Dallas billionaire Harold Simmons has a reputation as a ruthless corporate raider. But the financier outwitted his takeover targets as much as he out-muscled them.
The following is an excerpt from Golden Boy: The Harold Simmons Story, out this month. Simmons created the bulk of his wealth through corporate acquisitions, one of which is detailed here.
IN 1986, SPRING HAD EXPLODED AS USUAL in North Dallas with a profusion of green, yellow, blue, and pink as trees awoke from winter and wildflowers peppered the freeway medians. The annual metamorphosis was framed by the margins of Harold Simmons’ office windows, like a beautiful landscape painted by a master of Southwestern art.
But on this particular day, Contran’s chairman was too deep in thought to pay much attention to the scene, as he flipped through a stack of reading material and focused on the task of looking for his next takeover target.
The time had come, Harold knew, to put his sights on an even larger acquisition target, if he could find the right company. As always, the right company would have strong asset value not reflected in the stock price, and it should be stable with not too much of the stock held by any one individual or entity, and the price per share of the voting common should be at the bottom of whatever current cycle was depressing its particular industry.
Some of the business writers around the country had created the illusion that Harold Simmons was looking for a billion-dollar deal simply for the sake of bragging rights, but in fact the war chest was big enough now to require shopping in precisely that arena.
Harold leaned forward to re-read the first sentence of a small article in the Wall Street Journal that had snagged his attention. It was a report about a substantial old-line New York-based corporation called NL Industries that was in the process of restructuring. Nothing unusual in that, he thought, but there was something substantially unusual in the partial tender offer just made by NL management to buy back some of their own stock for $15 per share. When managements tried to buy back their own shares, it was a red flag that the stock might be undervalued.
NL’s oilfield business was hemorrhaging dollars while the chemical division remained strong and profitable. Harold turned around to his Quotron terminal and keyed in NL’s New York Stock Exchange symbol. A bid price of $10.75 per share popped up with an asterisk, indicating an important note or explanation. He hit the appropriate key and read carefully a small news clip that made little sense: NL management had suddenly withdrawn their $15 per share buyback tender offer, citing poor business conditions.
The New York investment house named Coniston Partners, Harold discovered, had made an unfriendly attempt to take over the company earlier in the year, and that, he figured, had probably triggered NL’s attempt to buy back up to 12 percent of the stock to minimize future takeover attempts. But to the shock of management, their quietly stated desire to purchase no more than 15 percent of the stock had triggered an incredible tender of 80 percent by stockholders eager to get out of their investment in the collapsing oilpatch, as the oilfield business was being called. The spreading recession in oil was creating a stampede, but with NL’s market value now well below the $15 NL’s leadership had offered for the shares they wanted, NL chairman Ted Rogers and his board canceled their buyback. The management team was deeply concerned about both paying too much and draining their remaining cash during a recession.
But their sudden retreat had just left NL "in play," in the parlance of Wall Street, and Harold had noticed. In addition, he’d spotted the crown jewel no one else seemed to be looking at: the fact that NL’s chemical division was very profitable and growing.
Harold picked up the phone and called his broker, giving the order to buy NL stock at the current price and to call him if any significant size was available. Over the next 10 days, he ended up buying about 19 percent of the stock.
The required SEC filings of Valhi [a subsidiary of Contran] alerted the NL board and started the predictable war. NL had already adopted an early version of an anti-takeover "poison pill" in the form of a corporate charter amendment, which would make it prohibitively expensive for any outsider to buy more than 20 percent of the stock without NL’s permission. If anyone were so foolish, NL management had figured, the poison pill provision would immediately issue all other existing stockholders a two-for-one share bonus, cutting the value of the raider’s investment in half. The pill also had other complicated restrictions on the corporation if 15 percent of the stock were acquired by one party.
But Harold and Lanny [Martin] and the Contran team began studying NL’s poison pill and decided it had several flaws. The pill, Harold believed, was illegal, and if they could convince a judge of that, the 20 percent trigger point could be swept away.
Harold knew that Rogers would be looking frantically for some other device to preclude a takeover. Valhi then announced and began a tender offer for NL stock at $15 per share, subject to removal of, or overturning of, the poison pill. Contran would have to move rapidly, and Harold had figured out a way to use NL’s own provision against them.
If the poison pill provision was triggered before some special deal could be reached exempting a white knight from the pill’s effects, any stock purchaser of 20 percent of the outstanding stock, friendly or otherwise, would instantly lose 50 percent of their stock value the moment the stock was acquired, because only the stockholders as of the date of the poison pill activation would get the two-for-one issue of new stock. Therefore, triggering the pill would make a white knight rescue all but impossible and would give Contran time to take the pill to court and try to get it thrown out.
NL management, knowing that the chemical division was what Harold really wanted, announced its intention to sell it in a public offering. However, Harold pointed out in a letter to the board that this would trigger their own poison pill because it would involve selling more than 50 percent of the earning power of the corporation. The NL attorneys immediately agreed and canceled the sale.
NL’s next mistake, this one fatal, was to create a new issue of preferred stock, which would have the right to receive dividends of all of the chemical division’s pre-cash flow, and to pay the new stock out as a dividend to all common shareholders. The new preferred stock began trading immediately at $12 per share, while the common stock dropped to $3 per share. Valhi immediately dropped its offer price from $15 to $3.50 per share for the common stock, greatly reducing the total cost of control, if the pill could be removed.
With the tender offer about to expire, Contran argued the case in federal court in the Foley Square Federal Building in New York as NL’s management paid for full-page ads pleading with its stockholders to refuse to tender their shares to Harold Simmons’ interests for any price. "We believe your shares are worth more than Contran is offering to pay," the ads proclaimed, ignoring the extreme irony that the price Harold was offering was slightly above the $15 per share that management had refused to honor a month before.
Before the court handed down a decision, Ted Rogers had flown to Dallas to offer Harold and Contran the entire chemical division for a little over $1 billion. The stakes were high, and the offer substantial, but as Lanny Martin watched with great admiration, Harold calmly held his course, believing firmly that the poison pill was thoroughly illegal, and that once ruled so by the federal court, he could easily acquire the entire company for far less.
Rogers flew back to New York empty-handed and angry.
On Wednesday, August 6, 1986, Federal District Judge Vincent Broderick ruled NL’s poison pill an "illegal device," just as Harold had predicted. But the following morning, NL’s legal team secured an injunction from a federal appeals court barring Contran from purchasing any more NL stock under the provisions of its tender offer.
"Okay," Harold decided, "we’ll drop the tender offer and just buy control in the open market."
Learning of Contran’s intentions, NL made a frantic attempt to secure a second injunction to prevent any open market purchases, but on the following Monday morning the appeals court refused. Lanny stood in the hallway outside the courtroom with a huge smile on his face as he punched in the number of Harold and Annette’s Santa Barbara home on his new cellular phone.
"Harold? Lanny. We did it. The court refused their injunction."
Within thirty minutes, Lanny phoned back to report that NL was scrambling for
"Well, that’s interesting, Lanny," Harold said, referring to the still-belligerent attitude of NL management and their stated determination to keep fighting. "Because we already own 51 percent of the company."
Harold’s clear, calm decision-making had won the day and secured a multibillion-dollar NL corporation with an investment of just a little over $200 million.
By mid-August, Harold became the chairman of the board of NL Industries and secured control of a majority of the board seats. One of the board positions went to Lanny Martin, who now had the assignment of learning as much as possible about NL, and making recommendations to Harold on how to improve its performance and its structure—as well as find out precisely what they’d just purchased.
And contrary to the dire predictions of the entrenched management that had fought so ineptly to keep the terrible Texan at bay, jobs did not disappear, divisions were not shut down or liquidated, and the human condition of the people of NL Corporation remained essentially unaffected.
The image of Harold Simmons as a ruthless, heartless takeover "artist" intent on acquiring companies for the purpose of destroying them as operating entities had become a very useful image for frightened corporate officers to invoke when news arrived that Harold was buying their shares. But the business press had followed Harold Simmons long enough by the mid-1980s to begin to understand that a Simmons takeover did not automatically mean that workers were in trouble, and in fact—as more and more financial writers pointed out, sometimes grudgingly—the opposite was usually the case. Working conditions for those employed by companies acquired by Harold Simmons often improved dramatically, and that was the second half—the hidden half—of the story.