Challenge to Management

THE RAIDERS

A old phrase is gathering new meaning among U.S. businessmen. The phrase is "company raiding," but very few businessmen agree on a precise definition. Originally, the term was coined in the robber-baron days of the late1800s and bore connotations of watered stock, rigged markets, stolen company assets. Today, some businessmen use the phrase to describe shrewd investors who snap up an undervalued company with the idea of liquidating it for a quick profit; others apply it to investors who take over such firms and ram through drastic changes to improve the properties and turn in bigger profits. The phrase has been applied to Robert R. Young, Louis Wolfson and Patrick McGinnis--to anyone, in fact, who starts a proxy fight, whether for good or ill, successful or unsuccessful, or who takes over a company.

BEANS & DIAMONDS

Last week the cry of "raid" made financial headlines in New York and Chicago.

P: Manhattan Financier WALTER W. WEISMANN, 64, chairman of the Aetna Industrial Corp., rocked Chicago's staid, old Libby, McNeill & Libby food-processing firm by claiming that a group of stockholders represented by him owns or controls some 1,500,000 of Libby's 3,600,000 shares of stock. Weismann thought that the company was doing poorly profitwise, asked for changes in the board and a new board chairman. Libby President Charles S. Bridges refused, wrote stockholders that the management was preparing to fight "a raid upon this company." The stockholders' committee that Weismann represented promised a proxy fight to enforce its demands.

P: Manhattan Real-Estate Operator IRVING MAIDMAN, 57, turned up as a major stockholder in Tiffany's jewelry firm and demanded a place on the board of directors. Maidman claimed control of more than 26,000 of Tiffany's 132,451 shares, charged that the company had not earned what it should (11-c- a share in 1952, 19-c- in 1953), said the business could be improved. Tiffany's President Louis de B. Moore, who with the Tiffany family and others claims to own more than 55,000 shares, flatly refused, and got ready for a proxy fight. Faced with a battle, Challenger Maidman last week changed his tune, started talking about selling his stock to a retail organization that would try to take over Tiffany's.

Behind the scenes, hundreds of other companies--in every industry--are changing hands. They are being taken over by a new breed of profit-minded investors, who are dissatisfied with professional managers (often owners of only a small stock interest) and want to direct the firms themselves. To some businessmen the new trend is bad; they call such investors "destructive opportunists," "mortuary millionaires" who kill off companies to pocket their assets. But to a good many other businessmen the take-over trend is all to the good. They argue that it is sparking a resurgence of stockholder interest in management, forcing management everywhere to work harder, improve operations, raise dividends. Said one raider; "We are conducting a counterrevolution to the inevitable excesses of the managerial revolution." Among the new counterrevolutionaries:

P: BEN W. HEINEMAN, 41, a Chicago lawyer, who with a group of associates recently spent 18 months secretly buying up stock in the Minneapolis & St. Louis Railway, finally waged a proxy fight to win control. When Heineman took over, M. & St. L. stock was selling at 24. He declared a one-third stock dividend; the stock is now 22.

P: Manhattan's LEOPOLD SILBERSTEIN, 51, who started out as a "professor of sick companies" in Germany during the 1920s, made his first U.S. raid by buying 75,000 shares (of 148,000 outstanding) in the small, shaky Pennsylvania Coal & Coke Corp. With that as a base, he diversified into gas and oil, went on to take over companies making cables, power shovels, and cranes (Industrial Brownhoist Corp.). With cash from his growing empire (now called Penn-Texas Corp.), he recently bought 80,000 shares of machine tool maker Niles-Bement-Pond, whose stock was selling a few points below the $25 per-share value of its working capital. Silberstein eventually got 51% control and forcibly installed himself as president.

P:Manhattan's PENNROAD CORP. which has joined with other investors to raid and reorganize sick companies. In 1952 Pennroad with Harris Upham and others secretly started buying stock in South America Gold & Platinum Co., which had a cash kitty of $4,000,000 (about 50% of its net worth), two years later had enough stock to oust the management. Last year Pennroad used South American's kitty to buy another gold company with $6,000,000 more in the till, then merged the two, diversified into cement and pipelines. As a result, South American's profits on 1955's first six months' gross are almost as high as for all of 1954. Another Pennroad venture, this time with South American Gold: buying the $31 million National Department Stores chain, whose stock was, selling at only $13 a share, while the working capital per share was $24.

P: Los Angeles' NORTON SIMON, 48, who built Hunt Foods into the country's fourth biggest canner of fruit and vegetables (1954 sales: $66 million), has used his profits to move into other fields. In 1946 Simon went into Ohio Match, whose stock was selling at some $2,500,000 below net worth. He had so many good ideas that the directors offered him a voice in company policy without a fight, saw their profits soar. Later, to get wood supplies for Ohio Match, he invested some of its cash in the Northern Pacific Railroad, which had big timber tracts, turned up with control of 14% of the stock. He won a seat on the board, forced a change in the way the company was leasing its oil lands, later sold most of Ohio Match's holdings for a fat profit. Simon also moved in and got control of Harbor Plywood Corp. and Wesson Oil, is now going into the McCall publishing company. In each case, he calls his opera tions "a technical service to management," rarely fights for complete control unless the company scorns his ideas.

DEATH & TAXES

The new take-over groups occasionally set their sights on giants, but more often they choose their targets among the hundreds of second-echelon firms. Many of them are companies on the New York stock exchange whose stock is selling below the per-share value of their working capital. Thus, if such a company were liquidated, stockholders would be paid more in cash than the market price of their stock.

At times, an investor need not even go into the open market to pick up an undervalued company. The owners themselves may be only too glad to sell out. High corporation taxes may block further company growth; competition from bigger firms may be slicing off once-secure markets. In one-man companies., stiff inheritance taxes may worry the founderowner; he is glad to sell out rather than pass on the business to his heirs, who in turn may be forced into a crash sale to pay death taxes.

When raiders have to fight for a company, they buy stock secretly, spread purchases over a period of months to avoid boosting stock prices. The stock is usually registered in a broker's name so that the raid is kept dark until the reaiders are ready to pounce.

LIQUIDS & POWDERS

Sometimes raiders buy barely enough stock to wangle a seat on the board of directors. More often, they shoot for working control. Once they win, they may make any move to make the company show a profit; they may merge, reorganize, diversify, even liquidate the firm entirely, and split the assets. In 1948, for example, Manhattan's Graham Newman Corp. paid out $47.50 a share for some 70,000 shares of Atlantic Gulf and West Indies Steamship Lines, a holding company for two small Caribbean shipping firms. Graham Newman tried operating the company for five years before it finally gave up. By selling out, Graham Newman got the equivalent of $117 a share for its stock, for an overall profit of almost $5,000,000 on the deal.

The mere possibility of a raid can mean expensive trouble for an entrenched management. Last year a financier named Hyman Sobiloff tried to buy up New Jersey's Dixon Crucible Co., 128-year-old manufacturer of pencils and other graphite products, for $70 a share, some $17 a share less than the net quick assets of the company. Dixon's management formed a committee to buy up the company's stock themselves, got help from the employees and the employees' credit union. The company thwarted Sobiloff, but it and the employees had to spend more than $500,000 to do so. Another company, New York &Honduras Rosario Mining, was faced with the same situation. It used its cash reserves to buy off a group of raiders led by a Manhattan lawyer named Leonard Sheriff, who had bought a substantial block of the stock and demanded liquidation; the company bought the raiders off by paying them up to double their original stock-purchase price at a cost of nearly 50% of the company's working capital.

CATALYST IN CHICAGO The man who has probably used takeover tactics to best advantage is Chicago's J. PATRICK LANNAN, 50, a silver-haired, nimble-tongued Irishman (see PRESS). He made a killing in the '30s by buying up joint stock land bank bonds, when no one wanted them, for as little as 10-c- or 15-c- apiece, sold them out at peak prices of up to $150. Then he did the same with utility bonds, used the cash to start taking over companies.

Since 1944, Lannan and his associates have bought at least 18 companies through raids, often reorganized their managements from top to bottom, and insist that in each case they have helped the company. One of Lannan's biggest coups was in International Telephone & Telegraph. After I.T.T. President Sosthenes Behn heard that a group was trying to get control, he called in Lannan to see if he knew any of the group. Lannan did, and was able to win a compromise that landed him on the board and made him the strong man of the corporation.

In 1952 Lannan bought the stand-pat Western Railroad Supply Co., which makes 90% of all railroad-crossing gates, pushed it into new fields, e.g., an automatic parking lot with a coin-machine gate, to expand its markets. Since then he has taken over the Automatic Canteen Co. and New Orleans' McWilliams Dredging Co., bought Denver's molybdenum-refining S. W. Shattuck Chemical Co., helped Promoter Arnold Johnson buy the Yankee Stadium and the Kansas City Athletics Baseball club, and reorganized several small utility and railroad companies around Chicago, including the Chicago North Shore railroad, which he hopes to turn into an investment company, with good use of the losses on its books through tax savings.

Like Los Angeles' Norton Simon, Investor Lannan dislikes open warfare, has never been in a proxy fight. But he is still tough enough to bull his way into almost any company with a sleepy management. Sometimes he negotiates with a company from the start; but often he prefers to buy control, then send the officers a polite note asking for a meeting. The management is first stunned, then outraged. It does no good. Lannan is in. He also claims that stockholders in his companies have benefited proportionately. Chicago's North Shore Gas Co. stock has zoomed from around $22 a share in 1949, when he took over, to nearly $80 a share.

By any name, company raiding or company revitalizing, Chicago's Pat Lannan thinks that his operations--and those of many other raiders--are good for U.S. business. With stiffer competition and the new stockholder interest, he says, a much stronger business management is growing up. Executives who are tuned to stockholder desires are faster to expand into promising new fields, less likely to hoard capital against some distant and unlikely rainy day. Says Raider Lannan: "Raider" is a negative word coined by the frightened managers. "For every Bob Young-New York Central fight and every Wolfson-Montgomery Ward fight there are thousands of management changes going on today. Every management change sets off the reorganization of still other companies. This is a rebellion of the owners."

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