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Insider Scandal Jitters May Slow Takeover Mania : Probe of Top 'Junk' Bond Dealer Raises Doubts on Financing for Some Deals

November 24, 1986|VICTOR ZONANA

Takeovers have been the most awesome money machine on Wall Street. And the investment firm of Drexel Burnham Lambert frequently has been at the controls, revving things up by feeding the financial markets with high-interest bonds that it called "high yield" and others called "junk."

As the insider trading scandal surrounding professional speculator Ivan F. Boesky widens, an atmosphere of fear and panic among securities professionals has enveloped Drexel. Federal investigators have subpoenaed a number of its officials, and the resulting speculation about who might be involved in the scandal has raised doubts about the ability of Drexel and other investment houses to complete takeovers and corporate restructurings that require junk bonds to be issued.

Troubles for Drexel and junk bonds could have widespread implications for the takeover wave that they have stirred up in so many different industries.

Stocks of real and rumored takeover targets fell sharply last week, although they recovered somewhat toward the end of the week. And Drexel and corporate raiders have felt obliged to assure the rest of Wall Street that their deals won't fall apart.

While Drexel may lose some business, the firm has completed some hefty financings in the midst of the unfolding scandal. And new takeover assaults emerged last week.

Here is a look at how uncertainty in the takeover and junk bond market could affect various industries:

Heavy Industry / Natural Resources

The Rust Belt, where corporate raiders have long trolled for unglamorous but profitable acquisitions, will likely see at least a temporary respite in junk bond-financed takeovers.

But the widening insider trading scandal and speculation that junk bond king Drexel and its officials could be implicated won't have much impact on the forest products industry, where a recent merger and acquisition wave appears to have played itself out.

In the heavy industries, perhaps the biggest casualty will be New York investor Carl C. Icahn's $31-a-share proposal to acquire USX Corp., a deal that would have required Drexel to raise a staggering $6.4 billion in debt financing.

"That deal would have required the participation of every junk bond buyer in the world," said one well-connected merger and acquisition expert. "Even before the problems, I'm not sure that deal was doable." Earlier this month, before the disclosure of Boesky's involvement in insider trading, there was speculation that Icahn would reach an agreement calling for a standstill on further stock purchases.

Since the Boesky case was disclosed, shares of USX--parent of U.S. Steel, Marathon Oil and Texas Oil & Gas--have fallen sharply, although they regained some ground late last week.

The chilling political climate toward hostile takeovers may also deter raiders of old, industrial companies.

Last Thursday, one day after enduring withering questioning by angry politicians at a Capitol Hill hearing, Sir James Goldsmith scrapped his bid to acquire Goodyear Tire & Rubber, selling his 11.5% stake back to the world's largest tire maker for $619 million. "This ghastly Boesky affair" was among the reasons Goldsmith cited for ending his run at Goodyear.

Another company that may enjoy a respite is Borg Warner, whose shares are being accumulated by Drexel client GAF. Still, like USX, Borg is expected to continue restructuring itself to enhance shareholder value and deter other raiders.

Executives of two big Drexel-financed industrial conglomerates--Triangle Industries of New York and Farley Industries of Chicago--didn't return phone calls seeking comment.

Triangle is best known for its junk bond-financed purchase of National Can, and Farley for its highly leveraged takeover of Northwest Industries. Their ability to raise money for new deals could be hampered if Drexel gets into trouble, though neither needs to tap the market to refinance its debts anytime soon.

The takeover wave in forest products ended even before the Boesky scandal. After Goldsmith's acquisition last year of Crown Zellerbach and International Paper's buyout of Hammermill this summer, stock prices of others in the industry rose by 50% to 100%.

"High stock prices are the best protection against takeovers," said Paul A. Bilzerian, a Florida investor whose bid for Hammermill earlier this year put the company in play. "I don't think the Boesky affair will have any impact there because these forest products and paper companies have risen so dramatically."

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