"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.
