What are investors to think? Corporate raiders and Wall Street traders are bidding up the stocks of companies in which chances of a takeover are slim to none.
In some cases, the action is bizarre. T. Boone Pickens, whose knowledge of aircraft is limited to the inside of his corporate jet, has declared an intention to buy part of Boeing Co. The acquisitive Haft family of Maryland and its investment partnership persist in going after Minneapolis-based retailer Dayton Hudson, despite a new Minnesota law designed specifically to deter them.
More of the current action anticipates management succession. In what one professional investor calls the "actuarial" market, traders count on successors to powerful, longtime managers being forced to restructure their companies.
Thus MCA, the entertainment company where Chairman Lew R. Wasserman, 74, has returned to work after an illness, continues to trade actively and near its all-time high--despite formidable takeover defenses.
Historic High Prices
Also trading at or close to historic high prices are: Occidental Petroleum, where Chairman Armand Hammer is 89; IC Industries, the Chicago-based railroad conglomerate where Chairman William Johnson, 68, was ill but has now returned to work; Amerada Hess, the oil company where Chairman Leon Hess is 83; W. R. Grace, the conglomerate where Chairman J. Peter Grace is 74, and Petrie Stores, the specialty retailer built by Chairman Milton Petrie, 84.
Does all this activity signal a new wave of takeovers? Not really. What it signals is the hunger of Wall Street traders and arbitrageurs for a deal. Because of changes in the tax laws, and generally lofty stock prices, takeover activity is slack these days. There were 927 mergers in this year's first half, compared to 1,527 in the first half last year, reports W. T. Grimm & Co., the Chicago merger consultant. Based on the current pace, this year will be lucky to see half as many mergers as 1986.
So Wall Street has excess capacity. Well-staffed arbitrage and trading departments are taking up high-rent office space and bringing in no revenue. And that provides an opportunity for the bidders and promoters who have no intention of actually acquiring a company. What they hope to do is rouse those idle traders and cause enough action in the market that managements of the target companies will do something--"restructure," perhaps, or buy back stock--to get the price up. Profit for the promoter, obviously.
But caution for the investor. The hype that surrounds all this action can be alluring but misleading. Both Pickens and the Hafts, for example, have filed declarations under the Hart-Scott-Rodino Act saying that they intend to acquire more than $15 million worth of stock in Boeing and Dayton Hudson, respectively. But they are not required to buy any more stock than they may already have. "My experience with Hart-Scott-Rodino filings," says one Wall Streeter, "is that they're used to create excitement by people who want to sell stock."
Beware also the chatter that says, for example, that MCA is "worth" $80 a share, or that Dayton Hudson is worth $65 a share, and so on. Those are hypothetical liquidating values for firms that have no need or intention of liquidating. As Christopher May, who analyzes merger situations for Prudential-Bache Securities, points out, a stock like Dayton Hudson could "go down five points as easily as it could go up."
To be sure, companies often change when longtime chairmen lay down the reins. And new top managers might well want to impress shareholders with a higher stock price or dividend--as the current stock market obviously anticipates.
But change is hard to predict. Sometimes it lifts the stock price, sometimes it doesn't. In two recent examples, the stock of Gulf & Western has gone up consistently since founder and builder Charles Bluhdorn died in February, 1983, and Martin Davis took the top job. On the other hand, United Technologies' stock has fluctuated in the three years since Chairman Harry Gray finally stepped down and Robert Daniell, the new chief executive, has tried to refocus the company.
The point is that market fads come and go, but companies are individual. Today's momentary hysteria seems to overlook that Boeing is one of the world's truly great companies. Present quarterly earnings declines are only the prelude to new products and future gains.
And as to MCA, another hot stock, traders there are betting that Sidney J. Sheinberg, now president and Lew Wasserman's undoubted successor, will be forced to do something--sell the company or spin off real estate--to, as they say, create value for shareholders.
These day-to-day traders, that is, are leaping years ahead and assuming the breakup of a company and a professional management that is the envy of the entertainment industry. The best bet has to be that events won't happen as the traders expect.
What should investors think? That unless they understand that today's game is really one of long-term investment, it's best to watch from the sidelines.