One CEO's battle to save his small public company from a hostile takeover.
Bert Althaver's battle to save his small public company from a hostile takeover
The first thing you feel when a takeover artist comes after your company is anger. The second may be fear. Walbro Corp. had spent 15 years developing technologies, markets, and international business relationships. Now, UIS Inc. -- in the view of Walbro CEO Bert Althaver -- was out to steal the fruits of all that investment. To Althaver, what was at stake was Walbro's very survival.
The hostile takeover has come to small business. -- E.W.
Cass City, Mich., a good two hours north of Detroit, lies far enough off the beaten path that Federal Express packages usually don't arrive there until the afternoon. One such package, unexpected and ominously thin, greeted Lambert Althaver when he got back from lunch on Monday, August 31, 1987. Althaver, chairman and chief executive of Walbro Corp., knew immediately what it was. "My heart started beating faster," he recalls. "I said to myself, 'Good Lord, someone's coming after us.' "
Inside the envelope was a copy of schedule 13D, filed with the Securities and Exchange Commission, stating that a privately held New York City-based company, UIS Inc., had accumulated more than 5% of Walbro's common stock. Attached was a letter from UIS president Andrew Pietrini, wanting to meet with Althaver to "explore areas of mutual interest that may be beneficial to both companies." Translated from execuspeak, the letter read in effect: We want to buy your company, whether you like it or not. Pietrini advised he'd call later that day. Althaver had no intention of taking the call. Instead, he phoned his lawyer.
The next day, Tuesday, September 1, Althaver phoned Pietrini and told him he wasn't interested. Then he flew to a trade show in Europe. Pietrini persisted, calling Walbro a number of times during the week before sending a second letter dated September 4. In it, he sought to "present Walbro with an attractive opportunity to strengthen its business and reward its shareholders." He threatened, "If you do not wish to discuss maximizing value for your shareholders in a timely fashion, we will have to pursue other alternatives immediately."
Pietrini by then had those alternatives in place. On September 9 UIS launched a hostile tender offer to buy 60.8% of Walbro's shares at $27.25 per share, a 20% premium over the $22.75 each share had commanded before the 13D filing. (Stock prices in this article do not reflect a three-for-two split in August 1988.) Althaver, in Europe, where he was already spending half his time on the phone discussing the threat with lawyers back in the States, knew it was time to cut his trip short. He flew to Chicago on Thursday, September 10, to meet with his lawyers, his board, and the investment bankers from Goldman, Sachs & Co. hired to defend the company.
That Thursday night Althaver sat down with two Goldman Sachs representatives to get acquainted before their Friday meeting. Five minutes into their chat, one of them, Eric Fornell, advised him: "We want you to know our fee for defending you will be $1 million."
Bert Althaver is not the only small-company CEO getting surprise packages by Federal Express these days. More and more small companies are getting caught up in the takeover-buyout-merger frenzy remaking the face of corporate America. The costs to these companies are high. Many small companies pay lawyers' fees of $75,000 and up to craft "poison pills" (also known as shareholder-rights plans) designed to deter would-be raiders. Throw in some advice from an investment banker against a potential threat, and you easily double the bill, while an active defense can quadruple it. To a small company, such outlays can spell the difference between a clean balance sheet and one loaded with debt. Plus, such professional advice offers few guarantees -- as Bert Althaver learned late in the game. "I was told by the people at Goldman near the end of the battle that only 5% of companies attacked survive in the form they had going in."
While many defend takeovers as a healthy goad to the restructuring of moribund corporations, others view them as predatory perversions that only harass managers and saddle their companies with debt of ruinous proportion. Less contested in this debate is the new reality of powerful, interrelated economic forces driving the buyout binge. These include the growing clout of the investment-banking industry, ever more potent computer technology to ferret out acquisition targets, the stock-market crash, the decline of the dollar, the rise of the junk-bond business, America's yawning trade deficit, the increasing fragmentation of markets and globalization of trade, and the innovative strategies of many smaller companies.
Walbro is a case in point. A maker of fuel-system components (carburetors, electric fuel pumps, and so forth) for automotive and small gasoline engines, the company has a strong engineering and technology base. It has earned Detroit's attention and respect. It sells to major auto manufacturers in the United States, Europe, and the Far East and is engaged in joint ventures with five of them. Between 1983 and 1988 Walbro saw its sales triple -- from $43 million to $132 million. Profits rose from $1.8 million to $5.7 million.
Though Walbro is tiny by past buyout-target standards, the trend is toward takeovers of even smaller companies. Of the 304 leveraged buyouts in 1988 recorded by Buyouts, a newsletter published in Needham, Mass., 35% involved companies with less than $50 million in sales, and a number of those were in the $10-million range.
The takeover pressure on smaller companies will continue to increase, believes Allen Michel, a professor of finance at Boston University's School of Management, who has written two books with colleague Israel Shaked, Takeover Madness and The Complete Guide to a Successful Leveraged Buyout. Says Michel, "A lot of small companies have proprietary technology, outstanding R&D, products that fit a particular marketplace, or distribution channels that are desired by others."
Michel and Shaked are advisers to a number of small companies that have grown increasingly scared by the threat of being taken over. They say that as recently as two years ago such a prospect was of little concern to their clients. Shaked describes a typical scenario: "After a number of rounds of financing, the founders' holdings get increasingly diluted. They own maybe only 10% of the company. Meanwhile, they've been working on a very sophisticated product for a few years and losing money. Then suddenly they come out with a breakthrough technology, and it fits nicely with a larger competitor's."
They are ripe for the picking.
Walbro Corp. has always seen itself as a fiercely independent and innovative company, its entrepreneurial roots sunk deep amidst the barns and beet fields of rural Michigan. The company was formed in 1950 by Walter Walpole, whose formal education ended with a severe illness his freshman year in college. He rose from messenger in a Chicago bank to secretary-treasurer of the carburetor division at Borg-Warner Corp. After the war, Walpole left Borg-Warner and set out to live the dream he had privately nurtured for years.
That dream partook of the larger American one: the postwar growth of suburban, leisure-time affluence. Power lawn mowers, garden tractors, outboard motors, and chain saws, Walpole believed, would become as ubiquitous as cars and radios. He would make the fuel systems for the engines powering these devices. Walpole was 45, had five children, had cashed in his pension, and had taken out a second mortgage on his house.
Cass City in the early 1950s was a rural town drifting into eclipse, its local merchants desperate to bring in some industry. When they heard of Walpole's venture, they invited him to make a presentation. The meeting's mood turned tense when the town's leading banker interrupted Walpole in mid-speech, announcing to the assembled, "This man's bankrupt, and he doesn't even know it."
The banker stalked out of the room, never again to speak to the merchant who had introduced Walpole to the group. Walbro, however, did come to Cass City in 1954, after an insurance company loaned Walpole money for a one-story cinder-block building. To raise working capital, he went around town and sold $25,000 worth of stock in the fledgling company, which eventually made some local folks rich. A $1,000 investment in 1954, excluding dividends, is worth $150,000 today.
In 1957 the company moved into the automotive aftermarket, and in 1972, with sales at only $10 million, Walpole went for broke and took Walbro international, setting up a joint venture in Japan. Today Walbro, its joint ventures, and its subsidiaries supply such established auto manufacturers as Hyundai, Saab, Jaguar, and Detroit's Big Three. Walbro supplies Ford Motor Co. with 45% of its fuel pumps, Chrysler Corp. with 75%. In the early '80s automotive carburetors gave way to electronic fuel injection, but the company had seen it coming and was ready. Walbro has since taken away market share in electric fuel pumps from the century-old European titan and fuel-injection pioneer, Bosch. The company has also been chosen to design the fuel system in a major international joint venture to produce the Orbital two-stroke engine, an efficient power plant widely considered the prototype internal-combustion engine of the twenty-first century.* * *
Sitting in his 26th-floor office, high above the throb and pulse of midtown Manhattan, John Sheldon oozes self-assurance. The baritone timbre of his voice matches his assertive style of dress: dark-blue suit and brilliant-yellow tie offset by a pale-blue shirt. Sheldon, now 34, was the vice-president at Goldman Sachs who led the defense of Walbro in its fight against UIS. "More Walbros will happen in the future. Small companies will be more active takeover candidates than in the past," he says with conviction.
"Buyers are focusing more and more on acquisitions that will give them a competitive edge." Small companies, Sheldon says, tend to fit that bill. "Small companies tend to have features that are more attractive to an acquirer. They're cleaner; they're better run; they have lower overhead; they're more focused." Walbro, Sheldon argues, is one such "franchise." Its products, considered unique, are sought by established customers.
Sheldon proceeds to offer a more subtle assessment regarding small-company vulnerability. "Smaller companies tend to have extraordinary events in their lives that affect them profoundly because they are the creatures of their founder's being. The founder gets fired; the founder gets divorced; the founder dies. This is a dynamic that you pay attention to."
On January 1, 1987, Walter Walpole died, and UIS's Andrew Pietrini paid attention. "When the family took the stock over, we thought it would be to the benefit of everyone if we talked," he recalls. UIS's strength was manufacturing; Walbro's long suit was engineering. Between the two companies, Pietrini saw "a good fit." In May 1987 UIS began buying Walbro stock through its investment banker.
A good fit to Andrew Pietrini looked like craven opportunism to Bert Althaver -- who, in addition to being CEO, was Walter Walpole's son-in-law. He figured UIS was after Walbro's technology and markets, which his company had spent 15 not always lucrative years developing. And he wasn't going to stand by and see the fruit of that investment taken away. Specifically, UIS makes aftermarket mechanical fuel pumps, rapidly being replaced by electric fuel pumps -- Walbro's niche. In addition, Walbro has global exposure and supplies the OEM (original equipment manufacturer) market, advantages that UIS lacked.
When the 13D filing hit Althaver's desk, Walbro managers scrambled to find out what they could about UIS. They might as well have been sparring with a ghost. UIS was privately held. When the tender-offer filing arrived 10 days later, finally providing some financial information on Walbro's suitor, Althaver stiffened in his resolve not to sell the company.
To him, UIS appeared to be in the business of buying and selling companies. It lacked a focus. It owned 14 companies in businesses as diverse as candy making and electrical supply. Walbro treasurer Gary Vollmar noted that UIS, three times larger than Walbro, invested only 50% more per year in capital spending. For Walbro, heavily committed to R&D, this was a dark omen. Pietrini dismisses that fear, citing one factory UIS completely retooled when it just as easily could have shut it down. "We spend money where we need to spend it," he says.
Vollmar rejoins, "Look, these acquisitions don't pay for themselves. The way you pay for them is you cut expenditures, you cut people, and you consolidate." Compounding the frustration was the fact that Walbro had done well by its shareholders. Between 1981 and 1987 the stock had appreciated 1,000%. Vollmar's sense of fair play, like Althaver's -- like everyone else's at Walbro -- had been threatened. "I feel that what we had here was a group of people who were out to steal the company at an unfair price and pillage it after they had it."
The takeover threat couldn't have come at a worse time for Walbro, which was in the midst of drawing up a five-year plan and was also making a strategic -- and friendly -- acquisition of Whitehead Engineered Products Inc., in Meriden, Conn. The UIS deal cast an immediate cloud over that. "We were told by Whitehead," Vollmar says, " 'If you're acquired by UIS, we don't want to have anything to do with you.' "* * *
On the morning of Monday, September 14, 1987, a team of investment bankers from Goldman Sachs arrived at Walbro. For the next four days they worked from 6:00 in the morning until late at night, studying the company, computing future cash flows and market prospects to arrive at a sound idea of Walbro's potential worth. Based on a confidential per-share figure that Gary Vollmar claims "wasn't even close" to UIS's offer, Goldman pronounced the $27.25 per-share bid "inadequate."
Goldman, meanwhile, had told Walbro that the company would inevitably be sued by stockholders eager to cash out and by UIS wanting much, much more. Hire the best to defend you, the firm advised. Althaver signed up the noted mergers-and-acquisitions law firm of Wachtell, Lipton, Rosen, & Katz. The fee would be $400,000 -- modest compared with those charged Fortune 500 companies, which often range into the millions.
By now the tender offer had drawn another layer of middlemen into the hunt. These were the arbitrageurs who trade stocks short-term, betting on potential takeovers. With the "arbs" now speculating, Walbro stock was in play, jumping from $22.50 in late August to $30 when news of the tender offer broke on September 9.
Some 3.5 million shares of Walbro common stock were outstanding, and Walbro's task in the 20 business days before the tender offer expired was to put 51% of those shares in friendly hands. Goldman Sachs, through a computer model, calculated that about 1 million of the shares, roughly 30%, had already fallen into the hands of the arbs. In 20 days, when the clock ran out and the game was over, those shares would be tendered to the highest bidder -- presumably UIS.
But Andrew Pietrini had discounted the bond that Wally Walpole had forged with the people of Cass City. Much of the original stock that he had sold to residents 33 years earlier remained in the same loyal hands. This block comprised about 13% of the outstanding shares. When Walbro asked these shareholders to sign an agreement not to sell their shares for 15 months, virtually all complied. The temptation to do otherwise must have been intense by now. Many of these investors had paid a dime a share for stock the market now valued at about $30. One Cass City resident did unload $120,000 worth of Walbro stock -- but he sold to a neighbor in a private transaction.
The community's stake plus the 17% held by Walbro's managers and directors put roughly 30% of Walbro's shares in friendly hands. How could the company control another 21%?
Two options presented themselves, and neither seemed palatable. One was to take the company private in a leveraged buyout. But that would only saddle Walbro with more debt, when it was already borrowing for future expansion. The second course was to pursue a self-tender, buy up shares on the open market and retire them -- take the shares out of circulation -- in order to shrink the total pie. For Walbro to simply buy and hold the stock would have been fruitless. Corporate, or treasury, stock does not carry voting rights.
Buying back and retiring enough stock -- 1.5 million shares -- for a successful self-tender meant taking on a mountain of debt with no clear assurances of keeping control. Walbro itself would become another player in the bidding war, a contest that could raise the price beyond Walbro's means and force the board to accept a higher -- and adequate -- offer.
The company would then be lost for sure.* * *
The stock-market crash of 1987 made apparent the power of technology to magnify the greed and fear that lurks within the financial system. October 19 will be remembered not as the day the U.S. economy collapsed -- for it didn't. It will be recalled as the day the computers, hell-bent on program trading and insuring portfolios, ran amok.
Coexistent with that legacy are the enormous databases that Wall Street commands. "There are now powerful technologies for gleaning financial information," says Martin Sikora, editor of Mergers & Acquisitions magazine. "The computer has put more information into the hands of more people." Publicly traded companies, no matter how obscure, can be called up instantly on computer screens, ready for scrutiny and imaginary breakup by the greenest of B-school recruits. "The whole range of companies is combed through very carefully," says Martin Carmichael, of Goodwin, Procter & Hoar, a Boston law firm. He helps companies devise strategies for dealing with unfair takeover tactics. "There are so many people out there now looking for deals."
What's more, the money available to do such deals now dwarfs the number of deals that would be worthwhile. Boston University's Allen Michel calculates that there is about $250 billion in leverage currently available in the country for buyouts. "In the past these investment and merchant banks have had a lot of deals flow their way," he says, "but now the deal flow has slowed down compared with the money available for investment. Now, they have to go out and find the deals."
The Japanese, meanwhile, have invested widely in a number of U.S. investment and merchant banks. Take, for example, Walbro's former defender, John Sheldon, who now works for The Lodestar Group, an LBO firm that is partially owned by Yamaichi Securities, Japan's fourth largest brokerage house. The name on his business card is in both English and Japanese.
"We see a sizable interest by the Japanese in certain cross-border affiliations," Sheldon notes. "There's a willingness to invest in smaller capitalization companies. They do it for the access to technology and to markets. They also see a great yield on their investments. These will be friendly deals," Sheldon claims, dismissing cries of increasing Japanese ownership of U.S. assets as the kind of xenophobic talk "that sells a lot of newspapers."
Others aren't so sure. "We see in many industries a grave worry that foreigners will come in and take over," Allen Michel says. "In a lot of cases, Japanese companies feel this is an opportunity to buy America cheap." When Michel and Shaked were promoting their first book, Takeover Madness, they signed copies at a Boston bookstore. The preponderance of buyers that day were Japanese executives attending a Harvard Business School course. Michel recalls asking them, "How come you guys are interested in hostile takeovers? You don't do them.
"The response I got was, 'Not yet.' "
John Sheldon's job was to put himself in UIS's shoes and try to psych out what Andrew Pietrini was really after. Then, within that mental construct, Sheldon and his Goldman crew could probe for weaknesses. They identified three.
First, the tender offer of $27.25 a share appeared inadequate when the market almost immediately priced the shares at $30. UIS made noises about sweetening the offer -- provided Walbro would sit down and talk. Walbro replied, "We don't negotiate through The Wall Street Journal."
If UIS had unilaterally bumped the price, it would have kept the pot bubbling and maybe brought in another bidder. That, in turn, would have ratcheted the price up further and really put the screws to Walbro management, which had a fiduciary responsibility to consider any bid that could be construed as fair. "If they had increased the offer to the market price," Gary Vollmar recalls, "that would have put an extreme amount of pressure on us -- and there already was a lot." But UIS didn't raise its offer.
Second, UIS initially offered to buy only 60% of the company. That confused stockholders. What would happen to the 40% who didn't sell their stock to UIS, which is private? Once UIS had control, would these shareholders be out in the cold? Walbro was lucky that UIS didn't immediately offer to buy 100% of the shares.
Third, UIS, in making a mandatory antitrust filing with the Federal Trade Commission, failed at first to provide adequate information. On September 23, 6 working days before the tender offer was due to expire, it was extended by another 10. Walbro had a reprieve. The extra time was a godsend.* * *
Walbro and Goldman devised an end-run strategy. Instead of trying to shrink the number of shares outstanding, they would expand the pie by creating 350,000 shares of preferred stock, convertible into 1 million shares of Walbro common. The number of common shares outstanding would thus rise from 3.5 million to 4.5 million. That preferred-stock issue would then be sold to a friendly party -- whom Walbro desperately needed to find.
The deal would thus roughly double the number of shares held by supporters of Walbro management to about 2.1 million -- about 46% of the pie. To tip the balance, Walbro would go out on the open market, buy up another 333,000 shares, and retire them, shrinking the pie to fewer than 4.2 million, putting majority control in friendly hands.
As the final step of this strategy, Walbro would turn around, buy back the preferred stock, retire it, and try to pay off the debt incurred. "We needed to go on the offensive to slow UIS down," recalls Forrest Walpole, a Walbro vice-president and Walter Walpole's son. "We had to find a way to keep the shareholders from panicking on us."
On September 22 Goldman Sachs produced a list of about 10 institutions that might be willing to buy the newly issued shares of preferred stock. One by one, they declined. Seven of them replied that they weren't even interested in reading the offering. Gloom set in at Walbro. "That was our darkest hour," Gary Vollmar remembers.
With little time to spare, Walbro started beating the bushes on its own for friendly help. The company talked with some commercial banks that had loaned it money in the past. They were interested, but federal law strictly limited the size of equity positions these banks could take. The company also talked to Mitsuba Electric Manufacturing Co., one of its joint-venture partners. Mitsuba was about to go public and worried the deal could gum up its initial public offering. Walbro called another joint-venture partner in Australia, Ralph T. Sarich, developer of the Orbital engine, but he thought Walbro's stock at $31 was too pricey. Walbro executive vice-president Robert Walpole, another of Walter's sons, flew to Germany one day and returned the next after talking to a wealthy investor who knew the automotive industry. He was interested, but noncommittal.
By September 24 Goldman Sachs's long list was suddenly short: Prudential Insurance Co. of America and General Electric Credit Corp. Prudential, practiced at doing short-term bridge loans like this one, expressed a vague interest. GECC, eager to get into what it saw as a lu-crative market, decided to bite. Goldman Sachs summoned Walbro managers to New York City on Friday, the 25th, to meet with GECC. At midnight they got down to hard bargaining, which carried on through the weekend until Sunday evening.
Walbro insisted on the right to redeem the stock -- buy it back from GECC and retire it as soon as possible. It had to signal its loyal shareholders that the deal would not dilute their holdings. Otherwise, they might panic and unload. Others would simply sue.
On Monday, September 28, GECC's board approved the deal. The following day Walbro's board met for nine hours and did likewise. The day after that, GECC had Walbro preferred stock, and Walbro had $35 million from GECC. Walbro used the money to complete the acquisition of Whitehead Engineered Products, to buy back shares on the open market, to pay expenses of the takeover defense, and to pay some general operating expenses. Within two months Walbro had secured more permanent financing to pay off what amounted to an extremely expensive short-term loan.
GECC's preferred stock carried a dividend -- in effect, interest -- which began at prime and jumped three points after the first six months and every three months after that up to 15%. GECC also charged a structuring fee for the deal: $1.5 million.* * *
John Sheldon sees no reason why the takeover frenzy won't continue. "I don't think fewer people will go public, but those who do are going to have to have their eyes wide open," he says. Such wariness takes different forms. For example, California venture capitalist Tom Perkins recently created a $1-billion "white-squire" fund to help protect seemingly undervalued small high-technology companies from the threat of takeovers.
In the past two years many leading biotech firms in the United States have put poison-pill defenses in place. Among them is minuscule Cambridge BioScience Corp., a Worcester, Mass., medical-products manufacturer with $4.2 million in annual sales and no earnings yet. Adopting a poison pill cost the company "tens of thousands of dollars," Cambridge BioScience CEO Gary Buck says. "We've made major investments in technology and driven that technology to a point where we are starting to see some success." Buck, like Bert Althaver, doesn't want others profiting unfairly from his hard labor. He fears midsize companies especially. "The way you insulate yourself against a bigger guy is you use excess cash to acquire a smaller company that gives you another dimension." Buck calls this strategy the Pac Man scheme.
Jim Lyons almost saw his company, Bio-Medicus Inc., in Eden Prairie, Minn., gobbled up after the stock-market crash hammered its shares from $9 down to $3. BioMedicus's blood-circulation pump, used in heart-by-pass surgery, was for a time considered a gadget. "Then suddenly it came to be seen as a dominant technology for years to come," he relates.
Lyons then received half a dozen casual inquiries from larger companies to buy Bio-Medicus, which has annual sales of $18 million. In each case interested parties told him that the market was overpricing his company. They'd be happy to relieve him of it -- at a discount. "When the stock was at $4, somebody would offer $2," Lyons recalls. "Then the stock went to $6, and somebody else came along and offered $3." Medtronic Inc., a $700-million-a-year medical-technology company, already held some Bio-Medicus stock. When it began buying more, Lyons negotiated a standstill agreement with Medtronic, limiting it to no more than 9.9% ownership of his company for the next five years, but appeasing it by allowing it to buy up to 20% if Bio-Medicus was ever put in play. This agreement alone cost him $50,000 in lawyers' fees.
The allegedly overpriced Bio-Medicus stock is now at $14 a share, and Lyons -- with poison pill in place and another $100,000 poorer -- feels that he has escaped the sharks for now. Asked if he has any regrets, Lyons quickly replies, "I sure do. I wish we were a private company."
While staying private may appear more attractive to small companies, it is not always what it's cracked up to be. Entrepreneurs "often feel great pressure from their investors," Boston University's Michel says, when it comes to reporting results or cashing out. Moreover, taking a company public lends legitimacy and eases the capital-raising process, given standardized public-disclosure requirements.
Michel's colleague, Israel Shaked, adds that a small public company's best defense often lies within. "The more sophisticated the business, the more leverage management has." It is not uncommon now to find small technology-driven companies outfitting their top scientists as well as their top executives with golden parachutes, Shaked says. This costs nothing -- that is, until a takeover is launched.
But the leverage that talent can provide is lessened as a company matures, John Sheldon suggests. While partnerships, by definition, are shaped in the images of the partners "and end theoretically when the partners die, a corporation never ends." Come hell, high water, or hostile takeover, a corporation is obliged to endure for the benefit of others -- namely its stockholders. Where does that leave Walbro?
Walbro on paper is a corporation, but there the resemblance fades. First there are the family connections between most of Walbro's top executives and the company's founder. Then there is the company's belief, expressed by employees from CEO Althaver on down, that a corporation's duty extends beyond its immediate shareholders to comprise a larger group: its "stakeholders."
Forrest Walpole reflects on the notion this way: "No one is looking at the good we provide to the community, which was clearly my father's viewpoint. We give people jobs that create some meaning in life, and we think serving the wider community is what business should be all about."
UIS knew after the GECC deal that it had to counterpunch swiftly in order to keep Walbro in play. On October 5 it sued Walbro in Delaware to block it from using the $35 million from GECC to defend itself. Because it was now litigating in another state, Walbro had to hire another set of lawyers. The following day the court ruled in Walbro's favor, refusing to hear UIS's case, and the end was in sight.
Three days later UIS ran up the white flag and asked to disengage. Walbro executives flew to New York on Sunday, October 11, where they met with their counterparts at the offices of Wachtell Lipton. Althaver, however, did not go to the meeting; Walbro wanted to hold him in reserve should the negotiations get sticky. Pietrini felt snubbed. UIS held a club over Walbro's head in the form of the lawsuits it had filed. It could tie Walbro up in court at great cost. Walbro had leverage because UIS owned 287,700 shares of Walbro's thinly traded stock. By dumping those shares on the market, UIS would depress the price and possibly lose money. Walbro could then swoop in and repurchase its shares cheaply.
Immediately the negotiations faltered when UIS demanded that Walbro make UIS its exclusive distributor for its aftermarket electric pumps for 10 years -- and sell the pumps to UIS at cost. The Walbro negotiators at first thought they were joking.
As the smiles faded, the Walbro managers, disgusted, got up and left their investment bankers to take over the negotiations, which carried on fitfully before breaking down at 8:30 p.m., only to be revived by a late-night phone call from one of Walbro's lawyers to a personal friend who also happened to be the UIS investment banker's attorney. That jump-started the negotiations, which dragged into the next day before faltering again late in the afternoon. "By now, we had the sense that egos had really gotten involved," Forrest Walpole recalls. "Our investment banker seemed intent on letting UIS's investment banker know how smart he was. It was time to cut through all that and let one businessperson talk to another."
Around 7:00 p.m. Althaver called Pietrini, and they talked for about half an hour. UIS, fearing possible lawsuits from disappointed takeover speculators, wanted an across-the-board indemnity, guaranteed by Walbro. Althaver, by now up to his eyeballs in lawyers, refused. He did, however, give a little on reaching an agreement for UIS to distribute Walbro's fuel pumps. The two men also settled on a price and timetable for UIS to sell its shares back to Walbro. UIS, which had paid an average of $22.15 per share for its 8.6% stake in Walbro, would sell them back to the company for $25.50 each, or a total cost to Walbro of almost $7.3 million. Walbro ensured UIS a profit on its aborted raid. UIS spared Walbro the nightmare of a protracted court case.
The lawyers began drafting the disengagement language, but failed to finish before running out of steam at 3:30 a.m. Althaver, weary, looked around for a hotel in the neighborhood and could find only a not-so-modest establishment called the Helmsley Palace, where he slept for all of three hours. His room that night set him back $250.
The lawyers' work again consumed all of Tuesday, October 13, 1987. By early evening they were done, and that is when Bert Althaver finally met Andrew Pietrini face-to-face. Pietrini shook hands with Althaver and told him he was sorry the two companies couldn't have gotten together. Althaver snarled inwardly and said only, "Where do I sign?" He handled the necessary paperwork and then added curtly, "Can I go now?"
As Althaver walked out of the lawyer's office, he found men clapping him on the back and proffering congratulations. He felt numb. He felt lousy. He had just spent millions in order to "save" his company.
The Charmont Inn is a hub of activity in downtown Cass City. Under one roof sit a bar, a restaurant, and a bowling alley, which doubles as the registration desk for the motel across the street -- where a room for the night cost about a fifth as much as at the Helmsley Palace. With the clatter of falling pins resonating through the restaurant, Bert Althaver nurses a drink at the end of a long day. "What bugs you about the whole thing is here you are going down the road, doing the best job you can. And now out of the blue comes a third party whom you've never done anything to, and suddenly your company's in play. We could have lost the battle. I was angry. You don't have control of your destiny in a situation like that."
As Althaver reminisces about Walbro's escape, he adds, "I think we really dodged a bullet. I guess sometimes in life it's better to be lucky than good." UIS didn't bump the price. No other hostile bidder appeared. GECC did appear. If Walpole hadn't sold stock to townspeople 33 years before, it's doubtful there would have been a large enough block in friendly hands on which to base a credible defense.
Good fortune aside, Althaver worries that the attempted takeover has changed his company in subtle yet fundamental ways. Recently Walbro laid off 75 workers. He suspects that before the takeover attempt the company wouldn't have moved so quickly and in such arguably draconian fashion. What sort of a signal does that send to his stakeholders? With Walbro now saddled by substantial debt, Althaver wonders if R&D, crucial to Walbro's very reason for being, will inevitably suffer.
The cost of staying free has been huge. The out-of-pocket fees to the various soldiers of fortune in three-piece suits totaled almost $5 million -- 80% of the company's record 1986 profits. Indirectly, Walbro spent $17 million buying back stock, money it had to borrow. Walbro went into the UIS fight with a long-term debt-to-equity ratio of 2% and came out at 71%. Interest expense in 1987 of $175,000 turned into almost $4 million in 1988.
Does Althaver feel Walbro is now safe? "You're never safe as long as you're a public company and you don't own 51% of the shares."
When asked why Ford, for example, with $9 billion in cash, doesn't just buy Walbro, he nods, offering a faint smile, "We'd be petty cash to Ford." He relates that Walbro licensed Ford to use its fuel-pump technology, giving Ford the most detailed of drawings so it could make some fuel pumps in-house and buy the rest from Walbro. But Ford, two years later, has yet to work out all the bugs and meet its targeted quota. It continues to buy more fuel pumps than anticipated from Walbro.
Two months after Walbro finally untangled itself from UIS's grasp, Althaver went to New York City to speak to a financial analyst at Shearson Lehman Hutton Inc. about the company. His pilgrimage bespoke his dilemma. He had to tell Wall Street about his company so the market might more fairly price its stock. Yet Althaver would be far happier working away in Cass City, just making the company tick. After their talk, the analyst took Althaver over to the corporate-finance side of the company. There he met a vice-president who handed him a book thicker than the Cass City phone directory. It listed a host of companies Shearson had screened -- potential acquisition targets. He invited Althaver to peruse the book. Maybe he'd find a company he'd like to buy.