Deft Defenses

Embattled managers who hope to avoid corporate takeovers can draw upon a wide array of defenses. Many have acquired exotic names: Pac-Man, shark repellent, white knight. Some are more effective than others, and none, alas, work all the time.

The first step is to hire outside advisers, including an investment bank and a law firm that specializes in mergers and acquisitions. Among law firms, New York City's Skadden, Arps, Slate, Meagher & Flom, for example, is well known for keeping unwanted suitors away. So feared is the firm's takeover specialist, Joseph Flom, 60, that 200 corporations pay fat retainers just to guarantee that Flom will work for them, and not against them, should they become takeover targets. The retainers add up to about $10 million a year.

Flom represented Allied Corp., which came to Bendix's defense after former Chairman William Agee's attempt to take over Martin Marietta failed and Martin Marietta counterattacked by buying Bendix stock. Allied bought Bendix stock so Martin Marietta could not buy enough to gain control. That made Allied a white knight.

Martin Marietta's tactic was a prime example of the Pac-Man defense, whereby a threatened company responds to a takeover bid by trying to buy up its attacker's stock. Another defense is the self-tender. A company threatened by takeover of fers to buy its own shares at prices higher than the attacker's.

Still another tactic involves creating new shares, thereby diluting the voting power of current stock. When those new shares are distributed to shareholders of record, the effect is to strengthen their control greatly. Directors of Dow Jones & Co., publisher of the Wall Street Journal, approved such a plan two weeks ago. While the company faces no immediate takeover threat, the new stock virtually guarantees that the heirs of Clarence W Barron, who bought the company in 1902, will continue to control it.

Then there are other ploys called shark repellents. One of those involves revising corporate bylaws to stagger the terms of directors so that only a few come up for election in any one year. To get a majority, a raider would have to wait at least two years.

Another maneuver is to adopt a bylaw requiring a super-majority of outstanding voting shares, say 70% or 80%, for approval of a tender offer. Reincorporating in a state with rules that favor existing management is another defense. In Delaware, certain defensive tactics, like issuing rights or options to buy shares of a company, can be approved by directors alone, without a vote by shareholders. Gulf reincorporated in Delaware from Pennsylvania, thus shielding itself at least for now against a raid by Mesa Petroleum's T. Boone Pickens Jr. Many experts question the legality of shark repellents. Dissident shareholders challenge them, charging that they amount to changing the rules in the middle of the game.