Getting Defensive

A CFO's key role at CSC helped thwart a hostile bid.
Linda CormanMay 1, 1998

If a company needs to mount a defense against a hostile takeover, the CEO’s first call likely goes to the general counsel. But increasingly, the finance department quickly gets brought into the fray as well.

Smart move, at least in the case of Computer Sciences Corp. (CSC), which in March managed to fend off a $9 billion hostile bid from Computer Associates International Inc. (CA) in near-record time.

When CA first approached CSC at a meeting at its El Segundo, California, headquarters last December 18, CSC chairman, president, and CEO Van Honeycutt “came down to see me two nanoseconds after CA left,” says CFO Leon J. Level. Soon after, Level began planning steps to make his company a tougher take-over target. For example, he sped up the closing of the third quarter–which was developing as a very strong one–and accelerated the budget process so that CSC could announce 1999 and 2000 projections, too.

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In mid-February, CA finally went public with a $108-a-share bid for the big computer-services concern. Three weeks later, CSC had forced it to withdraw–in large part thanks to the work of the CSC finance department–in what has been dubbed a textbook case in takeover defense.

Level’s longtime role as the self-described “point person for investor relations” was extremely important to CSC’s success. When he and Honeycutt went to Wall Street to argue that the CA bid was low, “it wasn’t the first time they’d ever seen me. That increased our credibility,” he says.

Hostile takeovers aren’t quite the huge factor on the merger-and-acquisition scene that they were in the 1980s, when poison pills and other structural corporate defenses came into vogue in a big way. Still, hostile bids have made a comeback since bottoming out in 1992, a year when only 9 deals, worth a total of less than $2 billion, were announced. Over the past five years, there were an average of 49 hostile takeovers a year, with a total value of $231 billion, according to Securities Data Co., in Newark, New Jersey. And in the early weeks of this year, 4 deals worth a total of $16.5 billion broke into the news, counting the now-defunct CSC bid.


Today’s hostile takeovers, though, are often very different beasts from those of the last decade, and they present new challenges. Rarely do raiders swoop down without warning anymore, stunning their targets’ shareholders with headlines in the morning papers. Acquisitive companies now may turn hostile only as a last resort– after making overtures that contain at least a semblance of civility.

In those early stages of interest, a weak, nar-row, or unsophis- ticated response from a target often entices the would-be acquir-er to keep at it. Then, the company rebuffing a suitor typically receives a “bear-hug letter,” a confidential communication saying that the bidder will pay a stated price if the target company agrees to be acquired. Things may then escalate into an unsolicited, publicly announced offer, followed perhaps by a tender offer, or the launch of a proxy fight.

A much larger percentage of the hostile bids these days are strategic in nature, as potential acquirers seek combinations that create economies of scale in their own industries, and increase the range of products or services being offered. Hostiles of the 1980s often were financial deals aimed at dismantling a target to help repay the debt of the purchase. Nearly half of 1988’s hostile deals of more than $100 million–32 of the 65 announced– were so designed, according to J.P. Morgan Securities; by 1995 only 4 of 35 hostiles were financially driven.

More strategic deals have meant smaller premiums being offered for target companies in hostile deals–16 percent smaller in recent years, according to J.P. Morgan. As the offensive targets and goals have changed, so has the style of defense.

To avoid being a vulnerable target, companies need strong ties to such groups as vendors, customers, board members, and investment bankers, says CSC’s Level. His company’s strong alliances with customers, for example, led to customer threats that they would break contracts if CSC were bought by CA. That helped CSC persuade the financial community of the importance of its remaining independent.

And it was a tip from a financial adviser that helped form the basis for one of CSC’s legal challenges to CA. Alerted that Bear Stearns & Co. was about to be replaced as financial adviser to Equifax Inc., a business associate of CSC’s, Computer Sciences looked at potential conflicts relating to Bear Stearns’s concurrent role with CA. CSC alleged in a lawsuit that CA had built its lowball bid for CSC in part on information wrongfully obtained from a Bear Stearns senior managing director who had recently advised both Equifax and Computer Associates.


Michael Biondi, chairman and CEO of Wasserstein Perella & Co., stresses the importance to a takeover defense of keeping the board and senior managers aligned–one area in which the CFO can be very influential. “If you have a business plan that the board and management understand and fully believe in,” he says, “they will hold up better in a long, nasty fight.”

Some think the finance department can also help out by encouraging a buildup in the proportion of stock held by retail owners. “Retail shareholders are usually supportive of management,” says Alan Miller, co-chairman of Innisfree M&A Inc., in New York, a proxy-solicitation and investor-relations firm.

Another tactic involves helping form strategic alliances, or positioning the target company as an acquirer itself. “In a consolidating industry, everyone is in play,” says James Zukin, senior managing director of Houlihan Lokey Howard & Zukin, in Los Angeles. To avoid becoming a takeover target, he suggests, “develop alliances or be a consolidator.”

William D. Rifkin, a managing director of M&A at Merrill Lynch & Co., suggests that senior executives prepare a hostile takeover defense by learning about standstill agreements, in which the parties agree to keep their discussions silent. “That’s so fundamental,” he stresses, in the growing number of situations in which relatively amicable overtures gradually evolve into hostile bids. “If you’re going to enter into serious conversations, you’d better enter into a standstill agreement first.” (Of course, standstills are unattractive to many suitors and can make you appear willing to do the combination at the right price.)

Learn, too, about the various poison-pill and other defenses that are available. While they alone can’t ward off hostile attacks, they can buy your company time to improve its performance or to find a white knight. CSC made itself harder to buy by removing some shareholder rights. (CA challenged the moves in federal court, but gave up before the court hearing.)


For Healthdyne Technologies Inc., of Marietta, Georgia, having a “dead hand” provision in its shareholder rights plan was critical in turning back a January 1997 bid from Invacare Corp., of Elyria, Ohio, says Wayne Boylston, who was chief financial officer of Healthdyne at the time. Dead-hand provisions allow that even if a board is voted out, only that former board can vote to redeem a poison pill.

Boylston says that the Healthdyne defensive provisions gave it time to persuade its shareholders that a plan was in place to improve earnings–which happened in the first two quarters of 1997. In addition, the dead-hand provision raised doubts in the minds of shareholders that Invacare could actually buy the company, even if it gained control of the board.

Doing all the right things and having proper defenses in place may not keep a company independent. Often, the only real option may be to ensure that it gets the best price from the best suitor.

There, too, the CFO can play a critical valuation and pricing role. Three months after Invacare was turned away, Respironics Inc., of Pittsburgh, announced a deal to acquire Healthdyne in a friendly tax-free stock transaction valued at $24 a share, or a total of $350 million–well over Invacare’s final all- cash offer of $15.

Some expect the continuing M&A boom to lead to a new wave of combinations by aggressive players, affecting companies and industries once thought to be relatively safe from the trend.

If there is any lesson for today, it’s that overconfidence can be a trap, warns CSC’s Leon Level. “Don’t be complacent,” he says, “thinking that because your company is strong, you’re immune.”

Linda Corman is a freelance writer in New York.