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AlliedSignal Takes Over AMP

AMP was the world`s largest producer of cables for computers and other electronic equipment. Its performance had disappointed investors, and the company was widely viewed as ripe for change in operations and management.

AlliedSignal believed that it could make these changes faster and better than AMP`s incumbent management. So in summer 1998, when AMP announced that its quarterly profits were down 50 percent, AlliedSignal declared that it would bid $44.50 per share for AMP`s stock. AMP`s stock price immediately bounded by nearly 50 percent to about $43 per share.

AMP at first seemed impregnable. It was chartered in Pennsylvania, which had passed tough antitakeover laws. Pennsylvania corporations could БІАААмjust say noБІАААн to takeovers that might adversely affect employees and local communities. AMP had also protected itself against takeover by establishing a poison pill. This gave its shareholders the right to buy more shares at a bargain price if there was a bid.

AlliedSignal held out an olive branch, hinting that price was flexible if AMP was ready to talk turkey. When its proposal was rebuffed, Allied decided to go ahead with its offer and 72 percent of AMP shareholders accepted. However, there was still the problem of the poison pill, and AlliedSignal`s offer stated that it was not obliged to buy any shares until the poison pill was removed. This was not something that AMP`s management was likely to do voluntarily.

AMP fought back vigorously. It announced a plan to borrow $3 billion to repurchase its shares at $55 per shareБІАААдits management`s view of the true value of AMP stock. At the same time it asked the Pennsylvania legislature to pass a law that would effectively bar the merger. The governor gave his support and in October the bill was approved in the Pennsylvania House of Representatives and sent to the Senate for consideration.

Meanwhile AlliedSignal was discovering that it too had powerful allies. About 80 percent of AMP`s shares were owned by mutual funds, pension funds, and other large investors. Many of these institutions publicly disagreed with AMP`s stubbornness. The

College Retirement Equities Fund (CREF), one of the largest U.S. pension funds, then took an extraordinary step: it filed a legal brief supporting AlliedSignal`s case in the federal court. Then the Hixon family, descendants of AMP`s co-founder, made public a letter to AMP`s management expressing БІАААмdismayБІАААн and asking, БІАААмWho do management and the board work for? The central issue is that AMP`s management will not permit shareholders to voice their will.БІАААн7

As the weeks passed, AMP`s defenses, while still intact, did not look quite so strong. By mid-October, it became clear that AMP would not receive timely help from the Pennsylvania legislature. In November, the federal court gave Allied Signal the go-ahead to ask shareholders to vote to remove the poison pill. Remember, 72 percent of its tockholders had already accepted AlliedSignal`s tender offer.

Then, suddenly, AMP gave up: management had found a white knight when Tyco International came to its rescue. Tyco was prepared to offer stock worth $55 for each AMP share. AlliedSignal dropped out of the bidding; it didn`t think AMP was worth that much.

What are the lessons? First, the example illustrates some of the stratagems of merger warfare. Firms like AMP that are worried about being taken over usually prepare their defenses in advance. Often they will persuade shareholders to agree to shark-repellent changes to the corporate charter. For example, the charter may be amended to require that any merger must be approved by a supermajority of 80 percent of the shares rather than the normal 50 percent.

Firms frequently deter potential bidders by devising poison pills, which make the company unappetizing. For example, the poison pill may give existing shareholders the right to buy the company`s shares at half price as soon as a bidder acquires more than 15 percent of the shares. The bidder is not entitled to the discount. Thus the bidder resembles TantalusБІАААдas soon as it has acquired 15 percent of the shares, control is lifted away from its reach.

The battle for AMP demonstrates the strength of poison pills and other takeover defenses. AlliedSignal`s offensive still gained ground, but with great expense and effort and at a very slow pace.

The second lesson of the AMP story is the potential power of institutional investors. The main reason that AMP caved in was not failure of its legal defenses but economic pressure from its major shareholders.

Did AMP`s management and board act in the shareholders` interests? In the end, yes. They said that AMP was worth more than AlliedSignal`s offer, and they found another buyer to prove them right. However, they would not have searched for a white knight absent AlliedSignal`s bid.

WHITE KNIGHT Friendly potential acquirer sought by a target company threatened by an unwelcome suitor.

SHARK REPELLENT Amendments to a company charter made to forestall takeover attempts.

POISON PILL Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.