How Goodyear Won the Anti-takeover War?

When Goodyear found itself as a takeover candidate, the company adopted a portfolio structure-type strategy that helped to effectively counter the attack   

In October 1986, after wide speculation that Goodyear could be a prime candidate for takeover, the company announced a restructuring programme. At the time the shares of the company were being traded at $32.75. Analysts were of the view that restructuring would push the share of the company in the range of $45 to $52. The company had  $109.3 million worth shares outstanding on a book value of $34 a share.

In November 1986, Sir James Goldsmith, an Anglo-French financier, chairman of the England-based General Oriental Investments Ltd. and corporate raider proposed to pay $49 per share for the 88.5% of shares that he did not own in Goodyear. The deal came to $4.7 billion. Further, Sir James said that he was not interested in receiving any greenmail.

What initiated the Attack?

Goodyear being a profitable company had a good cash flow. The cash flow could be converted into profits by cutting back in areas such as advertising and research & development. Further the market value of the company had left it very vulnerable to bids of corporate raiders.

The Defence Strategy

Goodyear countered the threat of the takeover by speeding up the restructuring programme, which included the repurchase of 20 million outstanding common shares and sale of three major units. The company also launched an active public relations campaign and applied political pressure to enlist the support of political leaders and labour unions.  The fate of the company now only depended on its ability to boost its stock price above $49, the price offered by Sir James.

The Chairman of Goodyear, Robert Mercer insisted that Goodyear resisted the takeover in the best interests of the company, its shareholders, employees, suppliers, creditors and last but not the least, the customers. The company, as a part of its restructuring plan offered early retirement to 4,900 salaried employees and announced rigorous cost cutting effort such as layoffs and other curtailments. The company closed two of its plants that resulted in the termination of around 3,200 hourly and salaried employees. This apart, the company slashed capital expenditures of its tyre related products to the tune of $275 million. The company left no stone unturned to protect itself from the hostile takeover.

The Results: Positive & Negative

After many anxious moments, Goodyear continued to be independent. The political pressure and stiff opposition from Goodyear forced Sir James to stop his bid. However, it had to pay a heavy price, which considerably weakened the company. Sir James was “persuaded” to sell his stock to Goodyear and in the process made a clean profit of $100 million in “greenmail”, emerging richer than he would have been otherwise. The company acquired 12.5 million shares for $613 million while the rest of the shares were bought by arbitrageurs. The company purchased back their shares for $56, i.e. the raiders made $7 for every share they had purchased four months back at $49.

The company also made a tender offer for an additional 40 million shares at $50 per share. The two purchases totalled 48% of the company’s outstanding shares. In order to reduce its debt burden, the company sold its oil and gas units, its aerospace units and its wheel-manufacturing unit, which was of 25% of the company’s assets. Sales of the company for fiscal 1986 reduced to $8 billion from $9.6 billion in 1985.

Ironically, Goodyear ended up doing a number of things Sir James would have done if he had succeeded in the takeover. Goodyear’s debt increased from $2.6 billion to $5.3 billion. Its planned investment decreased from $300 million to $270 million, while research expenditure went down from $1.6 billion to $1 billion. A total of $2 billion worth of assets were sold. The restructuring led to 12% downsizing and 4000 layoffs.

The shareholders of the company disputed with the company over greenmail payments. They were of the view that greenmail had prevented them from cashing in on the premium price that the company paid to the takeover groups. The company demanded shareholders approval for greenmail, poison pills and parachutes.

Analysis

From the shareholder’s viewpoint, there cannot be anything like a “hostile” takeover. The acquirer offers a premium over the prevailing price, which makes the bid quite attractive to shareholders. At a macro level, more often than not shareholders take on a heavy burden either to fight such takeovers or to pay for them.

Conclusion

What enabled Goodyear to resist the attack? It was its portfolio structure-type strategy that ultimately bailed the company out to remain independent.

Related reading  

“Hostile Corporate takeovers and public interest”: www2.bw.edu