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.
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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.
