WALL STREET REFORMS LOOM IN '87

The laissez faire days on Wall Street are probably over.

A great many of us in the Congress see the Ivan Boesky insider-trading scandal and Sir James Goldsmith's aborted pursuit of Goodyear Tire & Rubber Co. as the last straws. There is certain to be a flood of Wall Street reform" legislation in 1987 and some of it is bound to become law.My colleagues and I on the Senate Banking Committee intend to examine all aspects of the Boesky affair. We are certain to look closely at the entire takeover phenomenon. Junk bonds, disproportionate shareholder voting rights, discriminatory tender offers and every other way traders and raiders do business is going to get a cold, hard and utterly skeptical look, as it should.

A central question concerning the takeover phenomenon is what is the point of it all? Let's concede the valid argument that a takeover - or even the threat of one - often benefits its shareholders. What is difficult to accept is that it takes an outside party leveraging hundreds of millions of dollars to accomplish it. It's even harder to explain the lack of Reg G insured institution margin restrictions for non-investment grade securities when strict limits are placed on leveraging investment grade holdings.

Sir James Goldsmith's recent flirtation with Goodyear Tire & Rubber Co. is a case in point. Sir Goldsmith arrived on the scene with about $2 billion worth of junk financing from his investment bankers, who, not coincidentally, stood to earn a 10 percent commission.

Sir Goldsmith retreated from his $4.7 billion bid to acquire the company after Goodyear agreed to buy back the 12.5 million shares he had purchased in it. Goodyear consented to a restructuring to buy back a total of 40 million of its shares at a premium price, peddle some divisions, offer employees early retirement and embark on serious cost-cutting.

Sir Goldsmith strolled away $94 million richer, not counting various reimbursements and indemnifications against probable legal action by shareholders who had counted on the deal going through. Goodyear staggered

from the fray after dropping a fast $2.6 billion into debt.

There was no greenmail (strictly speaking), insider trading or any other legally questionable element evident in this affair. In fact, new law was invoked. The legislature in Goodyear's home state of Ohio had approved a measure allowing the company to rebuff Sir Goldsmith by excluding him from some offers to stockholders and by lending money to employees for stock purchases of their own. Sir Goldsmith himself credited this extraordinary legislative initiative as a determining factor in scuttling the deal.

The end result is that Goodyear is being broken up much as if Sir Goldsmith had been successful in buying it. It is hard to see that any value has been created for anybody except Sir Goldsmith, the lawyers and investment bankers. Goodyear emerges heavily in debt, with the promise of a probable increase in its stock price but little else. There is no prospect of additional productivity, increased market share or technological innovation. (The new debt servicing alone may preclude any of that.) Nobody will be working next year who isn't now because of this deal. In fact, just days after the end of the financiers' guerrilla war, Goodyear announced it was closing a plant in Maryland as part of its restructuring, throwing about 1,675 people out of work.

So value creation is eschewed in favor of debt creation in a transaction that is not even consummated. Nearly 1,700 people lose their jobs in the bargain. And this is one of the deals said to be on the up-and-up.

What effect does all of this have on other companies? Knowing their firm could be the next target - or raider, for that matter - prevents managers from planning properly for the future. What happens to research and development when so much money and brainpower goes into takeover strategy? Suddenly, the focus is not even on the quarter (a preposterously short time horizon as it its); it's on the day.

You can't worry about competing with the Japanese when you're competing with Wall Streeters for market shares in your own company. But in an era of $150 billion trade deficits, we have a $120 billion market in junk bonds.

There is something to be said for catching our breath before we embark on the next big deal. There is precious little hard information on the economic effects of megamergers. How many acquired corporations are broken up, thus eliminating efficiencies through economies of scale? What is the effect on their performance? Is there additional investment in modernization and research and development? What becomes of employees and the local economies dependent on these companies?

The Boesky and Goldsmith affairs ought to make us think a bit more about these transactions. They are fairly new to us, after all. From the standpoint of the country, it does not necessarily follow that one multibillion-dollar entity should buy another just because it can raise the money.

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