While I am not a tax expert, I do understand the energy industry, in which a portion of recent takeover activity has taken place. Accordingly, I know what has--and what has not--been the primary motivation behind the recent surge in merger activity in that industry.
I urge the subcommittee to move cautiously in considering the pending legislative proposals. It should reject misguided proposals that, in my view, reflect a basic misunderstanding of the realities of the marketplace, in general, and what is now occurring in the energy industry, in particular.
The proposed tax legislation designed largely to discourage takeovers implicitly assumes, against the great weight of evidence, that mergers are somehow bad per se, and that it is appropriate to add provisions to the tax code specifically to discourage hostile takeovers. The proposed legislation overlooks the overwhelming benefits of mergers that accrue to the economy and to its key participant, the American shareholder. These bills serve only to protect incumbent management, often to the detriment of shareholders. They are simplistically drawn and do not address at all the true cause of corporate mergers. The primary reason mergers are good is that they provide shareholders a means for calling corporate management into account.
Industry in Transition
Mergers among energy companies are motivated by the market realities of an industry in transition. Recent acquisitions are driven primarily by the need of companies to replace diminishing reserves in the most economic fashion.
The industry today is in the midst of an internal restructuring, which represents a response to existing market forces. Recent cutbacks in drilling simply reflect the realities of exploration economics: a scarcity of good drilling prospects, high finding costs and stable energy prices. There is a serious question whether current energy prices afford sufficient economic incentive to explore in frontier areas.
Mergers are recognized by authorities in government and industry not to be primarily tax motivated. Testimony before a Senate Finance subcommittee last year on oil company mergers, the assistant secretary of the treasury for tax policy stated that the current tax rules are not propelling the recent flurry of oil company acquisitions, and that Congress should not amend the tax laws for the purpose of discouraging these mergers. In addition, George Keller, chairman of Chevron, also stated before the Senate Finance Committee last year that the Chevron-Gulf merger was not made for tax purposes and that the idea of gaining tax benefits from the merger played absolutely no part in the company's thinking. Finally, I told the Senate Judiciary Committee last year that tax considerations were not major factors in Mesa's bid for Gulf.
A basic underlying cause of corporate mergers today is management inefficiency. As this year's Economic Report of the President pointed out, the American economy's success depends on competition. Competition should also play a significant role in what is a healthy market for corporate control. An active merger market is a healthy threat to incompetent management. It is good for the economy because it shifts corporate assets from poor managers to more efficient ones.
Proposed tax legislation will adversely affect shareholders. The key point is that companies involved in mergers are not owned by managements, but by shareholders. It is their interest that should be paramount. There are 42 million shareholders who own stock in publicly traded companies. This represents one out of six Americans. Stockholders place their investments in the hands of management and expect management will do its best to keep the market value of their investments as close as possible to its true value.
If investors are dissatisfied with management performance, they will serve notice on management to improve the return on assets left under their control. Too often unresponsive managements give the small investor little choice but to sell. Restrictions on legitimate tender offers would deprive these investors of that basic property right--the right to sell. Mesa would not invest if we did not believe that management would respond in a positive way to our ownership. The small investor can have a tough time getting management's attention.
Benefit From Premium
A number of studies have pointed out that target company shareholders who tender their shares benefit from a premium over the market price which averages in a range of 30% to 35%. For the bidder, the average gain is 3% to 4%. Legislative restrictions on mergers would deny to shareholders this premium and thus in effect would impose a new restraint on shareholder value.