Master Builders

By Barbara Rudolph. Report ed by Dan Goodgame/Los Angeles and Thomas McCarroll/New York

When executives discuss a corporate merger, they become as circumspect as Swiss bankers. So it went with the merger between Allied and Signal, announced last week. Edward Hennessy Jr., Allied's chairman, along with Forrest Shumway and Michael Dingman, Signal's chairman and president, met March 5 at Marriott's Camelback Inn, a plush Scottsdale, Ariz., resort with two 18-hole golf courses, two swimming pools and ten tennis courts. Hennessy and Dingman registered under the last name of Dingman's secretary. Although the executives are fond of sports, they seldom left their rooms. When discussing the firms, they called Allied "East" and Signal "West."

Such careful preparations eventually produced one of the largest mergers in corporate history. Allied, a conglomerate with stakes in the aerospace, automotive and chemical businesses, agreed to acquire Signal, an aerospace and engineering company. The deal is valued at between $4.5 billion and $5 billion. The new company, Allied Signal, will have annual revenues of more than $16 billion. Hennessy, 57, a former Roman Catholic seminarian in the Holy Cross congregation and the son of a West Roxbury, Mass., lumber salesman, will run what will be the 16th-largest U.S. industrial company. Shumway will be vice chairman of the new company. Dingman will be named president and in 1990 will succeed Hennessy as chief executive.

The agreement stipulates that Allied (1984 sales: $10.7 billion) will pay $45 a share in cash for about 20% of the outstanding stock in Signal (1984 sales: $6 billion). The remainder of Signal's shares will be swapped, on a one-for-one basis, for those in the new company. Similarly, one share of Allied stock will be traded in for one share of Allied Signal.

The two companies first started talking in February, but only about a joint bid for Hughes Aircraft, which was soon to be auctioned off. After brief consideration, they decided that it would be a mistake to break up Hughes. Says Dingman: "It would make no sense. Like a symphony, if you sold off the violin section, it would not perform as well." At that point, the talks shifted to a possible Allied-Signal merger. At meetings in La Jolla, Calif., and Morristown, N.J., the deal came together.

The merger unites two companies with similar histories. Both Allied and Signal have been fueling growth through a string of acquisitions. Allied's sales have more than doubled since Hennessy became chief executive in 1979. He had previously worked for two celebrated conglomerate builders, Harry Gray at United Technologies and Harold Geneen at ITT. Geneen sent his former deputy a congratulatory telegram last week saying "Great work." During his tenure at Allied, Hennessy acquired nearly 35 companies. His most dramatic coup came after a long and nasty takeover battle: the 1982 purchase of Bendix, an aerospace and automotive-parts manufacturer.

Under Shumway, 58, Signal has made its share of sizable acquisitions. In 1983 Signal merged with Wheelabrator-Frye, an engineering company that was founded by Dingman, 53.

Wall Street analysts are often critical of corporate mergers because they mismatch corporate talent and know-how. But they were enthusiastic about the new Allied Signal, especially since Hennessy plans to sell some of the less profitable divisions in order to concentrate on aerospace. As the core business of both Allied and Signal, that group is expected to contribute more than 40% of total profits. After the planned divestitures, Allied Signal should have some $2.5 billion in cash on hand. "This is uncommon," says Frank Prezelski, an analyst at Shearson Lehman American Express. "The typical acquisition leaves the combined company a cripple, loaded with debt."

One question raised after any merger is how will top executives of the new firm work together. When Allied took over Bendix, William Agee, the Bendix chairman, was named Allied president. Alonzo McDonald, Agee's deputy, remained president of the Bendix subsidiary. A few days after shareholders approved the merger, both men resigned. Shumway, though, points out that Hennessy, Dingman and he have long known one another and that the merger was a friendly one. Nonetheless, he does not rule out the possibility of dissension. Says he: "It's very tough to say whether we'll have serious conflicts, though I doubt it." As a way to avoid at least one problem, all three executives will receive exactly the same pay.