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Smith Turns to Chapter 11 for Bankruptcy Protection

March 08, 1986|CARLA LAZZARESCHI and ROBERT HANLEY | Times Staff Writers

The bankruptcy action, which allows Smith to conduct business as usual while it works out a repayment schedule, does not cover its foreign subsidiaries which accounted for about 26% of the company's total sales of $746 million in 1984, the last year for which sales are available.

In preparation for the filing, Smith closed about 300 of its bank accounts nationwide. The closures forced Smith to pay employees laid off Thursday by cashier's check drawn on CommerceBank of Costa Mesa.

Creditors' Committee

A normal part of any bankruptcy reorganization is the formation of a creditors' committee to help oversee the company's operations. However, in this case analysts and insiders wonder if Hughes, Smith's largest creditor, will be included on the committee because the two firms are business competitors. Allowing a Hughes representative on the committee, noted one insider, would give the company access to business secrets and plans that could ultimately ruin Smith.

"We haven't addressed whether we should be on the committee," said Hughes attorney Toy. "It certainly would be an unusual committee arrangement if we were."

Even without its obligation to Hughes, one analyst said plunging oil prices and declining oil drilling has placed Smith in a difficult financial position.

"I don't think the Hughes suit is the whole story, but it was one of the bigger factors," said Herbert Hart, an analyst with the San Francisco brokerage house of S.G. Warburg, Rowe & Pitman, Akroyd Inc.

Another major factor in Smith's fall, analysts have said, was a pattern of frittering away its assets and energies on what turned out to be ill-advised moves and strategies, including on-again, off-again diversification moves and, most importantly, the aborted attempt to acquire Gearhart Industries Inc.

Heavy Criticism

The original goal of the Gearhart deal was to incorporate the company's high-technology oil-drilling devices into the Smith product line, a strategy generally praised throughout the oil industry. However, analysts have heavily criticized Smith and its chairman for failing to withdraw from the deal when Marvin Gearhart started balking.

One key reason for Gearhart's stubborn resistance, said Tom Law, a Gearhart board member and the company's general counsel, was the unresolved Hughes patent suit.

"At that time it was just a question of how much they would have to pay," Law said. "We were concerned that the damages could run into nine figures, and we had very keen concerns that if Smith were to acquire Gearhart our shareholders would suffer very materially. . . . We could see the handwriting on the wall very clearly, and that was one of the biggest reasons we didn't want to have Smith take over Gearhart."

Despite Gearhart's opposition, Smith launched a costly legal fight that lasted more than a year. Eventually Smith wound up losing $80 million on the acquisition attempt.

That money "would have gone a long way to offset . . . damages from the Hughes litigation," said James Carroll, a securities analyst with Paine Webber Mitchell Hutchins in New York.

Smith International will probably remain listed on New York Stock Exchange. Story, Business, Page 1.

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