I heard him right, I think I heard Mr. LeBaron say that it might be something.to think of in terms of selling that vote-renting, I think was the expression.

The rhetoric of the raider is that he is doing everything for the shareholder. What we are really saying is we are willing to liquidate important parts of the strength of the economy to give more money to our pension funds. The real ironv of that is that the assurance that an individual will indeed receive his pension is dependent upon the long-term viability of that institution that he works for. Annual up and down performance of the pension fund has very little to do with guaranteeing the success of that.

Financial and "Real" Market Disparities. Opponents of takeovers also underscore the disparity which exists between financial markets and "real product" markets. They assert that the intentions of the takeover artists are to reap short-term trading gains, while committing nothing to R & D and the long-term productive performance of a company or the economy. That is, the raiders skim off profits in the financial markets while creating no real wealth in the product markets. Andrew Sigler commented:

Behind the smokescreen of doing good for shareholders and punishing stupid, entrenched management and using the magic cloak of the word "@ee market," a small group is systematically extracting the equitv from corporations and replacing it with debt, and incidentally accumulating major wealth.

Now, anyone who believes that there is no difference between debt and equity in the guts of the economic system just doesn't understand how the system reallv works. The basic unit we use in this syste@, basic business unit, is the corporation. We generally measure the strength of that corporation, its ability to perform its normal function to grow, et cetera, by the amount of this equity.

Now, we think it is fiscal insanity to let the country go on with this type of phenomenon because the country loses. When the equity moves out, it does not go into equity of another companv, so the economic system in effect is losing the fuel that makes it run.

Those arguing against takeovers focus on what they call the selfish intentions of takeover groups. Do they really mean to increase the economic performance of the assets, or are they opportunists vying for handsome greenmail payoffs? Major criticism ensues when people suspect that those who take over the company do not intend to preserve and further it. Rather, they plan eiiher to be paid greenmail or to strip the company of its valuable (undervalued) assets, pav off the bonds, pocket the difference, and get out. Those who believe in the likelihood of such a scenario not surprisingly see the takeover people as the first, cousins of the robber barons. It is only natural that an antitakeover coalition has emerged. Moral objections are based on both the harmful consequences of takeover actions as well as on the greedy and selfish motivation on those launching a takeover attempt. Opposition is composed of management, labor, and communities. They are the ones in line to bear the adverse consequences of restructuring.

Ends and Means

In his testimony regarding takeovers, Felix Rohatyn, a leading Wall Street figure, mentioned abuses brought about by what was happening and suggested the following:

The issues involved here are three-fold:

a. The integrity of our securities markets; b. The safety of our financial institutions; c. The constructive use of capital as an engine for growth.

T'hese are all jeopardized by what is happening today.... At the same time, if takeover excesses are curbed, abusive defensive tactics must also be curbed. Not all takeovers are bad, not all managements are good, not all directors represent the shareholders' best interests. Takeovers do not have to be friendly; they have to be fair and soundly financed. The following should be considered:

1. Outlaw all forms of "greenmail";

2. Re-establish the principle of "One share-one vote";

3. Eliminate any form of "poison pill";

4. Require shareholder vote on any bona-fide offer for 100% of a company, or on major restructuring proposals;

5. Eliminate "crown jewel options," "shark repellents," and all other defensive stratagems designed to discourage a bona-fide bidder;

6. Override state takeover statutes which provide management and directors with almost unlimited license to turn away bona-fide bidders and entrench themselves.

Management has developed a number of tools to discourage takeovers. In doing so, they have spawned a new business vocabulary: poison pills, green-mail, white knights, and golden as well as tin parachutes. These tools have one thing in common: to make a takeover so costly that no one would attempt it. It is important to examine what management is doing and whose interests it serves. The same moral scrutiny regarding the intentions of management as well as the consequences of its actions applies.

Takeover groups are criticized for junk bond financing. Junk bonds are highly risky in comparison with other bond offerings. They are not for novice investors. They remain, however, a legitimate financial tool. More important, junk bonds are not the driving force behind takeovers.' In 1985, junk bonds financed $6.23 billion of all mergers and acquisitions. This is less than 5% of the $140 billion that figured in all mergers an 10% of the $78 billion represented by takeover tender offers. In all, 38.2% of junk bonds in 1985 went for mergers an acquisitions. Even though this trend seems to be increasing somewhat, the mode of financing is not the key issue.

Poison pills have been increasingly used by management to fend off agressive takeovers. The definition of a poison pill is by no means uniform. In general, it involves the issuance of a pro rata dividend to common Stockholders. This dividend comprises stockholders rights to acquire stock of (1) the issuer ("flip-in" provisions) or (2) the acquiring persons ("flip-over" provisions) involved in a business combination with the issuer. In addition, poison pills may involve issuing stock with super voting rights ("back-end revisions"), which involve the right of shareholders to tender stock to the issuer for specified securities package, and convert preferred stock provisions.

The most important provision is that acuiring persons may be excluded from the exercise of such rights, even though they are stockholders. Poison pill rights cannot be exercises by stockholders unless triggered by specified events, such as a merger, the comencement of the tender offer, or the acquition of a specific percentage of the issuer's stock. Unless triggered, they are redeemable by the issuer at a nominal price. The intent of such pills is clear: Management hopes to set insurmountable barriers to hostile outside bidders who would purchase a company's shares. Stockholders are usually not insulted. In imposing prohibitive costs on itside bidders, poison pills effectively give Management exclusive authority to decide if acquisition can proceed. Defenders of the pill say that it buys time. Without it, the object of a takeover has only 20 business days following the beginning of a hostile offer in which to respond. Managment argues that the additional time to netiate is beneficial to shareholders in the long run.

The Supreme Court of the state of Delare upheld the legality of the pill in a 1985 decision, Moran v. Household Intemational. In the past few years, over 300 major American corporations have adopted the pill; not all have escaped takeover. Opponents of the pill include both corporate raiders and large institutional investors, who argue that the pill actually works against shareholders. Rarely are they allowed to purchase more shares at a discount. Furthermore, the lethal effects of the pill prevent the stock from rising as it normally would in the course of a takeover and, thus, deprive shareholders of profits they could make by playing the market.

Frequently, in defending itself from a hostile bidder, management will turn to a "white knight. A white knight is a friendly investor who will put away a large block of stock (at a discount price) but who will not pose a takeover threat. In its efforts to avoid being taken over by The Limited, Carter Hawley Hale Stores Inc. turned to General Cinema, which invested $300 millon in its stock in 1984. Eventually, in the face of a persistent bid by The Limited, Carter Hawley Hale had to come to an agreement with General Cinema. A white knight strategy does not necessarily save a company from restructuring, but it keeps it out of hostile hands, at least initially. (White knights do not always prove to benevolent.)

Another device that management uses are golden parachutes (for managers) and tin parachutes (for labor). A parachute affords the relevant party a hefty package of benefits in case it is dis-missed. Both labor and management find these parachutes very attractive, for they protect their own interests. Prospective raiders find them unattractive, for they impose increased costs. In terms of the bottom line, it is the stockholder who pays the costs. By far, the most controversial strategy employed by management is the payment of greenmail. When Walt Disney productions bought back Saul Steinberg's shares in 1984, it effectively paid him a $60 million pren-dum not to take over the company. Similarly, Gencorp was (in rrdd-1987) offering $130 per share for 54% of its stock against an investor group offering $100; the investor group could net nearly $100; the investor group could nearly net $100 million. In a 1964 ruling, the Supreme Court of Delaware upheld the practice of buying back shares at a premium as long as the directors could show a "legitimate business reason" for doing so. There is a great deal of controversy over what constitutes legitimate business reasons. Increasingly, shareholders are demanding that they get a chance to vote on the matter.

In addition to the aforementioned measures, a number of companies prefer restrictions tied to the length of time a stock is held. Furthermore, they want types of common stock classified according to voting power. In a related move, some manacement groups are putting together their own takeovers by taking the company private in a leveraged buyout. In either case, management severely restricts those to whom it is accountable.

Finally, a number of management groups are beginning to take a proactive stance to takeovers. They are scrutinizing their company profiles for items a raider would find attractive-large cash surpluses, undervalued assets to strip, overfunded pension funds, bloated stiiff-and taking measures to correct them before anyone initiates a takeover offer.

CLAMOR FOR ACTION

Business Action

The shareholder is a property owner who does not have full control over his or her property. Often, shareholders are a fickle group. With little or no long-term loyalty to the company, they monitor their portfolio's bottom line and enter and exit accordingly. Any tie to the company is rendered even more remote by techniques of program trading and portfolio hedging. Most observers appeal to management's duties to shareholders to secure an adequate return. The anonymous character and short-term behavior of most shareholders suggests that they may have no real commitment to the company. Such a reality calls into question the validity of the principle that the responsibility of management is to the shareholders and makes it imperative to recast the rights (and duties) of shareholders in the context of the rights and duties of stakeholders in a corporation.
Corporate Boards and Governance. The safeguarding of the rights and duties of all the concerned parties is a central responsibility of corporate governance. The weakest link in corporate governance today is found in the board of directors. In theory, the board of directors is charged with securing the best interests of shareholders and monitoring the performance of managers.

F. M. Scherer, who has developed data on over 6,000 mergers, summarized his conclusion this way:

You asked the question, how can we improve corporate governance? That is really where the problem lies. Let me make a simple proposal. The Congress ought to enact legislation that requires listed companies to have a certain fraction of their directors nominated directly by outside shareholders. This nomination would in fact be done largely by financial intermediaries who control for the larger corporations half of the value of shares. The financial intermediaries who now simply follow the Wall Street rule and bafl out on short notice, would then have to devote attention to making sure that good outside directors are appointed, to make sure the performance of the corporation is in fact good.

Sir James Goldsmith views the relation between managers and corporate boards as incestuous. It must be remembered that almost always, directors are not chosen and elected by shareholders. Normally, shareholders are asked to vote on a list of directors proposed by management. There are no priorities, and only rarely, and at a great cost, is an alternative list of candidates proposed. Shareholders have very little effective Annual meetings have not offered a tful venue for shareholders to communicate with each other, much less organized themselves. Shareholders are rouly ignored when important issues, such poison pills or greenmail, are decided on. In addition, a number of corporations interested in issuing nonvoting classes of common stock. Such a move is objection, for it would further insulate managment from market forces of efficiency and petition. The only real power shareholders have is to sell off their shares."

Over the years, an incestuous relation has emerged between top management boards. In 75% of large companies, the is also head of the board In Most situations, top management appoints the majority of board members. For the most part, boards of directors simply rubber-stamp what the management decides. For some years, there have been calls to make boards more pendent by placing more outsiders on the board. The issue raised is the moral rectitude anagement's intentions. It can no longer be assumed that management seeks the best interests of shareholders or other stakeholds. Nor can it be assumed that the board of tors protects shareholders or other stakeholders. Some argue that it is time for shareholders to gain control of the board and other stakeholders, such as local cornities, labor, suppliers, and consumers, would also be represented.

Be that as it may, such a change in the d would make management's task more difficult. That is exactly what is needed. The discription is simple: (1) Restore a shareholder's perspective, and (2) take explicit account of the claims of the various stakeholders in the business enterprise.

Government Action

Many observers look to public policy and legislation to resolve the main issues concerning takeovers. Both the United States Congress and a number of state legislatures have been very active in this regard.
Information and Disclosure. One important issue is the ethics of information. Observers recommend immediate disclosure of a raider's stock position (rather than the current 10-day lag). Disclosure is presently required at 5%, but a lower threshold (I%, for example) may be better. Most important, all secret collusion between acquiring partners, as well as the parking of shares, must be curtailed. Mandatory immediate disclosure at the 1% level would be helpful.

Margin Requirements. In addition, people have proposed changing the margin requirements for trading, linking voting to a requirement that a stock be held for a minimum amount of time, altering the taxation of junk bonds, and installing debt ceilings. Such proposals are all debatable. For the market to be fair, the central issue is to change the rules regarding information.

Restrictions on "Gutting the Assets." A third proposal is to prevent those who take over a company from disposing of its assets for the certain period of time (for example, one year). This would commit those acquiring the company to managing successfully in the product or real wealth market. This measure would help close the gap between financial and product markets.

Monitoring and Surveillance. The SEC is charged, among other things, with ensuring the quality of market information.increased data processing potential. In particular, the SEC's EDGAR system (electronic data gathering, analysis, and retrieval) is essential for timely market surveillance and information. In addition, the monitoring of audit integrity and improved cooperative agreements with other countries are both essential measures.

Stakeholder Actions

Local Communities. Finaly, the volatility of the world economy makes corporate restructuring an increasing likelihood. Labor and local communities must themselves begin to adopt proactive stances. How to do this in the general economy, let alone in the case of takeovers, is not clear. The point is to bridge the cap between micro and macro perspectives. For their part, local communities would be healthier if they moved to diversify their economic base so as to reduce their risk in the face of market readjustments. One-company towns are highly vulnerable. Part of the responsibility of local government is to build up a positive economic base by establishing a favorable business milieu.

Labor. Labor, too, must begin to build into its policy the likelihood of job turnover rather than persisting in the quest for lifelong security. Job retraining and relocation seem to be a basic feature of modern business. There is considerable scope for labor to change the way it acts on the business scene in other ways, also. For example, it can become a major shareholder through its pension funds. Most important, it must plan for the new emergent international competitive milieu by explicitly gearing its policy and proposals to economic efficiency rather than redundancy.
One perspective of organized labor concerning the impact of mergers on employees is provided by Thomas R. Donahue, secretary-treasurer of the AFL-CIO. In testimony before the Senate Banking, Housing, and Urban Affairs Committee, he listed three areas of injury and harm to workers and employees emanating out of the current wave of takeovers.

First, the takeovers and takeover attempts have led to tl-ie elimination of jobs, often those jobs held by long service employees. Although comprehensive data on lay-offs and job eliminations are not available, it is estimated that at a minimum, roughly 80,000 members of unions that are affiliated with the AFL-CIO have been thrown out of work as a direct result of corporate restructuring. And clearly, hundreds of thousands more have been thrown out as an indirect result of those closures and reorganizations.

Second, corporate reorganizations lead to a reduction of wage ani fringe benefits through raids on pension funds. Workers are forced to lower their standard of living and get by on less, while their retirement income is jeopardized, all in order to finance the employer's acquisitions or restructuring.

Third, by substituting a new employer for a preexisting employer, takeovers destroy seniority and other expectations that employees build up in their jobs over a period of years. New employers are not bound to honor the expectations of those employees, and those new employers all too often are ready to take advantage of their power in that regard. And the morale of affected workers goes to an all-time low, all the whfle they listen to an increasing number of lectures about labor-management cooperation.

Donahue went on to make concrete suggestions for changes in stock trading policies and called for new policies to protect local, communities and workers.

1. Abolish two-tiered offers which clearly have a coercive impact and are the largest imperfection in the present tender offer system.

2. In case of hostile takeovers or other threats to their jobs, incumbent managers often resort to leveraged buy-outs involving collusive sales of a firm's assets at bargain basement prices. To minimize such abuses corporate directors who receive an offer from incumbent management for a leveraged buy-out ought to be required to secure legal and investment advice from independent professionals, ought to be required to entertain competing offers from outsiders, and to select the offer that is in the best interest of the stockholders and the stakeholders in the company.

Raiders should also be denied the profits arising from the circumstance that their failed raid has inflated the value of the target stock. The mechanism for achieving that goal is quite simple. Section 16(b) of the Securities Act could be amended to grant targets the right to recover from a raider and those acting with a raider to recover any profit realized from the short-swing sales of stock acquired in connection with a tender offer and sold within a defined period of time after the offer expires or is withdrawn.

Those mounting a takeover attempt should be required to disclose along with the offer the principal econon-dc assumptions underlying their asset valuation and projections, the sources of and the conditions on the acquirer's financing, the business plans for the target, and any plans of the -would-be acquirer with respect to the closing or the sale of any facilities of the target.

Fiduciaries, including most particularly institutional stockholders, called upon to decide how to respond to a takeover, should be permitted to take into account the likelv community and social impact of their actions and should not feel legally constrained to maximize their short-term profits and to disregard entirely any longer range or broader interests.

6. Contracts voluntarily entered into by a corporation should be binding on the corporate successors or the new owners for the term of those contracts.

7. Acquirers should not be permitted to fund an acquisition or to retire debts assumed in connection with the acquisition by tapping a pension fund and withdrawing the so-called surplus funding from the pension fund.

8. Top managers of an acquired company should not be permitted to escape from a reorganization on golden parachutes at the expense of rank and file workers who are left without any economic cushion whenever their employment is terminated. just as employers are currently prohibited from discriminating in favor of high paid employees in paying retirement benefits, so too should they be prohibited from discriminating against those high paid employees in the golden parachute arrangements.

Notes

1. Donald V. Austin and David W. Many, "Tender Offer Update: 1986," Mergers and Institutions (July/August, 1986), pp. 55-57.

2. Buisness Week, "The Top 200 Deals" (April 15, 1988), pp. 53-81. A similar report was offered for 1986 (April 17,1987); from 1983 through 1985 a report on the top 300 deals was made.

3. United States Senate, Committe on making, Housing and Urban Affairs, Hostile Covers. Washington, D.C.: US Government Printing Office, 1986, p. 220. Hereafter cited as Senate Hearings. United States House of Representatives, Committee on Energy and Commerce, Committee on Telecommunications, Consumer Protection and Finance, Corporate Takeovers. Washington, D.C.: US Government Printing Office, 1986, p. 3 Hereafter cited as House Hearings.

Printing Office, 1986, p. 3. Hereafter cited as House Hearings.

4. James B. Stewart and Philip Revzin, "Sir James Goldsn-Lith, As Enigmatic As Ever, Bafls Out of Goodyear." Wall Street lou mal (November 21, 1986), pp. 1, 15. James B. Stewart and Daniel Hertzberg, "Goodyear Said to Be Target of Goldsmith." Wall Streetjournal(October29,1986), p. 3. James B. Stewart, "Merrill Lynch Could Get $200 Million in Fees on a Goldsmi 'th Bid for Goodyear." Wall Street journal (November 5, 1986), p. 4. Gregory Stricmarchuk and Ralph B. Winter, "Goodyear's Mercer Tries to Hold off Sir James in a Contest for Company." Wall Street journal (November 5, 1986), p. 28. Jonathan P. Hicks, "Goodyear's Uneasy Aftermath." New York Times (November 25, 1986), p. Dl.

5. Senate Hearings, p. 220.

6. Senate Hearings, p. 216.

7. Ibid., p. 217ff.

8. Ibid., pp. 219-20.

9. Ibid., p. 244.

10. Jonathan P. Hicks, "Goodyear's Uneasy Aftermath." New York Times (December 5, 1986), pp. D1, D2.

11. Tamar Lewin, "Business and the Law: Suits Aimed at Greenmail." New York Times (March 3,1987), p. D2.

12. Mergers and Acquisitions, "SEC's All Holders Rule" (November/ December, 1986), p. 15.

13. House Hearings, p. 217.

14. Michael C. Jensen, "Takeovers: Folklore and Science." Harvard Business Review, (November/ December, 1984), pp. 109-21.

15. Kenneth Lehn and Mark L. Mitchell, Do Bad Bidders Become Good Targets? Washington, D.C.: Securities and Exchange Commission, 1988. Gregory A. Robb, "SEC Study Links Bad Acuisitions to Later Takeovers." New York Times (December 5, 1988), p. D2.

16. Senate Hearings, p. 1076ff.

17. Ibid., p. 1078.

18. Ibid., p. 1079.

19. Mark Green and John Berrv "Take-overs-A Symptom of Corpocracy." New York Times (December 3, 1986), p. A31.

20. T. Boone Pickens, Jr., Boone. New York: Houghton Mifflin Company, 1987. T. Boone Pickens, Jr., "How Business stacks the Deck." New York Times (March 1, 1987), p. F2. Steven Prokesch, "America's Imperial Chief Executive." .New York Times (October 12, 1986), pp. Fl, F25.

21. T. Boone Pickens, House Hearings, P. 47.

22. New York Times, "Looking Who's Bashing Corpocracy" (November 24, 1986), p. 18.

23. Jerry K. Pearlman, "Save the Lectures-Give Us Some Help. " New York Times (December 14, 1986), p. F3.

24. Teri Agins, "John Emery Looks for a Better Package." Wall Street Journal (April 2, 1987), p. 34.

25. Anderson, Senate Hearings, pp. 137-38,
490.

26. Pickens, House Hearings, pp. 30-31.

27. Andrew Sigler, Senate Hearings, pp. 196-97.

28. Ibid., pp. 1995-96.

29. Rohatyn, Senate Hearings, pp. 101, 109-10.

30. Richard Wines, "The Stock Watch System: Early Warning on Raiders." Mergers and Acquisitions (March/ April, 1987), pp. 56-58.

31. Michael S. Helfer and William D. Brighton, "The Federal Reserve's Stand on Junk Bond Takeovers." Mergers and Acquisitions (July/August, 1986), pp. 48-54.

32. Suzanne S. Dawson, Robert J. Pence, and David S. Stone, "Poison Pill Defensive Measure." The Business Lawyer, 42 (February , 1987), pp. 423-39.

33. Isadore, Barmash. "Talking Deals Carter's Ally Calls the Tune." New York Times (December 11, 1986), p. D2. Robert Williams, "Taxes and Takeovers-When You Can't Resist a Bear Hug Look for a White Knight." Journal of Accountancy, 162 (July, 1986), pp. 86-93.

34. Alison Leigh Cowan, "New Ploy: 'Tin Parachutes." New York- Times (March 19, 1987), pp. DI, D8. David F. Larcher and Richard A. Lambert, "Golden Parachutes, Executive Decision-Making and Shareholder Wealth." Journal of Accounting and Economics, 7 (April, 1985), pp. 179-204.

35. Robert J. Cole, "$1.6 Billion Buyback by Gencorp." New York Times (April 7,1987), pp. DI, D7.

36. Tamar Lewin, "Business and the Law: Suits Aimed at Greenmail." New York Times (March 3, 1987), p. D2.

37. Mergers and Acquisitions, "Failsafe Profection" (November/ December, 1986), pp. 16-17.

38. Louis Lowenstein, "No More Cozy Management Buyouts." Harvard Business Review, 61 January/February, 1986), pp. 117-27.

39. Scherer, House Hearings, p. 156.

40. Senate Hearings, p. 1082.

41. Louis Brajotta and A. A. Sommer, The Essential Guide to Effective Corporate Board Committees. Englewood Cliffs, N.J.: Prentice-Hall, 1987.

42. Idalene F. Kesner, Bart Victor, and Bruce T. Lamont, "Board Composition and the Commission of Illegal Acts: An Investigation of Fortune 500 Companies." Academy of Management Journal, 29, no. 4 (1986), pp. 789-99. Idalene F. and Dan K. Dalton, "Boards of Directors the Checks and (Im) balances of Corporate Fernance," Business Horizons, 29 (October) pp. 17-23. John D Pawling, "The Crisis of porate Boards-Accountability vs. Misplaced." Business Quarterly, 51 (June, 1986), pp. 3.

43. Richard Wines, "The Stock Watch Systems: Early Warning on Raiders." Mergers and Acquisitions (March/April, 1987), pp. 56-58. Roger Oram, "SEC Projects the Case for Defense," Financial Times (December 10, 1986), p. 6.

44. Senate Hearings, P. 212ff.

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