Corporate Takeover: The Ultimate Game

Truly it has been a vintage year for one of the less civilized forms of business endeavor, the corporate takeover. The last few months have been a delight to those brave, bold souls who enjoy a good $100 million tussle, including a few businessmen in the Dallas-Fort Worth area.

Take Ashley Priddy, for instance, a former mayor of Highland Park who proved that being a fast draw still has its advantages. Priddy is president of Sabine Royalty, a New York Stock Exchange corporation which will make about $10 or $15 million this year producing oil and gas. From his offices in the Mercantile Bank Building, Priddy showed how to fend off an unwanted corporate suitor, enabling him to keep his $96,000-a-year job as Sabine’s president, at least for the time being.

Actually, the whole episode began more than a year ago, according to documents filed with the Securities & Exchange Commission. Frederic Hamilton, chairman of Denver’s Hamilton Brothers Petroleum, paid Priddy a visit and suggested that Hamilton Brothers and Sabine merge. Priddy rejected the offer, but agreed to meet on the matter twice last summer. Again Priddy rejected Hamilton’s overtures, so Hamilton prepared to make his move.

Sometime in late summer Hamilton Brothers began planning a tender offer to purchase 45 percent of Sabine’s stock, which would have given them control of the company. Apparently security over Hamilton Brothers’ top secret operation wasn’t tight enough. In the final week before Hamilton Brothers announced its plans to offer $60 a share for Sabine stock, the market price of Sabine rose steadily from 44 1/2 on September 16, to 50 by September 21, the day Priddy blew the whistle.

Priddy told the Wall Street Journal about Hamilton’s planned tender offer assault. On September 22, the Journal ran a story quoting Priddy, who revealed Hamilton Brothers’ plans. Priddy’s apparent strategy worked.

Before the stock market opened that morning, officials of the New York Stock Exchange barred trading in Sabine stock. Priddy thus succeeded in keeping Sabine stock out of the hands of arbitrageurs, who otherwise might have jumped in and bought substantial sums. (Arbitrageurs are investment houses who jump in after a tender offer is announced and buy vast sums of stock, while the stock is still selling below the price offered by the corporation making the tender offer. Then they sell it to the highest bidder, which in this case, probably would have been Hamilton Brothers.) Thus the Sabine stock remained scattered among 4,000 shareholders.

Trading in Sabine stock remained frozen until September 28. During the freeze, sources say, Priddy did some fast shopping for a friendly merger. Not finding one, Priddy turned back to Hamilton Brothers and cut a proposed merger agreement between Sabine and Hamilton Brothers – one that would prevent Hamilton Brothers from taking control of Sabine. Sabine considered the proposed merger from September 27 until November 1, then announced it was no longer interested.

During this whole episode, the price of Sabine stock increased more than one-third, or $15 a share. Obviously it would be far more expensive today for Hamilton Brothers or any other corporate suitor to attempt a takeover of Sabine. Sabine also just announced a dividend increase from 60 cents a share to one dollar, which might encourage the stock’s price to go even higher. For the moment at least, Priddy has won the battle.

For a fine example of how to pull off a corporate takeover, one need look no farther than Fort Worth, home of Energy Resources. In a move led by two Dallas businessmen, Merlin Schwenk and Elroy Roelke, Energy Resources was taken over this fall from the inside.

The Energy Resources story began last January, when Energy Resources acquired a Dallas company, TEPCO. As a result of the acquisition, the Schwenk-Roelke group wound up with 420,000 shares of Energy Resources stock, or about 23 percent of the company. After a disagreement with Energy Resources management during a spring board meeting, the Schwenk-Roelke group began making its move. In July it bought the largest individually held block of Energy Resources stock, bringing the group’s ownership to 593,000 shares, or 33 percent. Then the group met with Energy Resources president, Boyd Ray, and demanded several changes: initiation of a cash dividend, a halt of mergers with unrelated businesses, and consideration of a merger into a larger corporation. All three demands were aimed at improving the marketability of the group’s stock.

Ray failed to act on the demands, so the Schwenk-Roelke group announced it was preparing a takeover attempt. The group kept buying more Energy Resources stock over the American Stock Exchange, until October 7, when a showdown occurred during a board meeting in the Fort Worth National Bank Building. Realizing that the Schwenk-Roelke group now owned approximately 40 percent of the stock, the incumbent Energy Resources board capitulated to a reorganization of the company’s board, with Schwenk taking over the chairmanship.

There is a way to prevent such swift takeovers. Texas Industries of Dallas showed how to do it at its October 19 annual meeting of shareholders. Stockholders approved amendments to Texas Industries’ corporate bylaws which require six of the company’s seven present directors to approve a merger. If they don’t, 80 percent of the outstanding shares must approve it. If a raiding corporation wanted to take over Texas Industries, as Hamilton Brothers attempted to take over Sabine, the outsiders would have to buy at least 80 per cent of the Texas Industries stock. There’s one hitch to this: About 35 percent of Texas Industries stock is “friendly to” present Texas Industries directors – either owned by them directly or in trusts generally controlled by them, making it very tough indeed for those who might eye Texas Industries covetously.

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