General Motors will issue today its long-awaited prospectus for a new class of common stock to acquire Hughes Aircraft, which it agreed to buy for about $5 billion in cash and new securities last June, sources close to the deal said Tuesday.
The prospectus is coming out after months of delay, which has taken GM down to the wire in meeting its goal of closing the deal by the end of the year.
The giant auto maker must still conduct a stockholder vote and win approval from those holding a majority of the shares before its board of directors can finalize the agreement. Hughes is being sold by the Howard Hughes Medical Institute, a private foundation in Bethesda, Md.
Escape Clause in Contract
The effort to close the deal by Dec. 31 is important because the sales contract between GM and the medical institute contains an escape clause permitting either party to walk away from the sale if it is not concluded before the end of 1985, according to Irving Shapiro, a trustee of the medical institute.
Although neither party foresees a breakdown in the deal, the clause is putting pressure on GM to close the transaction as soon as possible, sources close to the deal said.
"If I were on either side of that contract, I wouldn't want to get into a situation where the escape clause was activated," one of the sources said.
GM has scheduled a press conference in New York today at which Donald Atwood, chief of the company set up to supervise Hughes--General Motors Hughes Electronics Corp.--is expected to review the prospectus.
The prospectus is expected to provide the first detailed financial picture of Hughes Aircraft, which was shrouded in secrecy through most of its history by its idiosyncratic founder, Howard R. Hughes.
Meanwhile, the delays have caused significant problems for the medical institute, Shapiro said.
"It has put us in a difficult financial position at the moment," he said.
The medical institute will not receive any of the $2.7 billion in cash or $2.3 billion in stock until the deal is formally closed. Until then, it must rely on dividends from Hughes Aircraft to meet its budget.
The institute had expected the Hughes sale to be completed far before the end of the year.
At least part of the delay is attributable to accounting questions raised by the Securities and Exchange Commission last August over how GM would treat the goodwill created by the acquisition. Goodwill is an accounting term for the amount that one company acquiring another pays over the book value of its purchase.
Under Internal Revenue Service rules, the institute, a tax-free foundation, must spend about 5% of its assets every year for medical research. On the basis that its assets amount to at least the $5 billion that it will receive for Hughes Aircraft, the institute would have to budget $250 million in annual spending, or about $21 million per month, to satisfy the IRS rule.
That spending rate represents a vast increase over the institute's historic rates of spending. It is thought by knowledgeable sources that the institute had substantially increased its spending based on the expectation that the Hughes sale would close long before year-end.