Bruce Wasserstein and Corporate Restructuring

In the mid-1980s, there was an avalanche of takeovers of underperforming companies, the targets of institutions and arbitrageurs who suspected that, with the help of plentiful leverage, they could increase corporate values by mobilizing assets. Often that term meant disposal of non-performing assets. In this earlier age of corporate restructuring, Bruce Wasserstein was an enfant terrible. M&A deals were being done at premiums of 3040% above market prices and Wasserstein would be in the middle designing strategies to make them happen.

This was also the heyday of shark repellents and poison pills. Often, the other side would be lawyers and PR people trying to set defenses against shareholders who had corporate control in mind, artfully removing shareholder rights whenever they might be exercised to change corporate control. But the SEC formed an advisory committee to evaluate many of these activities and concluded that the market mechanisms must be left unimpeded.

Wasserstein's youthful energy tapped intensity suited to the pulsing business of deals. Always very well prepared, he worked with arbitrageurs, lawyers, accountants and regulators to move business combinations forwards over institutions dedicated to thwart combinations, which, in the light of hindsight, seemed to favor one group of investors over another. He went on to found his own successful investment banking firm, his personality skills leading him on the correct path.

In his 1998 book Big Deal, Wasserstein surveys "the battle for control of America's leading corporations," including his own role in the past two decades or so. He describes five waves of mergers beginning in the mid-1800s: the first involved the building of the railroad empires; the second, in the 1920s, saw merger mania fueled by a frothy stock market and rapid industrial growth; the third happened during the go-go years of the 1960s and featured the rise of the conglomerate; the fourth occurred with the hostile takeovers of the 1980s, driven by names such as Icahn, Boesky and Milken; and finally, a fifth wave happening today. Wasserstein attributes the explosion of M&A activity at this turn of the century to the need for companies to reposition themselves in today's ever changing competitive environment:

Corporate Restructuring

One of the most high profile features of the business and investment worlds is corporate restructuring the mergers and acquisitions (M&A), leveraged buyouts, divestitures, spin-offs and the like that are contested in the ''market for corporate control." These recombinant techniques of corporate finance often have an impact on the financial markets far beyond the individual companies and sectors they involve and, in theory, all return real control of companies to shareholders. Virtually without exception, stock prices of participating companies rise in response to announcements of corporate restructuring. But are such events good for investors beyond the very short term?

The late 1990s have seen yet another wave of M&A activity. Indeed, the number and value of mega-mergers in 1998 set new records, a 50% increase on activity in 1997, itself a record year. This has reawakened the populist cry that such mergers do not create new wealth, that they merely represent the trading of existing assets rearranging the deck chairs on the Titanic. What is more, it is argued, the threat of takeover means that managements take too short-term a view, bolstering stock prices where possible, investing inadequately for the future and, where a company has been taken over in a leveraged buyout, perhaps burdening it with excessive debt.

On the other side of the debate, the primary argument in favor of M&A is that they are good for industrial efficiency: without the threat of their companies being taken over and, in all likelihood, the loss of their jobs, managers would act more in their own interests than those of the owners. In particular, this might imply an inefficient use of company resources, overinvestment, lower productivity and a general lack of concern about delivering shareholder value. Feeble supervision of corporations often leads to mismanagement, it is argued, and while increased shareholder activism is one option Certainly, a takeover bid is frequently beneficial to the shareholders of the target company in terms of immediate rises in the stock price (though acquisitions often have a negative effect on the profitability and stock price of the acquirer). And managements that resist takeover may be doing it for their own interests rather than those of their investors. Senior executives may use such bizarre devices as shark repellents and poison pills, which make it extremely costly for shareholders to replace the incumbent board of directors.

The next steps for investor relations are straightforward:

First, companies, funds and countries that wish to inform their constituency should maintain and publish FAQs (frequently asked questions), a common practice in industry. All questions with whatever favorable or unfavorable answer can be made available on a bulletin board. It is the next step to the ultimate in transparency, the ultimate being when the answers are created automatically regardless of the questions asked.

Second, companies should actively trade their own shares with open disclosure of transactions on an instantaneous basis. Companies would reveal their own interplay between business conditions, availability of capital and their assessment of prospects by their actions.

Third, and in the same vein, insiders would be encouraged to trade with no reservations on when, except that they would have to be identified as an insider.

Technology makes all these possible, and investor relations would be advanced, providing the user with live, real and significant information individually customized for each. It is possible today. But no one has done it.