Corporate Civil Wars

By John S. DeMott

Proxy battles are increasing, and worries grow about the paper chases

TWA usually stands for Trans World Airlines. Last week it could have meant Tussle, Wrestle & Armtwist. At the annual meeting of TWA's parent, Trans World Corp., in Kansas City, a group of investors calling themselves Odyssey Partners attempted to break up the firm by splitting off the corporation's red-ink airline business from its four other subsidiaries, all moneymakers. With only 1% of Trans World's stock, they nonetheless persuaded shareholders who control perhaps a fourth of the company to vote their way. That fell short of the required 51% majority, but Trans World Chairman L. Edwin Smart must remain worried about another challenge. Said a pleased Leon Levy, leader of Odyssey: "The same forces are still at play. Our recommendation still stands."

A similar drama was unfolding, meanwhile, at the annual meeting of GAP in Charlotte, N.C. Stockholders witnessed a bruising battle between the company's current chairman, Jesse Werner, 66, and Samuel Heyman, 44, a Connecticut shopping-center magnate and owner of 5.7% of GAF's stock, over how to liquidate the moribund company. Factions on both sides have been attacking each other in a blitz of newspaper ads, questioning each other's competence and judgment. At one point, the Heyman group distributed a chart showing how Werner's salary and bonuses had gone from about $160,000 a year to nearly $525,000 at the same time that GAF's stock dropped from $42 to $10. Said GAP Stockholder Ben Alderson before the annual meeting started: "I'm glad to see someone like Heyman upset the canoe. I've had stock for ten years, and I'm not at all satisfied." After a chaotic, three-hour session that was interrupted by arguments over rules of order, Werner, fearful that he was losing to Heyman, postponed the deadline for voting to mid-May.

Many company directors must be longing for the good old days of annual meetings, when the chief distractions were usually corporate gadflies like Evelyn Y. Davis, Wilma Soss and the Gilbert brothers. Those "professional shareholders" just talked a lot, loudly, and annoyed company chairmen with demands for more "corporate democracy" through cumulative election of directors.

What is happening now is nothing short of corporate civil war in the form of proxy battles. Said Levy after the Trans World meeting: "No longer can management be certain it can get through any proposal. That is really what this was all about." In addition, proxy fights are growing in number--68 last year vs. 40 or so annually in the late '70s.

The normal way to amass a controlling majority of a company's stock is a tender offer or a proxy fight. But takeover by tender has become much more expensive because stock prices have risen more than 50% on the average since August in the ongoing bull market. The Dow Jones industrial average closed last week at a record 1226.20. Buying a controlling interest may have been possible a year ago for only a few million dollars; now the price could be much higher.

Takeovers earned a bad name during the destructive Bendix-Martin Marietta fracas last summer in which Bendix Chairman William Agee first lost control of his company and later lost his job, when Allied Corp. came to Bendix's aid as a so-called white knight in the battle but then forced him out. Even before that struggle, companies had moved to make outright takeovers more difficult by setting up so-called shark repellents. Example: some companies altered their bylaws to require a two-thirds or three-quarters majority of voting shares to make changes in company policy, and some also set up "golden parachutes" to protect top executives. When Xerox was threatened last summer by a bid from GTE, it bought Crum & Forster, the big insurer, so that it would be more difficult to take over.

Now that the shares of even troubled companies such as Trans World and GAP are up sharply, although nowhere near their historic highs, the threat to managements is likely to come mainly from people who already hold substantial blocks of stock. Says Joe Parella, a general partner at New York's First Boston Corp.: "Proxy battles are a cheap way to take over a company. All you do is hire a smart lawyer and run ads." That can often cost anywhere from $1 million to $10 million. Gaining outright control of large firms could run into the billions.

"Compared to proxy fights, takeover battles are downright gentlemanly," says a Wall Street veteran of many tussles. "This is where you get the real down and dirty, where the action can get bitter.

Then they degenerate into slugfests." Says Kenneth Bialkin, a proxy expert with the New York City law firm Willkie Farr & Gallagher: "If management is doing a lousy job, you've still got to convince shareholders that a new team could do better."

Trans World's dissidents armed themselves heavily. They spent about $1 million on their campaign to get proxy statements explaining the breakup proposal into shareholders' hands and for a report from Booz, Allen & Hamilton, the powerful management consultant. The study showed that the sum of Trans World's parts was worth more than its whole. While TWA has not earned a profit domestically in almost a decade, Trans World subsidiaries such as Hilton International hotels, the Spartan Food Systems restaurant chain, Century 21 real estate and the Canteen Corp. vending-machine business were valuable and making money. The airline had a loss of $93 million during the first quarter of 1983, more than wiping out the $20 million earned before taxes by Trans World's nonflying parts. Levy and the other dissidents argued that all the parts of Trans World were worth as much as $70 a share, more than twice its current $31 stock price. "There is no synergism in Trans World," claimed Lester Pollack, a general partner in Odyssey. Trans World's defense to its shareholders, trumpeted in full-page newspaper ads, was that its diversification was a strength in bad economic times.

In the GAF case, much of the internecine warfare was over when and how to sell off parts of the company, not whether to do it. Two weeks ago, management announced that it had reached a $410 million deal with Allied Corp. to sell GAF's chemical business, its mainstay since the days when it was known as General Aniline & Film, a part of I.G. Farben. The firm was seized as German property by the Government during World War II, but it was turned back to private shareholders in 1965. Selling off its chemical operations would leave GAP with little more than one radio station. Another division that makes roofing is also due to be sold. The dissidents wanted to shed the chemical division all along, but they were still pressing last week to take over direction of the company. The reason, they claimed, was that current management might not follow through with the liquidation plan.

Things are just as sticky in other major proxy battles, which sometimes sound like plots from next year's Dallas shows. In Houston, the future of Superior Oil (1982 sales: $2 billion) is being fought over by Howard B. Keck, 69, the founder's son, and Willametta Keck Day, 67, the founder's daughter. Day, who owns 4.5 million of Superior's 127.4 million outstanding shares, wants to set up a committee of outside directors to consider takeover offers for 45% or more of the company's stock, now selling at $35 but valued by analysts at $45 to $65. Keck, who controls 14.6 million shares, the largest single voting block, will have no part of that. Superior's management claims that Keek's sister is in effect putting a For Sale sign on the company and making it vulnerable to a takeover by a major oil company such as Exxon or Texaco. Day has filed suit seeking to stop Superior from holding its annual meeting in May. That would forestall the re-election of directors whom Day deems obstructionist.

One of Day's supporters in the struggle is T. Boone Pickens, chairman of Mesa Petroleum and a takeover artist. Mesa already owns a reported 3.2 million shares in Superior and plans to vote them for Day's proposals in May. Pickens sees the Superior fight as a sign of things to come. Says he: "We are entering an era of stockholder awareness."

In New Orleans, dissident shareholders are gearing up for a battle with the management of Louisiana Land & Exploration (1982 profits: $76 million, down 48% on sales of $1.2 billion). The unhappy stockholders claim the current company officials have run the firm dismally for the past several years.

Experts have mixed feelings about the proxy battles. Some believe that they are a good thing because they force managers who may have grown careless to face up to the wrath of stockholders. Says one proxy-battle lawyer: "This proliferation is part of the trend back to quality, hard work and the American way that is cropping up everywhere, from the auto industry to ,high tech."

But the positives seem to stop there. Martin Lipton, a Wall Street lawyer who is advising Trans World, thinks proxy battles are a draining waste of effort and energy. Says he: "This is the worst thing that could happen to the American economy. You might have a situation where every company is at the short-term mercy of institutional investors." Adds John Phillips, chairman of Louisiana Land: "I do not think proxy battles are a legitimate dialogue between shareholders and management."

Phillips has a point. Proxy battles frequently do little good for the companies involved or the economy as a whole. They seem mainly to distract investors and company officials from their real business and into nasty paper chases. But those who mount proxy battles also often have a legitimate grievance: corporate managers do sometimes get sloppy and deserve being called to task.

--By John S. DeMott.

Reported by Don Winbush/Kansas City and Adam Zagorin/New York

With reporting by Don Winbush/Kansas City and Adam Zagorin/New York This file is automatically generated by a robot program, so viewer discretion is required.