Mergers and Acquisitions: A Special Report on the First Program of the J. Ira Harris Center for the Study of Corporate Finance ^X THE UNIVERSITY OF MICHIGAN SCHOOL OF BUSINESS ADMINISTRATION ANN ARBOR, MICHIGAN 48109-1234

Gilbert R. Whitaker, Jr. Dean (313) 764-1361 October, 1987

Dear Alumni and Friends,

This issue of Dividend celebrates and reports the opening event of the J. Ira Harris Center for the Study of Corporate Finance. A major purpose of the Center is to facilitate the interaction of students and faculty with the "real world" of corporate finance. This event will be a tough act to follow given the number and quality of the participants, but it indicates the importance we attach to the purposes of the Center. Our students' learning will be enhanced by carefully structured interactions which show that theory and practice are connected. We are extremely grateful to Ira Harris for his support and leadership in this venture.

As I write this letter, we are preparing for the arrival of the students for the 1987-88 academic year. Students for all of our degree programs were selected from the largest and best applicant pools in the history of the School. This increasing success is in part the result of major efforts by the faculty and staff of the School. However, it is also the result of the success of our alumni in their careers. All of you help us by your own success as well as by the financial and other support you have given to the School. Many of you return to campus as speakers, as recruiters, and as role models. Also, many of you have helped by speaking with students considering Michigan. Together, we are making a great School better. Thank you.

Sincerely, ^UAJ: (BJvZkt&fc^

Gilbert R. Whitaker, Jr Dividend Vol. XVIII, No. 3 October, 1987

Introduction Current Developments by J. Ira Harris 4 in Restructuring 23 J. Ira Harris, BBA '59, is n this special report on the first program By Bruce Wasserstein, Senior Executive Director of I Managing Director, Salomon Brothers Inc., in of the new J. Ira Harris Center for the First Boston Corporation, Chicago, III. Study of Corporate Finance, we bring you New York, N.Y. the presentations and discussion sections What Is Happening The International Merger at the SEC and in of the panel that gathered to discuss "Mergers Market 26 Congress? 6 and Acquisitions: The Past, The Present, The By John H. Gutfreund, Chairman and CEO, By Joseph A. Grundfest, Future." The panelists included investment Commissioner of the SEC Salomon Brothers Inc., bankers, takeover lawyers, corporate chiefs, New York, N.Y. Developments on the and an SEC commissioner — ten of the Recent Trends in the Legislative and Judicial most well-known and powerful names in the Fronts 8 Leveraged Buy-Out 28 By Joseph H. Flow,, Partner high-stakes world of corporate finance. Their By Henry Kravis, Founding in Skadden, Arps, Slate, individual statements and the discussions which Partner, Kohlberg Kravis Roberts & Co., New York, Meagher & Flom, followed took three absorbing hours before New York, N.Y. N.Y. a fascinated audience of about 500 in Hale Directors' A Program for Takeover Auditorium. The new Center was founded by Responsibilities Reform 10 J. Ira Harris, BBA '59, who provided the initial With Respect to By Felix G. Rohatyn, Takeovers 30 Partner in hazard Freres & endowment. A list of founder members and By Martin Eipton, Partner, Co., New York, N.Y. Corporate Affiliates of the Center appears Wachtell, Eipton, Rosen &f on the back cover. The Center was founded Katz, New York, N.Y. Commentary #1 12 to stimulate productive interaction between Commentary #3 32 Mergers from the financial executives from industry and Wall Perspective of a Chief Street and the faculty and students of the Pictures at the Executive Officer 16 Reception 34 By Donald C. Clark, Michigan Business School. Chairman, President Among Ourselves 36 and CEO of Household International, Chicago, III. Faculty News Notes 42 Dean: Gilbert R. Whitaker, Jr. Class Notes 45 Managing Acquisitions Associate Deans: Thomas C. Kinnear; Edwin L. Miller, and Dispositions for B. Joseph White; Anneke de Bruyn Shareholder Value 18 About the Cover — Overseth, Associate Deem for External Our cover pictures each By Donald P. Kelly, Relations Chairman and CEO, member of the panel Beatrice Companies, Inc., Editor: Pringle Smith who spoke on Mergers Chicago, III. and Acquisitions. The Copyright © 1987 by the Michigan Business School photography is by Dean Russell, who also took all Commentary #2 20 Printed by The University of Michigan Printing Services. This publication is made possible through the generosity of the pictures on pages 4 private donations. through 35. Introductioi

would like to welcome I everybody here this morning for this first program of the J. Ira Harris Center for the Study of Corporate Finance. I think we're going to have the ability through the Center of creating some very interesting programs, which will greatly benefit the students of The University of Michigan, the Business School, the Law School, all schools, and will bring about a better interchange between the corporate world, the academic world, and the students. I want to thank the panel members who are participating in this program. I have worked over the last year professionally and have also been privileged to have as friends everyone on this panel. That is, everyone except one gentleman, and he happens to be the man sitting next to me, and that's Commissioner Grundfest of the SEC, whom I have never met professionally, and I do not want to meet professionally, (laughter) I did have a diet Coke with him last night and I will tell you, under the ethics rule, he paid for it himself. We have without question, I think, the finest panel that's ever been assembled on this subject. I think their participation has given a great degree of credibility to this program at Michigan, and will be tough to beat in the future. I am going to introduce everybody starting on my right, very quickly, Salomon, Inc.; sitting next to him because these people really don't is Donald P. Kelly, Chairman and need introduction. Chief Executive Officer of BCI At my far right is Martin Lipton, Holding Corporation, better known senior partner of Wachtell, Lipton, as Beatrice. Sitting next to him is Rosen & Katz; sitting next to Felix Rohatyn, senior partner of him, John Gutfreund, and I still the New York investment banking introduce him as my partner, house of Lazard Freres 8c Company. even though he carries the title of On my immediate right, Joseph Chairman and Chief Executive of Grundfest, who is a Commissioner J. Ira Harris, BBA '59, is Senior Executive by J. Ira Harris Director of Salomon Brothers Inc. in Chicago, III.

The panel members prepare to start their discussion of Mergers & Acquisitions: The Past, The Present, The Future. of the Securities and Exchange Wasserstein, managing director, and be. We are going to have a number Commission and was the 65th co-head of the investment banking of short presentations, covering a Commissioner elected in 1985. To department of the First Boston number of subjects. At the end my immediate left, Joe Flom, senior Corporation. On his left, Henry R. of each segment, we're looking partner of Skadden, Arps, Slate, Kravis, senior partner of KKR for interchange among the panel Meagher & Flom. Sitting next to Corporation, whose name is members. At this point I would like him is Donald C. Clark, Chairman associated with leveraged buyouts to start off by asking Commissioner of the Board, President, and Chief as well as Kleenex is with tissues. Grundfest to give us a quick Executive Officer of Household At this point, let me just tell overview of what is happening International. On his left, Bruce you what the format is going to at the SEC and in Congress.

5 What's Happening at the SEC

t is an honor and privilege to hostile takeovers. Their argument, As these examples illustrate, I appear here this morning with in a nutshell, is that hostile insider trading and hostile takeovers this distinguished and, I might add, takeovers and insider trading are are two very distinct problems. Even unindicted group of investment so inextricably intertwined that if we stopped every hostile takeover, bankers, takeover lawyers, and takeover activity must be curbed the problem of insider trading corporate executives. if we are to make any progress would remain. Indeed, the insider The recent attention to insider against insider trading. trading problem is not only distinct trading has been a mixed blessing That argument is, however, from the hostile takeover issue, it is as far as my social life is concerned. dangerous and wrong. To illustrate in many ways much more difficult On the one hand, when I go to the very weak link between insider and profound. a cocktail party I don't have to trading and hostile takeovers, The insider trading problem explain what I do for a living. On consider first the insider trading must be attacked head-on and not the other hand, at some gatherings, that occurred in the RCA-GE through strategies of indirection like last night's reception, I got and Carnation-Nestle mergers. calculated to deter certain frisked at the door, walked through Those were both friendly transactions on the rationale that a metal detector, and followed by acquisitions, negotiated with great they are particularly or uniquely someone carrying a sign that says, confidentiality. Nevertheless, the susceptible to insider trading. "Shhh! SEC!" But such is the price transactions spawned illegal insider Our enforcement activities against of success. trading. insider trading are going to The parameters of the takeover Consider next the allegations continue unabated, but they should debate changed dramatically in regarding the Unocal hostile not be construed as granting license November of 1986 for two distinct takeover battle. There, the to attack through legislation any and very important reasons. government claims that Unocal's particular class of transactions. First, the Democrats — of which bankers tipped a third party about The composition of this first I am one — won control of the Unocal's proposed defensive panel makes the point quite Senate. The Democratic victory strategy. The third party bought directly, if painfully. Joe Flom's firm caused a shift in committee control puts on Unocal's stock and profited and Felix Rohatyn's firm have, to senators and staffers who, at handsomely when the market unfortunately, been touched by least in the public eye, have been learned of the target's plans for insider trading scandals. And, as more vocal calling for further an exclusionary self-tender. But an SEC employee, I cannot sit here governmental regulation of the to blame that trading on hostile with a holier-than-thou attitude market for corporate control. takeovers is like blaming pass because, in the 1970s, a Commission Second, on November 14, interference on the quarterback attorney was criminally prosecuted the Commission announced its who throws the ball. It simply for tipping information about a settlement of the Boesky insider makes no sense. pending enforcement action. This trading case. The implications of Finally, consider the insider morning's newspapers also report the Boesky settlement are yet fully trading alleged in connection with allegations that a former employee to be played out, but it is clear that the Colt Industries restructuring. of the New York Fed leaked many participants in the takeover There, the trading took place even confidential information to debate are trying as hard as they though there was no takeover — certain government bond dealers. can to link insider trading and friendly or hostile — pending.

6 By Joseph A. Grundfest Commissioner of the Securities and in Congress? and Exchange Commission

Does this suggest that we should potential takeover and want to shut down Skadden Arps, Lazard preserve greenmail as a defensive Freres, the Federal Reserve, and the tactic? The question certainly Commission's Enforcement Division deserves to be explored before because they have all generated legislation is enacted. inside trading cases? Hardly. Second, is the question of the The same logic also urges that 13(d) waiting period. Although we not shut off hostile takeovers the desire to shorten the ten-day because they can sometimes be window is often defended on the the subject of insider trading, just ground that it promotes desirable as friendly takeovers, takeover disclosure, it's important to defenses, and recapitalizations recognize that shortening the can be subject to such trading. window will certainly deter Now, addressing the question of legitimate takeovers. There is takeover legislation more directly, substantial evidence that the larger two topics appear to be of broad a bidder's toehold in a target general interest and I will address company, the greater the probability each separately. that a takeover will succeed. If First, is the question of greenmail. legislation makes it more difficult Although many congressmen to establish a toehold — either by appear to be sincerely outraged shortening the window or lowering at greenmail, there is a legitimate the 13(d) threshold — then fewer question as to whether legislation is takeovers will occur. necessary and, if so, how it should Therefore, it's important to "It is clear that many be structured. Seventy corporations recognize that there is an often already have anti-greenmail charter hidden subtext that pervades participants in the amendments, and there is no the 13(d) debate. That subtext has takeover debate are trying legislation Congress can pass that nothing to do with a public interest cannot be cast in a charter provision in disclosure and has everything to as hard as they can to that has an equivalent effect. do with a desire to stifle takeover link trading and hostile If corporations can do as much to activity. It's important that the takeovers. That argument protect themselves from greenmail legislative process keep this as Congress can, why don't more consequence in mind because is, however, dangerous corporations do more to protect legislative changes defended on and wrong." themselves? And, why do so many procedural disclosure grounds can, executives ask for anti-greenmail in fact, be advanced and adopted legislation but refuse to adopt for substantive anti-takeover reasons equivalent anti-greenmail charter that could severely upset the amendments? Is it because balance between bidder and target managements see greenmail as as currently established under the a desirable way of buying off a Williams Act.

7 Developments on the Legislative

By Joseph H. Flom f I could rest on what confident letter wasn't any good, Partner, Skadden, Arps, I Commissioner Grundfest said, I you realize that talking about the would be delighted to say no more. need for having financing in place Slate, Meagher & Flom Unfortunately, the political process is just another effort to try to close isn't working quite that way. The down the takeover process. attitude on the Hill seems to be that As an example, let's take the we've got to do something about 90-day period. If you say that we takeovers. Not necessarily anything need a 90-day period because there that has anything to do with insider is insider trading information going trading, but using insider trading as on — now, instead of having 30 an excuse. An analogous situation days where insider information would be where they tell you if you can be floating around, we will have banks, they will be robbed, so have 90 days! let's close the banks. I have talked to Another example is when the a number of Congressmen and that Congressmen propose a "balanced seems to be exactly where they are. bill" — one that will be fair to both A number of things have been the aggressor and the defensive proposed by members of Congress side. Then you point out that when — a 90-day waiting period for the thing gets on the floor, the doing takeovers; putting in an limitations on the aggressor will be impact statement which talks about pushed through, but the defense anything and everything that might tactics will be argued about. It will be affected if you do the takeover; be said you're interfering with the not allowing takeovers to go state's rights — state's rights being forward unless the financing is the right to talk about fiduciary already in place. And when you responsibilities and corporate start to talk to the congressmen maneuvers by the target. So you about the fact that these things run the risk that you will put in don't make any sense, you draw a bill that looks fair to both sides a blank in many cases. when you start, but one half of it Let's take the financing situation. will be eliminated. You don't have a bank loan Then you suggest that maybe agreement in any case that doesn't there is a way to deal with this have outs until the money is taken problem. Put it to management down. And, indeed, performance that if they want a 90-day waiting on highly confident letters period, they can have it, provided tends to be equally as good as that they agree to take no defensive the performance under letters tactics of the kind that are being of commitment from banks, used today as the price of getting where they have material adverse 30 to 90 days. This idea, change-outs and other outs prior incidentally, has gotten a lot of to closing. If you look at the history interest down on the Hill and may of a number of deals that didn't be something worth pursuing. go through because the highly Management has the choice. They and Judicial Fronts

say they want a fair auction, and maybe 90 clays for a fair auction is fine. But they're not going to be able to use the extra 60 days to keep stirring up the pot. Incidentally, in terms of the public perception of takeover activities, I remember when we went from 10 days to 30 days because of the Williams bill. What happened was there were less takeovers in the following year than in the previous year, but the public perception was that there were a lot more. Because, instead of the process being over in two weeks, you now had it in the press for 30 days or 40 days while things were going on. The result was that even with fewer takeovers, there were a lot more stories in the press that people interpreted as indicating the world was coming to an end because everybody was taking everybody else over. I think we are also seeing an interesting philosophical problem going on in the takeover area. There are abuses — nobody can argue that there are no abuses, but there is no aspect of life that doesn't have good and evil tied in with it. The problem from a social standpoint is the overall level of activity, good or bad, and the forcing of the restructuring of industry, good or bad. These are fundamental questions that ought to be addressed. They ought not to be "The attitude on the Hill seems to be that addressed because there are insider we've got to do something about takeovers." trading scandals or because, on an idiosyncratic basis, in one case somebody lost a job and, therefore, the whole movement is bad. Within 10 minutes I think that's about all I can say. A Program for Takeover Reform

By Felix G. Rohatyn Partner, Lazard Freres & Co.

t is very interesting being an sighted as well to think that there with financial institutions. There I investment banker today. There is no problem, because there's is almost a contradiction in terms was a cartoon in the New Yorker obviously a problem. in talking about an institutional about twenty years ago about First of all, there is a problem investor. An institutional investor a lady visiting her shrink and because a major industry within the has a horizon of about twelve the psychiatrist said to the lady, financial service industry has lost minutes. It's like talking about "Madam, I have good news for the political and public support of Ira Harris and management. It's a you. You have no complex, you are the people of this country, and it's contradiction in terms, (laughter) inferior." That's about the way it clear that that's happened. The Now, the things that are being looks from my end of the business perception out in this country today looked at in terms of abuses in today. is that what we are doing is not in our industry are going beyond just I make my living doing mergers, the national interest. It is rather insider trading. The Jeffries case takeovers, and acquisitions. I've parasitical and is rewarded beyond involves parking and it involves done so for about 40 years and it any level of contribution that we manipulation of markets in has been quite a good living. So, make to the national weal, and underwritings. There are other unless I were suicidal, I would not that something has got to be cases coming along that have be here arguing that all takeovers done. When that kind of political nothing to do necessarily with are bad, and that we ought to put perception is created — and not insider trading. The whole structure this industry out of business. without some reason — I think one of the industry, the relationship Nor do I personally make any had better go do something about between arbitrage and merger and distinction between hostile and it, especially since that perception acquisition activity is being looked friendly takeovers. I think those are has been created before any kind of at. The question of a Chinese wall, judgment factors — first of all, most financial downturn has happened in how does it work, and should it hostile takeovers turn friendly with this country — before the markets work, and can it work? the last $5 a share that are paid. have gone down — and in a period It seems to me that the time has So, I don't believe anybody can of relatively benign economic come to take a somewhat broader make those judgments, or legislate activity. look at our business. It was last whether a hostile takeover is bad Now, the reality of life is that this looked at, I think, in the early '60s and a friendly takeover is good. country has turned into a casino. with a commission; I think it was an What I'm concerned about is the Market activity is highly speculative, SEC commission headed by Milton process by which takeovers take place and a lot of this speculative activity Cohen which looked at the industry — whether they're fair, whether has centered around the takeover structure and the relationships they're properly financed, and in process. New technologies in between the various factors, the the last analysis, what the process financing areas have created a various people in the industry, means to the national interest. capacity to do things that nobody and how they relate to each other. I believe that it is remarkably would have thought about ten or I think that there is some reform optimistic from the point of view fifteen years ago. We're dealing required in the takeover process of our industry and relatively short- with world markets; we're dealing

10 quite aside from the whole question of insider trading. People who break the law and trade on inside information should go to jail. And they should go to jail probably for longer periods than those who have been convicted will go. That's just a simple matter of law enforcement. But the process, I believe, needs reform on both the offense and on the defense, because the abuses that have been created on the offensive side as a result of some of the rules that I think need to be changed have given rise to, I think, equally bad if not worse abuses on the defensive side in terms of entrenchment, in terms of poison pills, in terms of crown jewel options, all of these wonderful things. Joe invents something to win on offense, and Marty goes on a long weekend and invents the double hydrogen bomb on defense. We go on with these things and we are almost like the nuclear priesthood, you know, like people who negotiate nuclear disarmament. We've invented our own language that nobody else can understand and, therefore, we can deal with this for a period of time, but the time has come where it's really going to have to be changed. Rather than dealing with these things piecemeal in front of Congressional committees that really are not always technically capable of resolving what are very deep differences and views that "The reality of life is that this country are expressed in front of these has turned into a casino." committees, I think we should have a Congressional or SEC commission. Some people are on one side of the issues, some are on the other, for it possible to run an arbitrage a lot of the defensive mechanisms arguments that probably will sound department with an M & A that allow management to entrench equally intellectually convincing department? We're too small to themselves, and that there ought to to these same Congressional do it and feel comfortable with it. be essentially a level field between committees. I think it's quite possible for large offense and defense. I think that either a Congres­ firms to do it, but how to do it At the same time, when we're sional or an SEC commission of is a difficult question. What is the trying to encourage investment the Milton Cohen type should be relation of market making in block in this country, I think something created over the next twelve months trading to takeover activity? These should be done about limiting to really look at the entire structure are not simple issues. the activities of the so-called of the industry. Banks are coming I personally believe that there institutional investors in terms of into the business, overseas firms are should be reform in the process of their short-term trading activities. coming into the business, companies the offensive side of takeovers. I And I am concerned for the level like General Electric, Sears Roebuck think there should be reform in the of leverage that is being created in have come into the business. We relationship of arbitrage activity and some of the very large mergers by have world markets. All of these speculative accumulation of stocks what I believe to be an excessive things have to be looked at in in the takeover process, and that as use of high-yield bonds as part the context of the structure. Is a part of a package there should at of the process. the same time be the elimination of

11 Commentary #1

Harris: Thank you, Felix. The only Clark: Joe, there was a blue ribbon Lipton: Some of us here served on person I know that dislikes being commission in 1983 that came that advisory panel and we thought involved in management more than up with several recommendations. we did exactly that! We held I do is Felix, (laughter) Why don't Nothing was done by the hearings; we invited input; we we open the panel up with some commission based on those consulted with all the experts, and questions and see if we can get a recommendations. Is your proposed so on. We labored long and hard. little dialogue going. commission going to be the same We came up with a report that, scenario? as you know, the Commission Lipton: Ira, I would like to ask essentially rejected, and the Commissioner Grundfest what he Grundfest: Well, one can argue Commission's legislation got no thinks about the proposal made by about the color of ribbons. That place in Congress. And yet, the Milton Cohen and just seconded by was a special advisory panel on proposals made by the advisory Felix Rohatyn to have a new special take-overs that the Commission panel were very mild in relationship study of the securities markets actually put together and told "Go to the proposals now being put following the 1967 study by out and think about it and come forward in Congress. Milton Cohen. back and tell us what you think." The Commission considered Grundfest: Legislation has already the recommendations and Flom: A number of the been introduced suggesting that responded: "Look, this (package recommendations are presently there be a blue ribbon commission of recommendations) really is not incorporated in bills that have been appointed by the SEC. According to going to fly for a wide variety of introduced, and a number of those this bill the commission would have reasons." You can't have a group recommendations, had they been five members, a separate budget, go off, hide in the closet, and then in place, might have avoided some and be charged with looking at appear magically at the end of a of the agitation we have right now. some specific topics. year with a set of recommendations I thought that the Commission did I think that the group needs to be that people will then pick up. It has a very thorough job with broad put together with a specific mission to be part of a larger process. There representation from all aspects of in mind and not simply be charged has to be input into it; it has to be the community. There were, as just to go out there for a year and open; it has to interact with larger Marty said, public hearings. We come back and tell us what you parts of the interested community. had input from other government think after a year is over. As long as In order for these groups to come departments. The series of the group is asked to define specific up with results that are going to recommendations that were made problems that we see on the horizon be useful in the process, they have — including closing the 13(d) and as long as it has an appropriate to be very carefully structured, window, dealing with greenmail, level of credibility so that its views carefully managed, and carefully and requirement of a tender offer could be taken as objective by directed, so that the outcome will above a certain level of open market Congress, then I think perhaps a be relevant to the procedure. If accumulation — are all very hot great deal could be accomplished. it's done that way, then we could topics today. succeed, especially if we define I think what happened was Lipton: Has the commission taken that when the Commission adopted an official position with respect issues that are arising on the horizon. a number of the recommendations to that legislation? that were made in a proposal to Grundfest: No. Congress, it ran into a firestorm

12 on the Hill and with the extending periods by 10 days, If the proposals made by this administration, and so those 15 days, 20 days, and our economy panel a few years ago had gone recommendations were withdrawn. isn't helped by keeping the textile into effect, maybe we would have factories in Lowell instead of having avoided some of the problems Grundfest: I think Joe just put his route 128. we have today. It just proves the finger on a very important point. point that this industry, which is no Even if one were to persuade the Rohatyn: I think that we're different from any other industry SEC that a particular direction making a profound mistake in not or interest group in this country, appears to be reasonable, the recognizing that this country will really only faces reality when it is Commission then has to go out and not tolerate nor will any country dragged, kicking and screaming, test the waters. What's it like in the tolerate financial people taking in front of a Congress that decides Senate committees? What's it like control of this country's basic that the time has come, and that's in the House committees? What do industries and productive capacity. too bad. people in the administration think? When control passes to financial From that perspective, perhaps, people, profound political changes Flom: You know, Felix, you put we needed broader input. Another take place. We could make your finger on the key. I don't observation ties into something that statements here about the fact that think a panel dealing with whether Felix said — that the game is played the securities law should be according to some very complex reformed is what we should be intricate rules. It's a delicate minuet looking at. If you're talking about in terms of how you tread your a panel that should study and make way through the regulations. For recommendations as to whether the better or worse, the thrust of the "The problem here is entire method of changing control committee's proposals would have that the predators in is good or bad, considering a added a new level of steps, more the United States are whole host of matters — antitrust needles that would have to be not only fast of foot matters, the concentration of threaded. Perhaps there are other wealth, job creation, international ways to go, if we're talking about and long of fang, they competitiveness — that is a proper reforming the take-over process — are also very good on subject for a broad-based study. But not only to make it fairer — to level turn of phrase, the changes and the tinkering with the playing field — but also to make individual abuses, it seems to me, it less complicated. and accountability is has to be done on an ad hoc basis. always focused on the It always looks terrific to say we Wasserstein: When you go down to directors of the can design something that's going Washington, what people are most company. Very rarely to take care of every abuse that's concerned about is not the issue of happened so far, but the net whether you extend the take-over do we hear about result is you create new ones. process by ten days or not. accountability of the When we were on the commission, What's really going on is a basic other participants." we concluded that the ideal way to fundamental economic struggle in effect a change in control was under America, as we change the nature MARTIN LIPTON the English system. That was great. of our economy. And as there are I wonder whether we would have take-overs, there are questions felt that way in light of the latest about what happens during scandals in London. . . restructurings, what happens with employment. The key word is what Rohatyn: . . . which were exported we ought to worry about blue-collar happens to people in congressional from here, to some extent. . . . workers while we're doing these districts who are laid off or lose They didn't show up in the balance take-overs, but it is not going to their jobs and don't get fair of trade, unfortunately, (laughter) happen. We are not going to worry compensation for that? I think that's about blue-collars. It is not our job a legitimate concern. I think people Harris: I just want to ask to do so. It is our job to recognize in our industry should be more Commissioner Grundfest one the fact that there is going to be concerned about the equity question. No one has an argument reform in a system that badly needs of the whole general restructuring when you talk about outright total it because the excesses go beyond of America. But the restructuring abuses — those that are black and a couple of people selling inside is inevitable. It is a function of an white. The trouble is that an awful information. The process is not industrial revolution not only going lot of what has gone on has been right, it is not working right, and on in this country, but world-wide. grey. It may be a lack of budget the result is probably ultimately not The appropriateness and fairness on the part of the SEC, but a lot in this country's best interest, so it is of dealing with blue-collar of things have been permitted to more than just the technical things workers who don't have the golden continue for a period of years in as to whether we close the 13D parachutes is a legitimate policy the so-called grey area. It's almost window or whether we eliminate issue. But it sure isn't helped by like the guy who has driven on a poison pills or not. highway, where, yes, it does say 55,

13 but . . . You know, when I drive without having to muck around. that. So, then you say, well, boards between Chicago and Ann Arbor, That, I hope, is what we're doing. of directors? (There are all sorts of I've never seen anybody in the State books from every business school of Michigan drive on the Interstate Rohatyn: I think the issue is what about the efficiency of that less than 70. So people get to a is the appropriate way of shifting approach.) Then you say, well, wait point where they say, well, it's corporate control in this country? a minute, what about the take-over obvious in Michigan the speed Chicago's School of Economics process? Forget all the detail, but limit is 70. That's what is permitted. has one definition which treats should there be a means of having So, using this as an example, I corporate control as kind of an asset an accountability of management? would like your comment. Is it that you buy or sell and the freer Once you say yes to that, then lack of funds on the part of the the better. Now my admiration for it is all a question of method and Commission? Because a lot of the the Chicago School of Economics is approach and lots of people can things that are being talked about limited. On the other hand, I have have different ideas. If you say now have gone on for a long time never studied economics so I have no to that then you are saying that and nothing has happened. an enormous advantage. How there is some inherent right for should a shift in corporate control management to be management Grundfest: Could I get a list? be done, what is the impact, what without accountability to (laughter) I know what you mean. things should be looked at in the shareholders. The question about ambiguity is a process? We are going to have to legitimate one, and I think we have tinker with some of these changes Flom: I agree wholeheartedly to understand why it arises. There because the political process has with Bruce. A client of mine once is no statute and there is no rule started and it's not going to stop. said "people hate predators, and that says "this is insider trading, this The ultimate issue is — what the aggressors in take-overs are is how it's defined." Insider trading is the appropriate way for corporate predators." But have you ever seen is a product of the federal common control to change? a herd that didn't have predators? law. It's evolved on a case-by-case What happens to the herd? That's basis, in fits and starts. It's moved Wasserstein: It's all very nice to really the analogy I think one must in some direction and shifted course play with ten days or this device look at. over about 25 years. Any legal or that device — what Joe Flom On the other hand, there is doctrine that evolves through the calls "tinkering." There are some an argument that the corporation common law process has inevitable technical reforms that need to be is more than just a vehicle for areas of ambiguity and vagueness. made. After all, the Williams Act stockholders to make money. This It is inherent in the process. In the is several years old and many of approach says that the corporation common law you're not going to its assumptions aren't quite accurate — or at least major corporations — have a precedent on point for every anymore. It needs to be revitalized. is like some kind of quasi- case that arises over time as markets But, on the other hand, if you go governmental body where it must evolve, especially as new processes back to the original theory of Berle think of other constituencies in a emerge in the marketplace. What and Means — their indictment very meaningful way rather than we have done in the Commission, was very much that there was just the shareholder interest and I hope, is that we've tried to stay a no discipline on management in the shareholder interest in the million miles away from the shades America and that led to inefficiency short-term. of grey. When we brought the and problems. So, the fundamental question is the old reform issue, I say the whole problem is a Levine case, for example, there fundamental one — not only the were arguments made that, "Oh, which is, what happened to the idea of accountability in America? change in control — but what is the my gosh, the Commission's trying to corporation and who has a right to expand the scope of law! Where in What happened to the notion of accountability for management? the corporation? Should you be able the heck are they going?" But by to trade in corporate control and the time everybody looked at the There can be take-over abuses but that very seminal idea was that therefore the corporation (as the evidence that we had, they realized Chicago School would say), just it was a plain vanilla case. there should be some notion of accountability. So, let's see. What like you trade in sacks of wheat? Also, if the name was changed, about elections and proxies? Well, And there are various arguments and if the dollar signs were smaller, when you're through with staggered about the desirability of letting the you'd never hear of the Boesky boards, there are no elections, there marketplace put the assets to the case. The Boesky case is plain are no proxies, no one's going to, in greatest and best use. But to do that vanilla, insider trading. There any material way, in any material obviously involves upset; it involves is no ambiguity, nobody could number, throw out management changing the headquarters from the have thought otherwise for a who are bad. Let's just assume that town where the local charities got microsecond. We're not out there there are some managements who special treatment to one where to run amuck in large zones of grey. are bad. (Present company, of they no longer can count on that. We don't need to. (laughter) There course, excepted.) So you say to In many cases it involves cutting is enough to be done just by taking yourself, well, what is the process? employment because people are a rifle and shooting bull's-eyes Proxies? They're out, you can't do no longer interested in just letting

14 things go as they have. It involves the following statement without Now, suppose for an instant that change, and change is always raising any concern that I am a Nabisco had raised the financing upsetting. Marxist, (laughter) I would like to to do a hostile take-over of R. J. put forward, in roughly 90 seconds, Reynolds. Suppose also that Nabisco Lipton: The problem here is that a neo-Marxist perspective on announced, a priori, what their the predators in the United States class struggle and contests for cor­ intentions were: "We're going are not only fast of foot and long porate control. To do so, let's look to shut down the headquarters in of fang, they are also very good on at a specific transaction — the Winston-Salem and we're going turn of phrase, and accountability RJR-Nabisco transaction, where to move it to Atlanta, we're going is always focused on the directors R.J. Reynolds went out in a friendly to spin off a major subsidiary, of the company. Very rarely deal to buy Nabisco, using the and we're going to think about do we hear about accountability internal mechanisms of the spinning off the tobacco of the other participants — corporate governance process and operations." There would have been the accountability of people who operating under the traditional hell to pay even though the end provide financing to the predators; rules. result would be identical to the the accountability of people who result in the friendly take-over. provide advice to the predators; the Although the end effect is exactly accountability of the predators in the same, the political response eliminating jobs; the accountability would be remarkably different. Is of the predators in reducing there a possibility that it's because, long-term investment; the "I think people in our in one situation, the changes accountability of predators in industry should be operate through a socially accepted decreasing the ability to compete mechanism for the transfer of in world markets, and so on. more concerned about corporate power, while in the Now, all these I grant are issues the equity of the whole other situation it takes place in the of judgment and policy, but I don't general restructuring marketplace, and some people have think that we can have a fair debate less confidence in the marketplace or ever come to a rational resolution of America. But the than in traditional methods of of these issues without taking into restructuring is corporate control, such as votes account the accountability of all of inevitable. in the board room? the players who are involved. It is a function of an Lipton: I don't think any of us have Rohatyn: Including the Chicago industrial revolution any objection to what we frequently School of Economics. not only going on in call industrial mergers, whether Flom: For Marty to say that the this country, but accomplished by hostile tender offer or by negotiated acquisition. predators are the ones who are "fast world-wide." of phrase" when he is the inventor I think what we're focusing on is of the phrase "junk bond bust up BRUCE WASSERSTEIN not the combination of two business take-over" leaves something to be organizations in order to form desired, (laughter) a more effective organization. Instead, we're focusing on the Harris: We'll give the commissioner impact on American business of one last comment. I will tell you the movement away from industrial we can do a whole panel of just Subsequent to the friendly acquisitions and toward financial Joe and Marty, (laughter) Just one merger, the executives of Nabisco speculative activity. That's what last thing and then we're going rose through the ranks until they requires the attention — not to go on. became the dominant force within the combination of two major the J. R. Reynolds group. They companies. Grundfest: I think Marty's put his then decided to shut down RJR finger on a very important problem. headquarters in Winston-Salem Harris: I think we should move The issue is not about 10 day and to move the headquarters to into the next segment now to hear windows here, and 20 day waiting Atlanta. They also spun off a major from two gentlemen who have had periods there. That's not really RJR subsidiary. There is also talk — experience from the operating what's got America worried. We're I don't know how true it is — about side and the corporate side. What worried about the mechanisms of spinning off the tobacco operations I would like to do is start out first corporate control. I'm a person into a master limited partnership. with Don Clark, who is chairman who's often alleged to be a die-hard Now, all this divestiture is going on, and president of Household member of the Chicago School. and a major headquarters is being International. Don is going to Even though I've only been to moved out of town, but there's not give a few remarks about mergers O'Hare Airport. That's the extent much of an outcry from the from the perspective of the of my connection with Chicago — corporate community. chief executive officer. I fly through. So I hope I can make

15 Mergers from the Perspective of a Chief Executive Officer

By Donald C. Clark Chairman, President, and Chief Executive Officer, Household International

hank you, Ira. The people The basic premise of takeover point in any takeover situation, Ton this panel are the ones practitioners seems to be that because that value, along with the who make hostile takeovers work. the market is efficient in valuing premium the bidder is offering, I accepted the invitation here so I a corporation, and if break-up or determines whether or not could meet individually with each bust-up value exceeds current management can consider the offer one of them last night, and I gave value, that is really a reflection of as fair. We all know that in order them inside information about my management's inefficiency. This to acquire a controlling ownership company; now I feel perfectly safe. premise ignores all other values. position, a premium over market (laughter) There is substantial reason must be paid. If we start with my I come to this subject as to attack this efficient market premise that in some cases the a professional manager who hypothesis standing alone. In fact, market value does not accurately believes that it is management's within the academic community reflect a company's value, then, responsibility to recognize and there is significant current debate obviously, a higher premium deal with the sometimes conflicting on the issue. Yale economist Robert is necessary. However, some interests of a corporation's many J. Shiller argues that gyrations in economists seem to think that a constituencies; and while doing so equity prices over the past 100 years 30 to 40 percent premium by itself to maximize shareholder value over have been too wild to be accounted is sufficient evidence of value to the long term. This task is made for by changes in fundamental warrant a change of control. significantly more difficult when values. He claims fads and fashions I disagree. there is a hostile takeover threat, dominate swings in stock prices. I also disagree with some because inherent constituency Warren Buffett, chief executive economists on another point. In a conflicts are magnified. officer of Berkshire Hathaway, and cornerstone article in the Harvard A major conflict involves those one of the most successful investors Law Review, advocating enforced with a short-term view and those this country has ever seen, has said, passivity on the part of management with a long-term view. Shareholders "You might think that institutions, in a takeover situation, they who encourage the takeover with their large staffs of highly concluded: "Even resistance that game usually take the extremely paid and experienced professionals, ultimately elicits a higher bid is short-term view. They seek a would be a force for stability and socially wasteful. Although the premium over current market reason in financial markets. They target shareholders may receive a value, with no real regard for the are not: stocks heavily owned and higher price, these gains are exactly effect their demand has on the constantly monitored by institutions offset by the bidders' payment long-term viability of the company have often been among the most and thus by a loss to the bidders' or on the other constituencies inappropriately valued." shareholders. Shareholders as a that have made a meaningful The point made by Messrs. group gain nothing."1 but non-equity investment in the Shiller and Buffett is that the Well, as a manager I was taught corporation. In some cases this market is not necessarily efficient in to maximize value and to be an amounts simply to a demand for valuing a particular company's stock liquidation through a third party, at a particular moment in time, and with a sizable amount of the gain I agree. The market value of a 'Frank Easterbrook and Daniel Fischel, going to non-stockholders. company is, of course, a critical Harvard Law Review, April, 1981.

16 active advocate for the welfare of all of my company's shareholders. I cannot imagine taking a passive, "It is management's sideline role in a takeover responsibility to recognize situation. I would consider that an unforgivable dereliction of my and deal with the duty and a breach of my fiduciary sometimes conflicting duty of loyalty. To return to my main theme, interests of a corporation's we should all recognize that there many constituencies. . . . are many well-run companies in This task is made corporate America — companies that contribute enormously to this significantly more difficult country's economic well-being — when there is a hostile that could be restructured with takeover threat, because massive debt or broken up and sold piecemeal to give short-term the inherent constituency shareholders an immediate payout. conflicts are magnified." But is this management's role? And is it maximizing value in the long term? Should we put a For Sale sign out in front of every company headquarters? I think not. There is something fun­ The maintenance and devel­ one-sidedness of the current rules. damentally wrong with the opment of institutional loyalty Does anyone really doubt that a position that the only value to and commitment do not equate raider wishes to buy the shares of consider in managing a business to "entrenchment." I take great his target at the lowest possible is current gain to existing offense at the oft-repeated charge price from a widely scattered and shareholders. This thinking that management is entrenchment unrepresented shareholder group ignores the multiple dimensions motivated when it seeks to nourish under enormous time constraints? of corporate management institutional loyalty or pursues Does anyone really doubt that? responsibility. Short-term the long-term view. Those in the In this, the raider is assisted by shareholder gain is only one of academic field, with their tenure current rules which permit him, and a number of responsibilities and system, are sometimes the most others working with him, to secretly values that should be taken into vocal about entrenchment. accumulate a substantial ownership account. Others include the rights In short, it is a denial of major position before disclosure and of customers, employees, suppliers, aspects of corporate responsibility to to falsify the real purpose of and the communities in which regard short-term shareholder gains the accumulation without fear of businesses operate and which have as the supreme, if not the only, reprisal. All participants in the a dependence on business. responsibility of management takeover game must bear some To meet these responsibilities to which all other values responsibility for the growing management must concern itself are subservient, if they are to be public distrust of our system in light with developing for the corporation considered at all. I believe in, of current revelations of massive the financial strength to withstand and intend to continue to be an illegality and greed. The need for recessions and other adversities, activist manager, in defense of the meaningful reform is emphasized the resources to invest in long-term interests of the full by the fact that it was not our new technology, processes for range of constituencies that make system of checks and balances that developing new products and up Household International. uncovered the present wrong-doing, services, techniques for improving During the debate that followed but rather an anonymous tip that productivity — all of which are our adoption of a shareholders' started it all. of fundamental importance to the rights plan, one of my fellow Before my time is up and before future of any individual business panelists asked rhetorically why I am accused of being too one-sided and to the health of our economy management that adopts a rights in my views, let me readily state and the well-being and ad­ plan can accept the fact that their that takeovers, including hostile vancement of society as a whole. shareholders were smart enough to takeovers, should not be outlawed. Meeting these responsibilities know when to buy their stock but Rather we need a balancing of the also requires management and not smart enough to know when to power to control the outcome — employees to have a sense sell it? He misstates the issue. It's a leveling of the playing field. of institutional loyalty and not a question of intelligence but Leveling the playing field will help commitment, and this requires one of coercion. He and others management recognize the rights of confidence in the continuity of a would ignore the coercive nature all of a corporation's constituencies, business, albeit with continuing of all tender offers due to the and also may help us reestablish the change. integrity of our marketplace.

17 Managing Acquisitions and

eviewing the roster of speakers views are not biased in any management does not have the R. for this event left me overawed particular direction. It might be luxury of a stock market providing and somewhat uncomfortable. appropriate to conclude that I've current values on individual asset Congressman Rostenkowski has just been indecisive about what to groupings or affording them already put us in a position where do with my career. an easy exit vehicle. In addition, one can enjoy only eighty percent of From these experiences I have holding company management has a business meal. I admit, in my case, developed some rather definite the very important responsibility of this is more than required, but it is views. Most importantly, I believe management appointment and the upsetting. Commissioner Grundfest management has an ongoing understanding of long-term goals. is the man in Washington and need I responsibility to maximize Periodic evaluations of these say more. Messrs. Flom, Gutfreund, shareholders' values, using those individual asset groupings, their Lipton, Rohatyn, and Wasserstein approaches which by regular and current value, and future potential charge so much for their advice and objective analysis appear most become the basis for grow, shrink, services, I didn't dare say more than appropriate for their company. sell, or retain type decisions. The hello. Henry Kravis, although he All programs to insure shareholder aggregation of all asset values, seldom mentions it on weekends, is gains start with a basic requirement. plus or minus corporate assets or my boss. Thank goodness J. Ira is Individual corporate operations liabilities, is the on-going basis here. Being semi-retired, he charges must be managed by talented for the determination of the less to old-line clients and his free people with a single dedication — corporation's total value, a necessary advice is certainly worth it. And long-term improvement in the determination in equating the best finally, Don Clark is so spastic about return on assets employed. This course for shareholder benefit takeovers, acquisitions, etc., I had to may involve growth but it is not a and judgments relating to market sign a five-year stand-still agreement requisite. It does involve the recognition versus potential returns relating to his stock before he would willingness to sacrifice short-term from the sale or restructuring of appear with me. He said that he did gains for longer-term benefits. the company. not have a "For Sale" sign in front The realities of this policy must be The previous speaker indicated of his business. I thought when he articulated to the marketplace on a that the market sometimes does listed his stock on the New York regular and consistent basis in an not recognize the value of a Stock Exchange that said "For Sale" attempt to minimize the potential company. Then it is management's . . . but I may be wrong. damage to shareholders' wealth responsibility to get to the Clark: One share at a time . . . due to the "Street's" proclivity to marketplace and articulate its one share at a time. use "what have you done for me position to increase that value. Kelly: I'm sure that every today?" type of value judgments. I was involved in taking Swift investment banker here would My experience and this discussion 8c Company, a less than $3 billion agree that one share at a time, at relate to diversified companies, a year meatpacker, into Esmark, the proper rate, would be just which I believe should be made a $7 billion conglomerate, which fine with them. up of autonomous discreet asset was then reduced to a $3 billion I have spent a good portion of groupings overseen by a holding diversified company through a my executive life participating in the company approach utilizing to a major restructuring involving buying, selling, building, shrinking, degree the portfolio management selling off energy and fresh meat and restructuring of U.S. corpora­ approach. operations. Through internal tions — and supporting investment Contrasted with portfolio growth and acquisitions, principally bankers and lawyers. Therefore my managers, holding company the acquisition of Norton Simon,

18 By Donald P. Kelly, Chairman and Chief Executive Officer, Beatrice Companies, Inc. Dispositions for Shareholder Value

Esmark grew back to the $7 billion shareholders had and have every level, and in 1984 Beatrice right to expect that performance purchased all of Esmark. (Beatrice from me. offered $56 for the company This key element of man­ with management, $60 without.) agement's responsibility is too often (laughter) down-played or ignored by top During this period, Esmark/Swift management. All of the rest of their bought 50 companies for over $2.5 activities should be subordinate to billion, sold 35 for over $1.7 billion, this long-term objective. It is not issued 40 million shares and easy. You cannot let the "Street" repurchased 46 million shares. run your business. You must accept We were at least somewhat flexible. that certain actions which provide From 1978 through the sale long-term benefits may temporarily to Beatrice for $2.8 billion in reduce stock prices. You have to early 1984, while I was the chief recognize that the general level of executive officer, stock value stock prices can both benefit and increased from $7 to $60 per hurt your stock. All of these factors share. Incidentally, the Dow at that and more are part of the delicate period ranged from 800 to 1,200, balancing act management is somewhat less responsive than being paid to perform. In the today's market. final analysis, management Recently I became involved with must recognize they were hired KKR in the purchase of Beatrice. to improve shareholders' wealth. In the first eight months since They should be willing to be judged the acquisition, autonomy has on the basis of their record against been returned to operating units, that criteria. "In the final analysis, overhead has been cut $140 million, Acquire, grow, shrink, divest, management must $3.6 billion in assets have been sold, restructure, buy and sell securities, recognize they were hired and the company has some very incur and reduce debt. Sell the 9 ambitious plans for the future. whole company and lose your job. to improve shareholders Of the sales, four of them today are All of these are legitimate tools to wealth. They should be independent companies and one be used in meeting one's corporate willing to be judged on is a part of a major offering by responsibilities. I suggest companies Coca Cola. So, I really don't think use any, all, or none so long as the basis of their record that those sales have adversely they get the job done. Legitimately against that criteria." impacted America. winning is always more fun than I have, with the Beatrice losing and it doesn't make a lot experience, been engaged in of sense not to at least consider seven separate billion dollar plus using all the tools that are transactions. The net result of all available to you. of them, in my opinion, has been to increase shareholders' values. Since I am a professional manager,

19 Commentary #2

Harris: Don is the only guy I know Flom: I would like to ask Mr. Clark to management, let me assure you, that has bought and sold the same what he means by long-term? In the to see these people concentrate on company four times, (laughter) long-term we are all dead. I recall subjects such as: Is your company a client coming in who was worried a take-over candidate, and if not, Kelly: It's affection. about a take-over. I wanted to why not? Their horizon is extremely Lipton: It's known as periodic know why he was worried. We went short. I have substantial difficulty in entrenchment, (laughter) through his assets and he had a trying to equate their interests with 100 years' worth of minerals in the interests of others who are truly Harris: Why don't we open it up these mines. I said, how much in the picture for perhaps 5 years for discussion here. Who wants to credit are you getting from the or longer. start? market for the last 80 years? Well, he said, not really very much. Then Rohatyn: I would like to support Lipton: I would like to ask Don that. I think that we pay too little Kelly how he reconciles these two I said, is it one mine or can you sell off the 80 years? Oh, you can sell it attention in this discussion, or propositions: (1) the development in any discussion dealing with of long-term shareholder value, off, he said, but in the long-term that's going to be important. They take-overs, to the fact that the and (2) the maximization of stock ownership of corporate America is market price on a current basis. could have sold the 80 years' worth of supplies for more than the total shifting to managers, and that these Kelly: We're not talking about market value of the company, managers, who now, I think, control getting up every morning and being so I just want to know in terms roughly 70 percent of corporate assured that the stock is going to of stockholder interest, what America, view their responsibilities represent on that day all the values do we mean by long-term? very differently and they have a management ascribes to it. The facts legal basis for doing so. If you look are that one should be looking at Clark: Joe makes a good point. at ERISA, if you look at some of it on the basis that assets you have Certainly in the particular the statutes involving pension fund under your control are going to illustration that he's used, it management (I spend a great deal be more valuable if you continually would have been a much better of our money paying very good make the kind of investments that management decision, based on the lawyers, so I don't practice law), but support those assets. Temporarily limited facts we have, to dispose of what I hear is that there is basis for you might have less PE recognition, that property. When I talk about their saying, look, if there is a bid or you will have a reduction in EPS long-term, I'm talking about a at a premium here, I have no right that will affect you. It's your job to strategic planning horizon — which to turn it down. That creates a get out in the Street on a consistent in most companies would perhaps dynamic that is very, very difficult and regular basis and articulate be a 3- to 5-year period. What is to deal with. your company's position. Esmark most bothersome to me is the If you've got market actions had 33 up quarters and then had short-term view of the institutional where there are market one down quarter. I was back out investor who today owns a majority accumulations, where arbitrageurs on the Street explaining it and the of the major corporations. I just are accumulating stocks, and where stock went up. If you consistently got back from an institutional trip, the institutions themselves, the tell the investor the story, you can talking about the prospects of the pension funds or the insurance overcome some short-term swings. company. It's most discouraging

20 companies or the banks become owners in every single company and when Don Kelly can cut over $100 players, in effect, because of what that's critical. million in corporate overhead out they see as their responsibilities On the answer to the question, of Beatrice Company, and continue under the law, that is something Felix, when you go into a board to grow the company, that's a case that is worth reviewing in terms of of directors in Gulf Oil and talk in point. And my question really this whole question of the shift in to them as they're under attack by is, going back to Felix's earlier corporate control, because, in effect, Boone Pickens, the chief executive comment that financial buyers are they control United States' business. tells you that as a private company bad, and that this is really bad for The other issue that is brought we will be able to save anywhere corporate America, I find some real up is the question of leverage and between $200 and 400 million a trouble with that. I would like Felix whether junk bonds are good or year in corporate overhead! Or you to expand on that, if you would. bad for you, which is an argument that is raging at least in a small Rohatyn: I never said that. Henry, eclectic circle in this country. as you perfectly well know, because And, as always, there is no one we've been involved in a number answer to it. There are obviously "I blame the board of of things together, I strongly companies that have to issue supported a bid you made for a high-yield/low-grade bonds because directors in most company that I advised — a very they can't do anything else. companies. Boards of large company — because I thought Whether the use of that instrument directors by and large it was the right thing to do, and it went through. I was not the most as a part of the mechanism to take do not own any stock over and break up large companies popular person on the block at is good or bad, we will only know a and there is no one that point. few years from now. There have that's accountable." I am not making that argument been 120, 130, 140 billions of these and, as I said earlier, I make bonds issued, maybe half or a third HENRY KRAVIS no distinction between hostile have been issued in connection with and friendly take-overs, none take-overs, and so far the record whatsoever. The issues that Fm has been pretty good. After the concerned about are appropriate next recession, we will see where all "What is most financial structures and appropriate this comes out, and since amounts bothersome to me is process on both sides of offense and of this size can only be acquired the short-term view of defense and, as much as possible, by institutions where fiduciaries the absence of frenzied speculation are representing either retirees or the institutional in the markets of this country. policyholders, or depositors — if the investor who today That's what Fm talking about. experiment turns out to be wrong, owns a majority of the I don't think that it's revolutionary, the taxpayers will pick up the bill. and I don't think it says anything So far, on the basis of a 5-6-year major corporations." to the effect that there shouldn't be experience cycle, nothing terrible DONALD C. CLARK financial buyers. I have no problems has happened. On the other hand, with financial buyers, as long as in that same 5- to 6-year cycle, we've you structure your deal properly. doubled the national debt and we've I do have a problem with got a $180 billion trade deficit and a financial institutions buying paper 2,300 market, so I think the returns go into General Foods when they by the tens of billions that may be aren't all in, and we'll just have to were under attack by Phillip Morris. difficult paper to service the next see what happens. The first thing the chief financial time there is a recession in the hope officer said to me was, "When of being able to sell assets in the Kravis: I find what I hear Felix you're figuring out your numbers, meantime which they may or may saying, troublesome, because if we'd figure on a savings of $300 million not be able to sell. They may not continue on the course that he's on, a year in corporate overhead." all be as smart as you are and as we won't be in LBOs, we'll be in the These are not sales of assets. These successful as you are. You've been venture capital business, or we'll be are strictly day-to-day operating one of the bell wethers in the doing something else. We have had expenses. industry. And, so what Fm talking an experience of some 20 years, I blame the board of directors about is really the fiduciary this is not an experience of 5 years. in most companies. Management responsibility of the institutional We have spent approximately $30 doesn't own any stock in these investors because that's what's billion buying companies and we've companies. Boards of directors by driving the system. bought over 30 companies during and large do not own any stock and that period of time. What's there is no one that's accountable. Kelly: You may not like it that the interesting is that every one of Management is there. They institutions are your investors, but those companies have grown and continue doing what they're doing. they are, and they are the people prospered. Managements have been In some cases it's very good; in you are responsible to — your other cases not so good. I think shareholders. It's always amazing

21 to me that we, as managers, can put I would take exception to an earlier out an annual report and say that line of reasoning that Bruce used. I although we anticipated earnings think the proxy system is the system of X, an unusual event has caused "I would like to ask Mr. that should be used. I think people us to have earnings of Y. We are Clark what he means who say we don't want to use unable to predict the future. How by long-term? In the the proxy system are those who management can sit with a stock at long-term we are all substantially benefit in a monetary $40 and look at an offer of $60 and sense from the hostile tender offer say our stockholders are going to dead." situation. I've always taken the position that "give me more time benefit because we are projecting JOSEPH FLOM that three years from now we are and, if, indeed, my shareholder going to have earnings of X, I think group wants to liquidate the is an assumption that is not valid. company, instruct management You have to make your judgment and I'll do it passing out all of the on the basis of what you can return proceeds to the shareholders." That to the shareholders. When we made "When we made the way, up to 10% will not be diverted the decision to sell Esmark to decision to liquidate to certainly excellent, legal and Beatrice, there was no liquidation. the company into investment banking talent, but All we had was a change of another company, nonetheless a substantial amount ownership. It wasn't bad. It was so of the assets of the corporation. good that we bought it back later. there was no real liquidation. All we did Harris: Do you know, Don, Flom: You know, when one talks was have a change of the pressures my partner, Mr. about the market and management Gutfreund, and Bruce Wasserstein making a judgment, they can make ownership. It wasn't face in having to put all these MBAs a judgment. The question is how bad. It was so good to work? wide the band is. You have another that we bought Clark: It's an interesting point but interesting phenomenon here. if we could get you MBAs to go into You say create long-term values for it back." the manufacturing segment of this shareholders. Which shareholders? DONALD P. KELLY country, we would be much more Let's say you're in the department competitive. store business. The best companies are selling between 7 and 10 times Harris: At this point I suggest we earnings. You're selling at IV2 or take a 10-minute break. We will 8 times earnings. Now, somebody with actions that I considered totally then start the next part of the comes in and offers 13 or 14. If outrageous and which turned out to program with a gentleman who somebody likes the dynamics of be completely successful, (laughter) I have had the great privilege of the department store industry, they competing against for many years, can make the 13 or 14, go back Harris: I've got one question, and that is Bruce Wasserstein, who in and buy other shares at a lower Don, I would like to try to get a is managing director of the First multiple and still have a play in clarification. In your remarks Boston Corporation. I would that industry. To some extent talking about restructuring and just like to make one comment. in the United States, this whole what is forced on companies, I Bruce is a 1967 graduate of The phenomenon, as we're captive of the believe you used a term "the gain University of Michigan, and while depth of our markets, but, I'm not goes to non-stockholders." I'm not he was an undergraduate he served saying it's all right and all wrong quite sure that I understand what as the editor of the Michigan Daily. on this. I think that it is something you mean by a non-stockholder I would like to say to my good where there are real grey areas of getting the gain? friend, Stan Cook, up there, a very, very significant dimension. president of the Chicago Tribune You have people who are advocates Kelly: That's the people at this Company, that I only wish that his for one side or the other who refuse table, (laughter) One of my people at that time had been more to look at it. concerns is . . . successful in recruitment. If they had recruited Bruce to go into the Grundfest: I would like to be Rohatyn: I would like to just say Tribune Company it would have in the interest of full disclosure that excluded from that . . . (laughter) made life a lot easier for Felix and if Joe were really so much in favor Kelly: Except that the Commission myself on Wall Street, not having of the open market for corporate is paid from the capital gains tax. had to have Bruce as a competitor control that he advocates, I would One of the serious problems I all these years! Bruce is going have been successful in taking over think management faces is this to start off this section of the two companies which he defended whole question of whether or not program by talking about current a company should be liquidated. developments in restructuring.

22 Current Developments in Restructuring

By Bruce Wasserstein ra, thank you, and, as when I better. Why go to the stockholders? I was at school in Michigan, I'm You can go to one person and get Managing Director, still fighting for truth, justice, and something even better. You can go First Boston Corporation the American way. (laughter) to Marty Lipton and he'll give you Against the odds, as you can hear the vote. He'll give you the Number from this panel, (laughter) One. The Model, The First Poison "Many of the companies Now, I think that to introduce Pill. He will not only give you the in the United States are this section, you have to get a vote, he'll give you the election. He context of how much the reality (Clark) talks about democracy, and structured the wrong way, differs from the rhetoric in all it's Marty Lipton who gets the vote. and it is, I think, very these discussions. You've heard a (laughter) That's called election important to recognize nice exposition about why Marty restructuring, (laughter) believes in industrial takeovers, but What's restructuring all about? that." somehow individual takeovers by Restructuring is narrowing the gap entrepreneurs — they're all bad. between break-up value or market Now of course, the legislation value or real value and stock doesn't distinguish between those market value. two, so it's a little unclear what There are lots of reasons that gap Marty means. comes into play. It's a perception Better yet is the discussion of problem. A company could be, in voting. Now Don (Clark) here fact, under-leveraged; it could be, believes very much in the vitality in fact, unrecognized; it could be, of the election system as the key to in fact, under-managed. If in every responsibility of management. It's company you can cut $200-300 absolutely the key approach. Of million dollars (in overhead), it does course, then you wonder — wait a say something. If you've ever gone minute, what is a staggered board? through a big company and seen Now, Don (Clark) do you have a all the public relations departments, staggered board? at some point you ask the question, Clark: Thank you for asking the what's that good for? It may be question. NO. I stand for election good for employment, and it every year. may be good for the Michigan Wasserstein: That's right. And Journalism School, but at some when Don realized he didn't have point you say, is this all really a staggered board, he asked his quite necessary? advisors what do I have to do to The fourth point is that there get one? And they said, you have to may be a confusion in focus that is go to your stockholders to get their not recognized by the market. So, approval. But did he do that? No. you come back and you say, what's What he did do was something even the reality here? The reality is that it's about time people take a look at

23 the American industrial structure the realities of the day. Much of testament to that experience. The and say, what makes some sense, the statistics that are seen in the facts, the verifications, are right what can get recognition? newspapers about levels of debt there. They're not very hard to Is some of this fad? Yes, there and the various ratios are entirely find. They're right there in Henry's is no question as in all markets, misleading. Why is that? Because, record of achievement. When whether diamond markets or stock of course, they're using book value companies are focused and they markets, there is an element of fad. statistics rather than market value have decent management, there is a They're an element of cycles. Is or current replacement data. For vast difference, not in the financial part of it something concrete? Yes, example, if you were a company gyrations, but in the operating I believe so. There are substantial who didn't sell stock and your stock performances of some of these elements that are real. was at the average Dow-Jones level businesses. You just can't take the present of 800 a couple of years ago, and Now, what specifically are some form of a corporation for granted. the market's at 2400, there is a of the manifestations of this? You need to look at it as one would presumption that somehow your Specifically, what you see are share look at a stone that's been cut. You value is much higher than it was, repurchases, public recapitalizations, have to look at every ray of light but on a debt-ratio basis, the better known as, "If Henry can through the prism, see how it results are the same. So, a lot of do it, why can't I do it as a refracts, see if there is some other the statistics are, of course, public vehicle," spin-offs, massive way to put the building blocks entirely misleading. divestitures. What you're seeing together. So you look at the financial in the United States now is a very Another way to think about it structure and think what works large movement to restructuring. is there were people in the 1960s for the long term? What is prudent Whatever you believe about who put together large American and makes sense? No one wants takeovers, good or bad, the central conglomerates block by block. Now, the pressure that's created by an point is that some very rudimentary twenty years later if that format inappropriate financial structure. form of accountability does have a and those building blocks aren't But many of the companies in the positive effect on forcing companies fully valued in the American United States are structured the to take some positive actions. stock market, is there some moral wrong way, and it is, I think, very Will we see more of this? imperative why they shouldn't be important to recognize that. Of Absolutely, because it is a reflection reorganized, why they shouldn't be course, Japanese structures are of a fundamental industrial fact. We disassembled? Is there some quite different than ourselves, are a maturing economy, and that's imperative as to why nostalgia for quite a bit more leveraged, and happening throughout the western the 1960s should be a matter of it sure hasn't hurt them in the countries. You see it in France, national policy? international capital markets. you see it in Germany, you see it So, how do you narrow that The second point though is more in the United Kingdom. There gap? How do you create value? fundamental. You need a coherent is a necessity to realize that Obviously, if the problems business strategy. Financial strategy the corporate structure and the are that a company might be by itself doesn't make a lot of sense economic units of the 1960s, which under-leveraged, unrecognized, — isn't credible. What you need were all very exciting and dynamic, under-managed, or diffuse in focus, is to wrap it up with a coherent are not necessarily appropriate what we recommend to people is a business strategy. What is the as we reach the 1990s. This three-pronged type of approach. purpose in Beatrice of 9,000 fundamental economic fact First, you take a look at the different units running around in overrides all the alphabet soup financial structure of a company. different directions? There is no of SEC regulation. This all has What may have been an appropriate question from the outside world's to be linked to some fundamental structure when a company was in a perspective, that one of Don Kelly's economic realities. high-risk competitive market, when great successes has been to really Our experience is in case after a company may have been very new come back and use some basic case, that you can get the market to with its products, may be different common sense as to the form of a recognize underlying value. I look than it is today. corporation. One only has to look to data in the last couple of weeks. The ideal financial structure may at conglomerate after conglomerate I just want to mention two things be very different when junk bond where many good companies are we've worked on. Diamond interest rates can be under ten somehow lost in the byzantine Shamrock and LenCorp were percent in today's financial market, management structure. There is a both public deals where the hostile from when good industrial credits need to rejuvenate the concept of deal was defeated basically by were above fifteen percent (as they business strategy, and that's partly restructurings where the market were just a couple of years ago), reflected in the restructuring perceived incremental value because and where short-term borrowings movement. of the change in the financial were closer to twenty-two percent. The third point is operational. structure, and in strategic focus In other words, you have to Companies, with that additional of the company. tailor the financial structure to attention, can be better operated, The other point that Marty and Henry's whole record is a asked me to talk about is the bridge

24 type of financing. Essentially that's a device whereby a financial institution, sometimes an investment banker, sometimes other financial institutions, provides the funding whereby a company or an individual can effectuate a financial transaction. Now, what's different about this than in the past, is that in the past everything was done with, if you would, a 1960s pace and approach. That is, someone would have an agreement to go buy a company and then three months later he'd go get the financing on a leveraged buy-out. That would be a typical example. The problem came in when an LBO firm let's say is competing with an industrial company who has the money. Would you sell to the industrial company, who has real money, or would you sell to the LBO company, who says they're highly confident they might get the money? In this type of case, the financial intermediary says, I am very confident I can raise this money in (Merchant banking is a concept that will explode' the long term, but you need it in the short term, so what I'm going to do is bridge our underwriting commitment. capability to back up your point of doing the deals that go right. The Now, where this came from is view with a capital commitment. art is being able to manage the really an innovation led by John For example, a company is doing ones that seem to go wrong. Gutfreund. The idea of cash and a divestiture. You think a series of I think this trend will continue. resources being on line, bids being nineteen companies that you want Merchant banking is a concept immediate, and underwriters taking to divest are worth a billion dollars. that will explode. The function of risks was really pioneered on the You go to some other advisor and investment banks, whether we like bond trading side. It was also they say, well, it will take us three it or not, will change and that will reflected in the way deals are done months to sell nineteen companies, be accelerated by the rise and in Europe. The technology basically but we think we'll get at least a intervention by other financial being that people in our business billion. That's quite different from intermediaries such as banks are calibrating risks, and capital going to a second advisor who says, and insurance companies. should be accessible to people who you have nineteen companies, we On the other hand, will we need it as long as it's thoughtfully think they're worth a billion and, have occasional massive screw-ups? done. furthermore, we'll guarantee we can The answer is yes. It is the inherent I think we're just seeing the tip get at least a billion, and we'll share nature of our business that it is not of the iceberg on this innovation. the upside beyond that. Again, time all secure; it is not all predictable. If I believe we will enter a generation is the critical ingredient in the new you step back and just think of the of what I call merchant banking. capital markets and this is a way to incredible gyrations in the value of Investment banking — that is, shorten time exposure. the dollar versus the yen, in interest the advisory function — and the Now, can this all go astray? rates, and in the stock market, you principal function will become more Yes. There is no question there can see that the only thing that and more intertwined. Basically if will inevitably be mistakes. For is true of our business situation you open your mouth as to what this to work, one needs a sense of is uncertainty. When you have you think will work, in most cases understanding the assets, some accelerating waves of uncertainty you're going to land up — not technical implementation, M & A and the fundamental economic in all cases, there will be a role for experience, access to money, and dynamics in our system, you're those firms that are purely giving the experience of having gone going to have some mistakes advice and not having a financial through a lot of these deals because and a lot of opportunity. commitment — needing to have the they often go wrong. The art is not

25 "If you look at our industry a generation ago, ten to twenty years ago, it was a bunch of small businesses with modest capital. It's exploded."

The International Merger Market

By John H. Gutfreund Chairman and Chief Executive Officer, Salomon Brothers Inc.

'm going to be quite brief I because my job is managing a public company that's in the financial services business. What I want to point out should be evident by the facts of the last two hours, is that in financial services you've had the privilege this morning of listening to a panel of the likes of which I have never heard, and I've been in business 30 odd years. You have probably the two outstanding lawyers, practitioners of the take-over game, fortunately one of them is my partner, Ira Harris. You have three of the top field guys in the business, and you have the number one firm in the leveraged buy-out business. I think the international M & A field is most interesting for one reason, to me anyway. So far, the process has been money coming here for investments here, not going the other way. Of course, the reasons for that are not just the immediate weakness of the dollar. There are structural reasons about America and the way we run our businesses that probably are correct. transaction values are that 22.8 billion nine. Extraordinary number. Certainly everything you've heard billion came in in 1986 from foreign Why does this all take place? Well, today indicates they're correct with countries. 18.8 billion came in #1, it has got to be the political and some limitations. But, its been an in '85, and of course, that's not economic stability in the United extraordinary series of events. inclusive of what's come into the States. #2, is the decline of the All other countries among the bond market, what's come into dollar to which I've already alluded. major industrialized countries real estate. On the other side, the #3, the decline of the dollar is are protectionists in one way or outflow in the United States in '86 accompanied by the accumulation another. The numbers here on is, according to these numbers, a of large capital surpluses abroad

26 and you particularly hear about The same thing goes with the it in Japan. stock exchange where membership Next, you have the investment "On the other side, the outflow is very difficult to obtain in Tokyo. opportunities, next the extra­ They claim on the Tokyo stock ordinarily attractive stock values in the United States in '86 is, exchange that they just can't handle versus the indigenous markets according to these numbers, it physically. They don't have the around the world, and, of course, a billion nine. Extraordinary electronic capability, (laughter) I you can't talk about our stock values think when I talk about opportunity without talking about the quality number. Why does this all in M & A, I get off the track of our marketplace, which take place?" because I'm not an M 8c A specialist, is matchless. There is nothing but I'm supposed to be a specialist even close. in running a financial business, and One of the things that's depressed looking at the opportunity through me over the last year is that because the globalization process, it's going there have been some excesses, except after the fact. I think that to continue. Whether it's on the because there have been some whether it's the Federal Reserve or regulatory side or the business cycle mistakes made in the market, and Congress, unless things get terribly side or the currency side, I don't the press has been preoccupied with bad with great dislocation, I think think in your lifetime the world will that, it has given us a very bad view that pattern will continue, which be in sync — that is synchronized. If of ourselves even in light of the obviously is a great advantage you look at how financial businesses overwhelming quality and integrity for those people who are alert, are run today, they take their of the U.S. market. There's nothing particularly in the financial greatest profits by understanding that's in the same league. But I services industries. that synchronization is not a fact think this bad view of ourselves Conversely, we are beginning to and they reposition themselves will continue. make progress abroad. I can look internally with their market I don't know what we can do at our own company, which in 1971 capacity on an almost minute- about it except run our businesses established a small discreet presence to-minute basis. as well as we can and I think that in London, upstairs, a dozen In my opinion, you will have to we're all attempting that with the people, nothing too showy. We now have a lot more skills, a lot more assistance of the SEC as a relatively are resident on top of the railroad technical abilities, a lot more benign regulator to improve the station in London with about 800 capital than historically most of the way we run our businesses. If you people. And the shaking isn't all financial businesses have had in any look at our industry a generation from the trains going underneath country. Now, at the moment, that's ago, ten-twenty years ago, it was every morning! not quite true with Japan, but even a bunch of small businesses with In Tokyo, a similar U.S. there with all their hidden reserves modest capital. It's exploded. It's expansion. I think that you just saw and with the strong currency they exploded for technological reasons, last fall the first sign of deregulation are very highly leveraged. I'm it's exploded because it's proven to as far as the U.K. goes in terms not going to get into a leverage be of more value. It's also exploded of the exchange and the functions. conversation because it is not because the world situation has Much of the U.S. innovation appropriate. It's different, I think, changed and this has become was learned from the Europeans. and I could be challenged by my something where we are inextricably They've been practicing the arts industrial friends, for a financial involved with the rest of the world. a lot longer than we. company than it is for a I have the opportunity in ten Japan is a very difficult situation, manufacturing company. minutes to talk about the most but we are doing better. I know in I would like to conclude by extraordinary opportunity that the case of Salomon Brothers with saying I think that our industry, will exist in your lifetimes and will government bonds which we are the financial industry, financial continue to exist, regardless of reputedly pretty good at — perhaps services, has never appeared to be how we've screwed things up. the largest in the world market and more interesting and have more Among the things that I was the United States — our allocation opportunity. But because of supposed to mention here was fear has gone from .07 percent, that's the other folks around this about protectionism. At the moment not 1 percent, but .07 percent to a table, management change — in terms of this business, I'm not quarter of 1 percent, and we're re-deploying the way these unduly concerned about that. moving towards 1 percent. If you businesses and their assets are run Lastly, of course, is the open-door can imagine conversely the Japanese — will be a permanent fact for us. policy in financial areas which has securities dealers in the United When you're my age, either you always been the U.S. attitude. States, they bid for whatever they want to get the hell out, or you just Fundamentally, regulators will choose through a government want to keep playing because it is only react to a matter of prices or auction, and if they buy 50% a fascinating game. It's never the pay-offs. I don't think you can or 100%, good luck and God same from one minute or one day expect regulatory intervention bless them. to the next. I think it's going to remain that way.

27 Recent Trends in the Leveraged

t is a delight to be here on this business, are the first to get the Company, or Metropolitan Life, I panel because it is the first time call. What we'll find is that we're or the Equitable to come in with that I have sat on the same side of up against the recapitalization a layer of senior debt long-term, the table with you people. And also that Bruce Wasserstein talked a layer of senior subordinated, the first time that I sat for this long about. Because that's usually possibly some preferred stock, without having to pay you anything. the alternative. and they would end up buying a (laughter) Today you don't hear the large part of the common equity. I have been asked to speak about company president saying, well, Today that's all changed, the current trends in leveraged the first alternative is merging with largely because of the advent of the buy-outs in 10 minutes, so I'll touch company XYZ, a large industrial high-yield and junk bond market on some of the highlights. The company. The first line of defense that has been referred to on market has grown dramatically in we find is either restructuring or numerous occasions this morning. the past few years. In 1985, there the leveraged buy-out. Examples of The reason for the change in were approximately 12 billion this are Fruehauf, Safeway, Revlon, structure is that the banks today are dollars in total financing for and SCM. willing to put up much more money leveraged buy-outs. In 1986, On the offensive side, manage­ than they ever were before. And so approximately 35 billion dollars, ment ownership is one of the big you see a structure today that could and I don't know what 1987 is reasons that managements decide be for a $5 billion acquisition with going to bring. We'll watch and see they would like to take a company bank debt and equity or a bridge what Mr. Proxmire and others in private. Anderson-Clayton, Beatrice, loan and equity, which was the case Washington are going to propose. Macy's, Dr. Pepper, Wometco, and in Owens-Illinois. Or you may find The first billion dollar leveraged Owens-Illinois are examples of some the situation such as in Safeway buy-out was done in 1983, with of the offensive leveraged buy-outs or in Beatrice where we had debt, Wometco Broadcasting; in 1984 that have taken place. Tender offers securities back to the shareholders Dr. Pepper for a billion dollars; today can be effective in leveraged which enabled the shareholders of in 1984 most of City Investing buy-outs. the company to participate in the for a billion five; in 1985, Storer Before 1983, all leveraged ongoing growth in the particular Communications for 2.5 billion buy-outs were done through what company being acquired, and then dollars; and then in 1986 Revlon we called the cash merger, which you had a layer of equity under­ and Macy's were in the 2.5 to 3.5 necessitated the filing with the SEC, neath that. billion dollar range; Safeway for a proxy statement to be circulated, The interesting thing that has 5 billion dollars; Beatrice with total shareholder vote, and in each case it taken place today is that you have financing of almost 8 billion dollars; was a 90-120 day process. Well, with what we call "son of leveraged and Owens-Illinois, the recent the ability of any firms, Bruce's and buy-outs." "Sons of leveraged leveraged buy-out with almost ours and others, to do a leveraged buy-outs" are such companies as 5 billion dollars in total financing. buy-out via tender offer, you cut Playtex that was part of a buy-out of The leveraged buy-out is used in the time down to a 20 business Beatrice Corporation. It was then a number of different ways. One day period. We're now as com­ sold to the management of Playtex way is for tender defense. This is petitive as any corporate buyer for about a billion two fifty. when a company is under siege in America or overseas. Management now has it as an by a hostile raider, whether it be Financial structures are quite independent company. Avis a financial raider or a corporate different today than they were in Corporation is another; Amstar, raider. And, in most cases, the the '70s and early '80s. In the '70s which is the Domino Sugar leveraged buy-out firms, whether you had a layer of bank debt. You Company, is another, and you see it is ourselves or others now in the had to use the Prudential Insurance

28 By Henry R. Kravis Buy-Out Founding Partner, Kohlberg Kravis Roberts 8c Co.

more and more of these taking place today. There are numerous participants in the leveraged buy-out game today, which there never were before — names such as Goldman Sachs, First Boston, Merrill Lynch, Morgan-Stanley, Lazard Freres. These are all firms that today not only are participating as an agent, but also have equity pools, or mezzanine pools of capital themselves, where they can go in as principal and buy companies and either take them private or keep them private, if they are a private company or a division of a public company. There are numerous partnerships that exist today, such as the Metropolitan Life Insurance partnership with First Boston to do leveraged buy-outs, or Connecticut General with Morgan Stanley, or the Equitable Insurance with Adler and Shaykin, where they go in "Financial structures are quite different today than they on a joint basis and provide a large amount of capital. were in the '70s and early '80s." What is the reason for the growth? I think there are two reasons — one is on the Financing penny back. Yes, it may have had — to say they did a billion dollar side and one is on the executive and to restructure, it may have had to deal, or a three billion dollar deal, management side. On the financing defer for awhile, but in almost every and to take the fee and to go on side, all the financial institutions in case the banks have gotten their to the next transaction. And there this country, and I think pretty soon money back. I agree with Felix is not enough focus on what do around the world, have realized or when he says that the question we do with the company now will realize the substantial kinds of still remains to be seen — what that we own it. returns that have been able to be happens five years later with the We insist at KKR, in every gained in leveraged buy-outs. high leverage that is put in many situation we're involved with, that There is plenty of money to companies due to the high-yield we control the board of directors invest — pension funds are growing market. We don't know what's going and work very closely with each day and they don't have homes to happen. I think there are and management and operate with what for the money. There's safety in have been too much money chasing we call "no surprises." That differs financing. Particularly at the bank too few good deals, and deals that from many people who are involved level. I can't name one catastrophe are being done today where people in the leveraged buy-out business. where a bank has not gotten every want to do them to get on the map One of the other phenomena

29 that we are seeing today is that every small bank and some small insurance companies around the country have the opportunity for the first time to participate in leveraged buy-outs through sub-participations with the banks. For example, Bankers Trust led a recent leveraged buy-out of Owens-Illinois and they committed 500 million dollars. When it's all over, my guess is they will be left with about 150 million dollars. They will have stripped off the fees, Directors' Responsibili and banks in Japan and Europe, and Des Moines, Iowa, and maybe Ann Arbor will be participants in Owens-Illinois. On the other hand, you have the company CEOs who have seen that irst, I want to ask Bruce to stop this is a way for them to chart their Freferring to me as an entrencher own destinies. It is a way for them of corporate management. From now on, Bruce, I would like to own a meaningful piece of their PA own company and more importantly to be known as an "advisor on to stay independent, to run the the maintenance of corporate company for the long-term and institutional loyalty." (laughter) not have to deal with the security I would like to offer to John analyst who often forces companies Gutfreund if he would like it my to make short-term decisions when boiler plate, staggered board, and long-term decisions are required. poison pill. They're readily available Quarter-to-quarter earnings are at competitive rates, (laughter) not even a factor once we buy a I think the most significant company and take it private. We question we face today is where we must insist the company be run go in this whole field. Mention has for cash flow and run for the been made of Adolph Berle and the long-term. Leveraged buy-outs original Berle and Means thesis of also provide the executive the 1932. Felix has mentioned that Mr. opportunity to stay away from Berle changed his mind in the '50s the unwanted raider. and '60s and I think it's of critical importance to focus on that change. Probably at the bottom of all of In the '50s and into the '60s, this is a greed factor, and that is Professor Berle recognized that that an enormous amount of money "We have to impose there was a fundamental change in can be made by executives and political and social control the ownership pattern of American by the people putting the deals on institutional investors." business from what he had first together. It's one of the reasons recognized in 1932. And there was a for the substantial growth in the shift taking place from management leveraged buy-out business. control to institutional investor In concluding, I feel strongly that control. And he then embraced the leveraged buy-outs will continue to enterprise theory — the concept proliferate in size and in number. that corporations should be Don't forget that LBOs have been managed not just in the interests of around for many years the way we the shareholders, but in the interests know them, 20 in our case. And of the enterprise as a whole, which we've been through upturns and includes, of course, the employees, downturns, inflation/deflation, high customers, suppliers, and the interest rates and low interest rates. community in which a corporation In my opinion it will be the stock lives. market and the inherent values in companies that will determine the I am a believer in the enterprise volume of LBOs in the future, not theory and I think the most the availability of capital. significant economic problem and probably the most significant social

30 By Martin Lipton, Senior Partner, Wachtell, Lipton, Rosen and Katz ies With Respect to Takeovers

and political problem that faces us to directors' responsibility or almost all the major public for the next decade or so in this changing the rules as to how corporations that we can really area is how Congress resolves this takeovers or tender offers are made. address the question of director question. Are we going to resolve I think that we can accomplish responsibility. the question by allowing what the change in a number of ways. I think Don Clark is absolutely I call unrestricted institutional The present Proxmire committee correct when he says that the way shareholder dominance of corporate thinking is to amend ERISA so as to to deal with director responsibility activity? Or are we going to impose remove the question as to whether is not through tender offers, a sharp social responsibility on trustees of pension funds may but rather to give shareholders a institutional shareholders so as consider long-term investment meaningful opportunity to address to level the field in which these objectives and forego immediate the management question. There fundamental questions are decided? stock profits. ERISA would be I would change the proxy rules As I indicated before, I am not changed so as to provide that the to provide that any shareholder a believer in the total elimination trustees could take into account who has a substantial stake in the of the hostile tender offer. I think long-term values and the benefits company — you have to protect some mergers are not only good to the beneficiaries of a particular against the gadflies with a hundred but necessary. My thesis is not pension fund, so that a company's shares — any shareholder with to eliminate takeovers or to pension fund that has its own three percent of the voting eliminate mergers or to eliminate securities could take into account securities of the company restructuring of a business. the ancillary benefits to employees would have the same access that However, I think that we cannot such as continuing employment and management has — free and equal ignore the social impact of this the future value of the company. access to the proxy machinery. That activity and one can't say that I think this is a very important way, if the shareholders disagree the focus should only be on the change. with the way the company has been maximization of shareholder wealth. Warren Buffett made a run and would like the company to First, one has to recognize that suggestion that I think is significant be liquidated, if they would like it we don't really understand what and should be pursued and that to be restructured, and so on, or, maximization of shareholder wealth is to force institutions to act as indeed, if three institutions each is, and that in a society like ours, long-term investors (which they holding one percent of the stock we often have to sacrifice individual claim is their policy) and to provide would like to achieve that and they wealth enhancement to the for a penalty, whether it is in the can get together, aggregate their societal need. form of a tax or a recapture, if one percent holdings into three Where does that bring me? I institutions hold for the short-term percent and present a plan for the think we have to change. I think and not for the long-term. Warren restructuring or the liquidation of we have to change the tender offer Buffett suggests a 100 percent tax the company, you would have really rules. I think we have to level the on any profits realized within one meaningful shareholder influence playing field with respect to that, year. I think the one-year period on the way a company is being but I think we have to do something is far too short. I would opt for a operated. At the same time, we far more fundamental. We have to five-year period and perhaps scale would have eliminated much impose political and social control the penalty or recapture, depending of the game playing, the financial on institutional investors. I think we on the length of holding. But it's maneuvering, that takes place in the accomplish absolutely nothing in only if we can change the actions of takeover market today. terms of long-term policy objectives the institutions that now control by changing the rules with respect

31 Commentary #3

Harris: Thank you, Marty. Now the institutions, but they're making let's turn it back to the panel. the decisions to improve their own quarter-to-quarter performance Grundfest: If we think through "What you're doing because it's their compensation and the implications of your proposal, is maximizing it's their ability to attract funds to Marty, they really are fundamental shareholder values by manage that is determined by their in an extraordinary way. When you creating a structure quarter-to-quarter performance. seek to impose political and social control on institutional investors, that realizes profits What we've done is turn over a it's fascinating how far that takes today that would major factor of control of American business to people who have a government intrusion into the otherwise be made market process. tremendous incentive to force a over the next 10-20 short-term outlook — the exact Now, we're not talking about the opposite of the outlook that Don regulation of the take-over process years." Kelly and Don Clark espoused as itself, we're talking about regulation FELIX ROHATYN good management. Now, I'm not of stockholder incentives. It's really sure that my recommendation as to questioning the responsibility how to control that process is the of stockholders in the way they best way. It's a new area. But there exercise their franchise and it seems is no question in my mind that that to me that you would require that at the time warranted selling the is the future problem of American government impose these political shares of one department store and business, and unless we solve that and social controls because you moving into the shares of another problem, we will continue a process don't trust institutional stockholders department store. of overspeculation, overleveraging, to behave rationally. Then we have When you view it from the and focus on short-term rather to add certain changes in ERISA standpoint of the institutions than long-term results, to the great which were put in, as I understand themselves and the investments detriment of the business of this it, in part to deal with potential of the institutions, all you have is a country. conflicts of interest, and we have . . . revolving door. As one oil company is taken over, the institution will Rohatyn: Marty and I agree on lots Lipton: I think we're overlooking reinvest the proceeds in another of things, but I would not support what the institution is and whose oil company, or oil companies, these proposals. I do think that incentive is involved in the or periodically, as they see fit, they you can argue that you could put a institutional turn-over of securities. move from one industry to another modest tax on short-swing turn-over As Joe Flom said before, the industry. The people who are of institutional investors, if the institutions reinvest, and I think he making these decisions are the holding is below a year and the used a department store example managers of the institutions, tax is modest in size. where the opportunity to sell at 13 and they're making the decisions But I think the point that is worth times earnings as against an 8 or not with respect to the long-term 9 price earning industry average making is the question of leverage profitability of the institutions and and comparing the structure of the long-term investment results of Japanese companies to the structure

32 of American companies and talking Lipton: I would like to raise in the sense that you talk frequently about the much increased leverage a question and I think I should to one of these people, and if you that is bearable in the Japanese address it to Joe Grundfest, because know that if somebody looked at structure. There are two factors no one else on the panel would your phone records, they would that I think are worth noting, one dare answer. Why would an invest­ find a lot of phone calls going back of which goes somewhat to Marty's ment banker ever speak to an and forth between you and one point. Because so much of the arbitrageur? Joe? of the people you observed, you holdings of Japanese industries are then have a serious question of held by financial groups that are judgment and a serious question of exceedingly stable and don't turn appearance. What would it look over with any kind of frequency like if you observed this scene, because the process of take-overs "When you seek to drew the inference, and then went is almost unknown in the Japanese impose political and and started trading? People will market, and because the leverage social control on draw incorrect and unreasonable that's created is part of, again, implications based on that. As in all institutions that are involved in the institutional investors, walks of life, a little bit of common shareholding and have invested in it's fascinating how far sense will get you a long way. the companies, you have a very that takes government So, getting back to your question different financial structure. The intrusion into the about conversations between ability to sustain very much greater arbitrageurs and investment leverage on a long-term basis is market process." bankers. They certainly can be quite different because of a much JOSEPH GRUNDFEST legitimate. Moreover, they certainly stabler environment and a much play a very vital, valuable, and stabler shareholder. important role. Information flow is The other point I would like what the market is all about. Buyers to make is on a point of corporate buy because they think prices are restructuring, which is worth Grundfest: Well, we had a little going to go up. They find sellers thinking about — I'm not saying chat last night about zones of grey. because sellers think prices are it's good or bad, but, I believe, There is the law as written and going to go down. I think we would it is an economic reality. When then there are, for want of a better be doing a disservice to the market you maximize shareholder values term, practical litigation realities if in our approaches to the insider by doing a restructuring where and questions of appearance. The trading laws we overreached and you shrink the capital structure of hypothetical we dealt with last night tried to shut down those channels the company by 30-40 percent by involved somebody walking by which are legitimate. borrowing a billion, 2 billion, and and seeing a group of CEOs, LBO paying it out to the shareholders experts, and take-over lawyers get Rohatyn: You know there is a by buying half their stock and at out of a limousine. This gathering story about George S. Kaufmann, a very large premium, the reality is observed on a public street, and who was a wonderful playwright, of life is that what you're doing is a person draws inferences from watching a lady play a hand of maximizing shareholder values by, that public observation that the bridge very badly. When it was in effect, creating a structure that executives' corporation may soon over, she turned to him and said, realizes today profits that would be the subject of a bid. Can you Mr. Kaufmann, if you were me, otherwise be made over the next go ahead and can you trade? how would you have played the 10-20 years. Because what you're Now clearly, if you are somebody hand? And he said, madam, under going to have to do to operate who doesn't know these people, you an assumed name, (laughter) have no contacts, and there are no the company to service that debt, Harris: Ladies and gentlemen, I phone calls going back and forth, is to reduce investments and other think on that note we will bring this the law as it stands today would say growth efforts that otherwise would program to an end. I want to thank there is no breach of fiduciary duty, have been realized over a period each and every member of the there is no misappropriation. You of years. That may be good for the panel for participating, for being can go and trade on the basis of country, bad for the country, it may here, and hopefully for providing whatever inference you draw from be indifferent, but, I think, that is all of you with interesting first-hand that information. the economic result. knowledge of what it is all about. If, however, you are a colleague Thank you all for coming.

33 Pictures at the Reception n the night preceding the Oformal opening of the J. Ira Harris Center for the Study of Corporate Finance, a dinner and reception was held for the founder members, panel members, and other honored guests. Pictured at the reception are: This page, top picture: Left to right, Donald N. Frey, Chairman of the Board of Bell & Howell Co.; J. Ira Harris, senior executive director of Salomon Brothers Inc., Chicago; Paul W. McCracken, Edmund Ezra Day Distinguished University Professor Emeritus of Business Administration, Economics, and Public Policy. This page, lower picture: Left, Joseph Flom, partner in Skadden, Arps, Slate, Meagher & Flom, New York, who was a member of the panel, and Jay Pritzker, chairman of the board of Hyatt Corporation. Facing page, top picture: Left to right, Thomas A. Roach, Regent of The University of Michigan; Congressman Dan Rostenkowski, D.-Ill., Chairman of the House Ways and Means Committee; University of Michigan President Harold T. Shapiro; Edmund M. Carpenter, President of ITT Corporation. Facing page, lower picture: Left to right, Jackie Harris, daughter of J. Ira and Mrs. Harris; Jerry Pearlman, Chairman and President of Zenith Electronics Corporation; Mrs. J. Ira (Nicki) Harris; Michael Rosenberg, Vice President of the Samuel Keywell Company; and Barbara Pearlman.

Photos by Dean Russell

34 35 Among Ourselves An informal collection of items, including news of the faculty, of alumni, and of the school, and assorted other information, opinion or comment that we think will interest you.

Stephen M. Ross, BBA '62, Census Answers Some of Establishes Professorship the Questions About Who in Real Estate at B School Are the U of M Alumni? Stephen M. Ross, BBA '62, has The University of Michigan pledged the funds to establish an had a 46% reply to the 251,000 endowed professorship in real estate questionnaires mailed out in the at the Michigan Business School. all-alumni census. That means that It will be named the Stephen M. 115,000 replied, or 11,000 more Ross Professorship in Real Estate. than it takes to fill the U-M stadium Mr. Ross is president and founder on a football Saturday. of The Related Companies, Inc., Here are some of the census a national, multi-faceted, full-service findings and a few interesting real estate company headquartered "bits and pieces." in New York City. He is a native • The oldest respondent was of Detroit, and holds a law degree born March 5, 1883, and graduated from Wayne State University. He from U-M in 1907. also has a masters of law degree in • The most distant returns came taxation from New York University. from: Victoria, Australia; Papua, In 1980, he was the recipient of the New Guinea; Katmandu, Nepal; Master Builder Award presented by Dhaka, Bangladesh; Lahore, the Associated Builders and Owners Pakistan; and Tokyo, Japan. of Greater New York. He also was • The strangest return was the presented the Humanitarian Award charred remains of a reply salvaged Stephen M. Ross, BBA '62 for 1986 by the American Jewish from the wreckage of a mail plane Committee. in Montana. Just enough of the "This professorship will bring subsidized and conventional address remained for the Postal additional strength to our finance residential apartment properties. Service to forward it. faculty," said Dean Gilbert R. The company has experienced • 94% indicated a positive Whitaker, Jr. "Adding an excellent dramatic growth in the last few attitude toward The University of teacher/scholar in this area will years, and is now a multi-faceted Michigan, with 46% being strongly make a real estate finance option organization with extensive positive. in our degree programs extremely experience in residential, • 60% of the respondents were attractive and will greatly enhance commercial, and mixed-use men; 40% women. the effectiveness of our joint properties. The firm's syndication • 12% were in their 20s; 27% MArchitecture/MBA program." specialists have raised capital for thirties; 22% forties; 16% fifties; more than 180 limited partnerships, The terms of Mr. Ross's gift 11% sixties; 8% seventies; and representing in excess of $250 will allow the School to undertake 4% eighty years or over. million in equity. In addition, a national search for outstanding • 19% were single; 72% married; Related is a partner in several joint candidates with a goal of having the 6% divorced; and 3% widowed. ventures with leading financial and successful candidate join the faculty 32% of the men and 50% of the investment banking institutions and, by the fall of 1988. women were married to someone through its own separate financial who had attended U-M. The Related Companies, Inc. was subsidiaries, itself provides founded in 1972 by Mr. Ross to mortgage banking services to • Looking specifically at business develop, own, finance, and manage developers and other clients. school alumni, the census had a response rate of 50% (males 84%; females 16%).

36 B School Annual Fund Exceeds $1 Million for the First Time! The Business School's Annual Fund has exceeded $1 million for the first time in the School's history. Final tallies are now complete and we can report that 5,804 alumni and friends of the School con­ tributed $1,341,613.00 in 1986-87. "Passing the million-dollar hurdle was a milestone for the School, and one that illustrates the extent to which private support has increased over the past seven years," commented Anneke de Bruyn Overseth, associate dean for external relations. "We look forward to sustaining and increasing this level of growth, which is so essential for the Business School to maintain and improve its position as one of the very best in the nation. However, for the moment it's nice to pause to celebrate our accomplishment, and to thank every one of you who contributed to making it possible." B. Joseph White, new associate dean at the Business School, brings both academic skills and corporate experience to his new appointment.

• Of business school alumni, 19% were single; 76% married; B. Joseph White Is Administration Library and the and 4% divorced. Appointed Associate Dean School's Computing Services area. • The top three occupations "We are very pleased with this of business school alumni were B. Joseph White, who was an appointment because Dr. White's accounting and auditing, 15%; associate professor of organizational academic and industrial experience marketing, 10%; and finance/ behavior and industrial relations on will bring important skills to the economics, 10%. our faculty until 1981, is rejoining Dean's Office," commented Dean • The largest proportion of the Business School as associate Gilbert R. Whitaker, Jr. "Dr. White business school alumni had a dean. had a good research record and full-time personal income of His administrative appointment, an outstanding record of teaching between $40 and 60 thousand for a five-year term beginning when he left the Business School in (30.7); next was an income between Sept. 1, was approved by the U-M 1981. On his return to Michigan, he $60 and 100 thousand (24.9%); Regents at their July meeting. will renew his research and writing followed by $30-40 thousand He will also serve as professor efforts with a focus on the dual (15.8%); $100-200 thousand of business administration, insights of his academic and (12.5%); $20-30 thousand (9%); with tenure. corporate backgrounds." over $200 thousand (4.7%); and White became a member of our White now serves on the Board under $20,000 (2.3%). faculty in 1974, was promoted to of Directors of the Cummins Engine Alumni who have not yet associate professor in 1978, and left Foundation, the Human Resources returned their questionnaires are the school in 1981 to become vice Roundtable, the Conference Board, encouraged to do so, as analysis and president-management development and as chairman of the Executive readjustment of the statistics will „, for Cummins Engine Company, Inc. Committee of the Board of continue as long as new information in Columbus, Ind. Later he was Directors, Southern Indiana is made available. Questions about promoted to vice president- Health Organization. the census can be directed to personnel and public affairs. He received his B.S. degree from Gerlinda Melchiori, project director, As associate dean, White will have Georgetown University, his MBA at 6018 Fleming Building, University responsibility for academic affairs, from Harvard University, and his of Michigan (telephone 764-9238). including the BBA program, and Ph.D. from U-M in 1974. oversight of the Kresge Business

37 of 1980 with major responsibility to to Progress — contains Margaret serve as the volunteer structure for Finn's keynote speech to the the $15 million campaign for our first Conference on Women and new buildings. Its first chairman Organizations, which establishes the was Louis Allen, BBA '51, MBA '56, theme for this book: women must executive vice president-finance, not only be competent, they must Beznos/Beztak Co. He was followed also have confidence in their own by Edman, who was also the abilities and those of other women. national chairman for major gifts Only then will they develop the for the U-M's Campaign for credibility they need. Michigan. Following sections — Critical "The Board will now concentrate Skills for Professional Women and its work on expanding the School's Recent Findings from Research on permanent endowment," said Dean Professional Women — highlight Gilbert R. Whitaker, Jr. "I think such topics as "Professional that we will do wonderfully under Negotiations: How to Get What You Bob's leadership. We are very Both Want," by Theresa L. Clow, fortunate that he has accepted this "Career Design: How to Find a important leadership position for Good Fit," by Brenda M. Beckman, the School." "Women and Organizations: A Study of Mentorship," by Carol M. Michael and David M. Hunt, and Robert Hooker, MBA '58 "The Role of Sports in Developing Female Managers," by Kathleen C. DOR's Book on Resources Brannen and Randolph M. Feezel. Robert Hooker, MBA '58, Information which the book Takes Over as the New for Professional Women provides is innovative and Chairman of the DAB Goes into Second Printing stimulating. Take, for instance, Robert Hooker, MBA '58, Current issues facing professional Dorothea Nuechterlein's thought- president of Transnational women and effective training provoking article "Motherhood and Motors, Inc., in Grand Rapids, is programs for women are described the Career-Minded Woman." the new chairman of the School's in Preparing Professional Women for Nuechterlein describes a small-scale Development Advisory Board. He the Future: Resources for Teachers and research project that she has replaced John R. Edman, BBA '50, Trainers, edited by V. Jean Ramsey conducted over the past half-dozen MBA '51, Chairman of General and published by the Division of years among 500 undergraduates in Motors Acceptance Corporation Research. different North American countries. and Motors Insurance Corporation. The book was conceived as a set Students are asked to state their expectations regarding possible Hooker began his career as of resource materials for individuals designing and teaching courses, future marriage roles; they then advertising manager and consumer go over the same list, guessing how products development manager conducting training workshops, or developing programs for their opposite-sex peers would for Sackner Products, then became respond. The ten statements used vice president of Import Motors professional women. It is written with all professional women in deal with such items as whether Limited, Inc. He became executive financial decisions will be made vice president of Transnational mind — those who are entering the workplace and those who are well jointly, whether child care and other Motors, Inc. in 1977 and president household responsibilities should in 1981. He is active in community established in their careers, as well as for their teachers and trainers. be shared, and whether the wife affairs, and is presently on the should combine motherhood The book is divided into four boards of the Gerald R. Ford and career. Foundation; the Pine Rest major sections, and includes two Foundation; the Grand Valley extensive bibliographies — one of The responses she has received Colleges Foundation; the Grand books and the other of films and have demonstrated three consistent Rapids Sesquicentennial Committee; videotapes. It collects the best patterns. First, in comparing female and the Players Made in the papers and workshop materials responses with male guesses, the USA tennis group, besides his from two conferences on Women men prove to be remarkably chairmanship of the Business School and Organizations. accurate. In fact, it is not unusual Development Advisory Board. Section One — Competence, that, on selected items, the men will One of his four children, David S. Confidence, and Credibility: Keys guess the women to be more liberal Hooker, graduated from the than the women's responses would Business School with his MBA suggest. Second, this is not true in 1987. The Development Advisory Board began meeting in the spring

38 the other way around: females are z usually quite mistaken about male c attitudes on most of the items, with only a few trends in the right direction. For example, most young males seem to support the idea that if both partners work outside the home, both should share responsibility for work inside as well. However, barely half the women guess that men will feel that way. Third, the most significant comparison is that between the attitudes of both sexes. On nearly every issue there is extraordinary consensus among the students surveyed, with males at times expressing more liberal attitudes than do their female counterparts. Although Nuechterlein states the proviso that hers is an impressionistic study, done without scientific controls, she emphasizes that every replication largely confirms those preceding it. Thus, she says, the suspicion emerges Gretchen Jackson, formerly director of fAlumni Alumni Relations,Relations, hashas been promotedpromoted toto that present-day North American director of the Business School AnnualI GivingGiving Programs.Programs. SheShe isis pictured here collegians indeed share many on the left, along with Ellen Abramson,i, newnew directordirector ofof Alumni Relations. expectations concerning possible Ellen is hard at work on the fall alumnini programs,programs, andand withwith the dramatic equalization in marriage roles, growth of the Business School Fund, GretchenWetchen isis busierbusier thanthan ever. but only the males realize it. Conclusions such as these make a strong case for the need for women McCracken Professorship in Busi­ to educate themselves, and, having Texas Instruments Pledges $100,000 to the Paul W. ness Economics. Appointment will done so, to become more assertive be to a five-year renewable term. as they explore their options for McCracken Professorship Professor McCracken is the the future. The first "Texas Instruments Edmund Ezra Day Distinguished V. Jean Ramsey received her Director Award" has been voted University Professor Emeritus Ph.D. from the School of Business by the Board of Directors of Texas of Business Administration, Administration in Organizational Instruments Inc. to be given in Economics, and Public Policy. He Behavior and Industrial Relations honor of Paul W. McCracken, who served as chairman of President in 1979. She is now Professor and retired as a general director of the Nixon's Council of Economic Chairman of the Department of company in April, 1986. Advisers, and has written Management and Quantitative The award, which is meant to extensively on economic policy Methods, Illinois State University, matters. He is the recipient of Normal, Illinois. recognize the service of a general director upon his retirement, numerous scholarly honors Preparing Professional Women for provides that $100,000 be and awards. the Future: Resources for Teachers contributed to an educational Those wishing to make tax and Trainers can be obtained from institution recommended by the deductible contributions to the the Division of Research ($10.00, retiring director. With this gift from professorship in honor of Professor paper), 313-764-1366. Texas Instruments, the Paul W. McCracken should send their McCracken Collegiate Professorship contribution, made out to The by Virginia W. Hayes in Business Economics has reached University of Michigan, to the a funding level, in cash and pledges, Paul W. McCracken Professorship, of more than $400,000. Development Office, School of Income from the endowment will Business Administration, The be used to pay the partial salary of University of Michigan, Ann Arbor, the individual named to the Paul W. Michigan 48109-1234.

39 Alumni Office Offers Programs for Fall More Donors, More Dollars October is a busy month for Than Ever Before alumni programs. It starts with an alumni reception at Fairlane Manor in Dearborn on October 7, to be followed by a reception in Bloomfield Hills, October 8. "Beyond the Right Stuff: Some Thoughts on Entrepreneurial Management" will be the topic of the Chicago alumni program to be held October 13 at the University Club of Chicago. The speaker will be John E. Tropman, professor of administration at the U-M School of Social Work and 1986-87 winner of the Zell-Lurie $25,000 prize competition in the Teaching of Entrepreneurship. His prize-winning course, taught last year at the Business School, was entitled "The Entrepreneurial Manager." A reception for Pittsburgh alumni is planned at The Duquesne Club in Pittsburgh for October 20. In November, the Detroit Alumni Program will feature George Siedel, professor of business law, in a talk One impact the dramatic growth of the Business School Fund has had this year entitled "Alternatives to Litigation." has been on the hand and pen of Dean Gilbert R. Whitaker, Jr. He personally That is scheduled for November 6 signs acknowledgment letters to all donors, which amounted to 12,000 signatures at the Westin Hotel. this year. Here he is shown signing one of the 12,000. Papers representing the other 11,999 are stacked next to him. The Grand Rapids alumni will hear a talk by Merle Crawford, professor of marketing. He will Book Fund in Memory speak on "Where's the Innovation The Post-Reagan in Product Innovation" on Economy is Featured on of Stephen Hannagan November 13 at the Amway Reunion Weekend Is Established Grand Plaza Hotel. "Saturday Morning at the A book fund in memory of David Brophy, associate Business School" on October 31 Stephen Hannagan, a member professor of finance, will speak to will feature a panel on "The of the BBA class of 1988 who San Francisco and Los Angeles Post-Reagan Economy." Speakers died tragically last fall, has been alumni on November 11 and 12, will include Allan D. Gilmour, established. respectively, on "The Changing executive vice president and chief Because of Stephen's keen interest Venture Capital Marketplace." financial officer of Ford Motor in the field of entrepreneurship, the The second "Saturday Morning Company; Paul McCracken, book fund in his name will focus on at the Business School" program Edmund Ezra Day Distinguished volumes dealing with that subject. will be held November 21. George University Professor Emeritus Gifts to the fund are tax Cameron, professor of business law, of Business Administration; and deductible, and can be mailed to: will speak on "Product Liability Martin Zimmerman, former the Stephen Hannagan Book Fund, Reform." associate professor of business Development Office, School of economics at the Business School Business Administration, The who has just been appointed University of Michigan, Ann Arbor, Chief Economist for Ford Motor Michigan 48109-1234. Company. This will be followed by a tailgate party before the U-M-Northwestern football game. This is also the fourth annual Business School Alumni Reunion Weekend.

40 1987 Pryor Award Given for Entrepreneurial Concept of an Intergenerational Academy The concept of an intergenera­ tional academy that will combine child care with senior citizen programs has won the fourth annual Pryor Award and $2,500 for two 1987 MBA graduates of the University of Michigan School of Business Administration. Sandy Giudici and Kelli Matthew designed the award-winning plan to serve the needs of both young children and people over 65. The Pryor Award was created by Millard H. Pryor, a member of the first class to graduate from the School of Business Administration in 1926. He established the award with a $50,000 grant to the School as a challenge "to commit the entrepreneurial dreams of students to paper." Kelli Matthew (left) and Sandy Giudici, both MB As '87, won the 1987 Pryor entrepreneurial award for their concept of a preschool-senior academy. The academy designed by Giudici and Matthew would be a non-health-oriented service with intergenerational programming consulting at Ernst and Whinney. intergenerational programming. offered in coordination with the Judges who reviewed the business On the preschool level, it would preschool academy. plan and chose the winner included help answer the increasing demand "The U.S. population over the Herbert S. Amster, CEO and for child care "due to demographic age of 65 is expected to comprise Chairman of the Board, Irwin and sociological trends in the U.S. 20 percent of the total population Magnetic Systems, Inc.; James A. work force" that are expected to by the year 2030, in contrast to Parsons of the venture capital Firm continue throughout the 1990s, 11 percent today," note Giudici of Regional Financial Enterprises; according to the winners. and Matthew. Ian R. N. Bund, managing director They also hope to establish the Both students bring a wide range of MBW Management, Inc.; and preschool academy as a leading of business experience to the Michael Gallagher of the Ann authority on early childhood project. Arbor Medical Clinic. development and to foster Giudici earned her bachelor's Committee members who oversee cooperative alliances with major degree in business administration the administrative activities of the corporations, office buildings, from Oakland University and Michigan Individual Entrepreneur and technological parks. worked for General Motors in Project and who set policy for the "The preschool academy will human resources and business project include Millard Pryor; Dr. strategically position itself in planning and materials John Psarouthakis, Chairman and contrast to current unaccredited management. She also has served President of J. P. Industries, Inc.; centers by providing a level of as a marketing/planning consultant James Filgas, professor of business programming, facility features, and for the Institute for Financial administration; LaRue T. Hosmer, staff higher than currently offered Planning, Inc. in Farmington Hills, professor of corporate strategy; and in most areas," say Giudici and Mich. She is now an operations David Brophy, associate professor Matthew. scheduler for the Hewlett-Packard of finance at the Michigan Business The "senior" part of the academy Medical Products Division in School. Executive director of the will be a comprehensive, Massachusetts. project is Linda Powell. non-health-oriented program that Matthew, who received a The Pryor Award competition will include a permanent facility bachelor's degree in economics and is open to all undergraduate specifically designed for older management from Albion College, or graduate students who are people. The purpose of the senior has been a senior accountant on the registered during the academic academy is to help senior citizens audit staff of Ernst and Whinney, year. Proposed business ventures overcome isolation and depression serving manufacturing and health may center on consumer or through socialization and to provide care clients. She recently accepted industrial products and services a sense of belonging and a job as manager of health care or real estate projects. appreciation through the Allen Spivey has been appointed to a committee to study the feasibility of a National Statistical Science Faculty News Notes Research Institute. The committee is jointly sponsored by the National Science Foundation and the American Statistical Association, and has been charged with considering all areas of statistics and the many interrelationships of statistics with various Fields in the social and physical sciences and in engineering. The committee will also be concerned with issues of blending theoretical and applied aspects of research in statistics. Johnson, Smith & Knisely, executive management consultants, have awarded Noel Tichy and his co-author, Mary Anne Devanna, of Columbia University, the "New Perspectives on Executive Leadership" award for their book, The Transformational Leader (Wiley, 1986). It was judged the best business book by a panel of senior industrial executives. The award carries a grant of $5,000, which Professors Tichy and Devanna Martin B. Zimmerman, associate professor and chairman of the department of will use to establish fellowships to business economics and associate professor of economics, has left the Business encourage doctoral students to do School to become Chief Economist for Ford Motor Company. Professor research in the leadership area. Zimmerman received his A.B. summa cum laude from Dartmouth and his Ph.D. They will be seeking matching from the Massachusetts Institute of Technology. He was a national fellow at grants from corporations. the Hanover Institution at Stanford from 1980-81 and served as senior The Business School's Human staff economist for the President's Council on Economic Affairs in Resource Management Journal annual 1985-86. He has researched and published widely on the causes and symposium was held this year in effects of government regulation of industry, the impact of regulation Tokyo, Japan, from June 2-5, on risk-bearing and managerial efficiency, and economic policies in the 1987. Fifty participants (half from field of energy. He began his new post at Ford on August 24. academia and half from industry) from the United States, Canada, Australia, the United Kingdom, Sweden, France, Hong Kong, and Six faculty members have been Kathy Stecke gave a plenary Japan participated in the discussion promoted or awarded tenure this overview of "FMS Operating of human resource management in year. They are: Problems" at the National Congress the multinational corporation. Both Clifford Ball, from assistant to in Systems Engineering in Santiago, a special issue of the journal (Spring associate professor of statistics, with Chile, in August, and also gave 1988) and a book to be published tenure; David Blair, from assistant an overview of "O.R. Models in in 1988 will include the symposium to associate professor of computer Flexible Manufacturing" at IFORS proceedings. Attendees from the and information systems, with '87, in Buenos Aires, Argentina. Business School included Noel tenure; Michael Johnson, from In addition, she is an associate Tichy, Carole Barnett, Vlado assistant to associate professor editor for INFOR, the Canadian Pucik, and Wayne Brockbank. of marketing; Stanley Kon, from Journal of Operational Research associate (with tenure) to professor and Information Processing, Thomas C. Kinnear's article, of finance; Judith Olson, granted and a special department editor "Individual Differences and tenure as associate professor of for Management Science for a Marketing Decision Support System computer and information systems; forthcoming issue to be focused Usage and Satisfaction," has been and C. K. Prahalad, from associate on flexible manufacturing. Tom published in the May issue of (with tenure) to professor of Schriber is an associate editor Journal of Marketing Research. It was corporate strategy. of that special issue. co-authored with George Zinkhan,

42 Ph.D. 1981. Tom has been elected to the Board of Directors of the American Marketing Association for a two-year term, July 1987-1989, and will serve as AMA's Vice President of Marketing Education in 1988-89. Paul Sweeney presented his paper, "One-Dimensional Cutting Stock Decisions for Rolls with Multiple Quality Grades," at the TIMS/ORSA joint national meeting in New Orleans in May. Paul also chaired the session on production management: process planning. George Siedel presented a seminar on alternative dispute resolution to faculty members in the School of Business Administration at Central Michigan University on April 30. CMU is planning a Center for Dispute Resolution, which will be housed in a new addition of the Business School. E. Han Kim was invited by the Japan Securities Research Institute to give a speech on mergers and acquisitions to a group of Japanese professors and researchers in Tokyo. He was also a keynote speaker at a symposium celebrating the first anniversary of Lucky Economic Research Institute in Seoul in April. Vern Terpstra recently participated in a World Bank program in Chile. He says he represented The University of Michigan in a country which seems to know only two American universities — Chicago and Harvard. (Two Harvard Business School professors were also James Pilcher, professor of finance, became professor emeritus of finance this on the program.) The Michigan summer. He has been a member of our faculty since 1948, and holds the B.A., connection received special M.B.A, and Ph.D. from The University of Michigan. He served as a director of comment when Vern was the Detroit Chapter of the Financial Executives Institute and of the Great Lakes introduced. During the program, Federal Savings & Loan Association, and as a trustee for the City of Ann Arbor he had several meetings with Employees Retirement System. A graduate scholarship is being established in Chilean government officials, Pitcher's honor. Further details will be provided in a future issue of Dividend. executives, and academics.

Gary Hansen, a recent corporate strategy Ph.D. graduate, has received the Strategic Management Society Award (best dissertation Arthur F. Southwick is the author Rosoff, JD, and David F. Berwall, award) from the Business Policy and of Chapter 4 in the book, Teaching DBA, as editors. The chapter is Planning Division of the Academy Health Law: A Guide on Health Law entitled "Content of Graduate of Management for 1987. This same for Health Services Administration, Health Law Courses." published by the Association of award was won in 1985 by Harbir Robert K. Kazanjian's article, University Programs in Health Singh, another recent corporate "Implementing Internal Administration, with Arnold J. strategy graduate, who is currently Diversification: Contingency Factors on the Wharton faculty.

43 for Organization Design Choices," has been published in a recent issue of The Academy of Management Review. It was co-authored with Robert Drazin of Columbia University. Gunter Dufey spent most of the 1987 summer semester at Univ. des Saarlandes at Saarbruecken as a visiting professor under a DFG (German National Science) grant. He gave a weekly seminar on "Internationale Finanzmarkte" and did research on the regulatory environment of financial innovation in Germany. In addition, he looked after the students participating in the new exchange program between the Univ. des Saarlandes and the University of Michigan Business School. During the annual meeting of the Graduate Management Admission Council (GMAC) in Kansas City, Missouri, Judith Goodman was elected to a four-year term on the board of trustees. The GMAC has 81 member schools and a board of eight trustees, who are elected by the membership. Goodman has been active in the GMAC since 1982.

David Wright has passed the final examination to become a Fellow of the Society of Actuaries. His paper, "Reducing the Risk of Misspecified Priors During Bayesian Estimation of Accounting Information," has won the Big 10 accounting Walter G. Kell, professor of accounting, has been granted emeritus status by the manuscript competition. The Regents. He held teaching positions at Michigan State University and Syracuse paper was presented in May at University, before joining our faculty in 1961. He has always been active in the the Big 10 doctoral consortium profession, serving as vice president and president of the American Accounting at the University of Illinois. Association. He is active in the American Institute of Certified Public Accountants and is on the board of directors and on the accounting and George D. Cameron Ill's paper, auditing procedures committee for the Michigan Association of Certified Public "Research Visibility," won first Accountants. He is the author of the textbook, Modern Auditing (with William C. place in the outstanding paper Boynton and Richard E. Ziegler), and an author (with others) of Internal competition at the Tri-State Control in U.S. Corporations. Regional Business Law Association's meeting held at Livonia, Michigan. Judges were Horace Gilmore, U.S. District Court; Patricia Boyle, Michigan Supreme Court; and and Economic Development in topic. She also presented a paper Roman Gribbs, Michigan Court of Developing Countries" at the on "Singapore's Foreign Policy" Appeals. Last year, Indiana swept Conference on U.S. Development at the Conference on Southeast the awards. Assistance for the 1990s, at the Asian Foreign Policy, Department Center for Advanced Study of of Political Science, University In June, Linda Lim presented her International Development, of Windsor, in June. The paper paper on "The Impact of World Michigan State University. The will be published in a book on the Economic Trends on Trade paper will be published in a book conference subject, to be edited by with other papers on the conference David Wurfel and Bruce Burton.

44 Class Notes

MQ KARYL V. LYNN, BBA TltF '48, MBA '49, has retired from Colt Industries, where he was Donald R. Mandich, BBA '46, MBA '50, director of personnel administration Comments on Trade and Cheaper Dollar for 14 years. He will remain as a consultant for Colt for one year, Donald R. Mandich, BBA '46, "If there is a 'sin,' the 'original and will also continue to teach MBA '50, chairman of Comerica sin' is on the side of the foreigner an executive compensation course Inc., wrote a column in the April who has chosen to sell his goods developed four years ago for 23 Detroit News on the cheaper to us for dollars and then wishes the American Compensation dollar and the trade deficit. the United States to preserve the Association, as well as continue Mandich served on the Foreign value of his dollars. . . . to lead an annual symposium on Exchange Committee of the New "The only long-term solution executive compensation, which he York Federal Reserve Bank for to a continued imbalance in trade started 16 years ago. He will also four years. He is a member of is to require foreign countries continue to serve on the board the Visiting Committee of the to limit their dollar holdings and of directors of the American Business School. spend them here. In the face of Compensation Association. Karyl Excerpts from his article any unwillingness on their part writes that he retired in 1985 follow: to do this, we will have to impose from the position of chairman of "We are warned that if and enforce quotas. This is a the Association for International we don't keep a strong dollar, policy nobody wants. It is one Practical Training, but plans to foreigners will punish us for that is difficult and expensive remain active on that board. Karyl that 'sin' by not investing in U.S. to police. lives in Hillsdale, New Jersey. securities — stocks and bonds — "In the short-run, however, or they won't hold our dollars devaluing the dollar is a 9 Cf A ROBERT G. LITTLESON, anymore. necessary step in bringing O^T BBA '53, MBA '54, "Hogwash! Foreign investors American trade relationships writes that he has started his own can buy far more shares of stock back into balance. The falling consulting business after more and more bonds if the dollar dollar should not be thought than 30 years as an accountant is cheap. If foreigners choose of as 'cheap.' It is only more in manufacturing and marketing not to hold the dollars anymore, properly priced vis-a-vis its companies. After serving as vice they can sell them — they cannot trading partners. A devalued president of finance, CFO, and destroy them — and others will dollar will help tourism in the corporate secretary of public and obviously buy them. If they don't United States, strengthen privately-owned firms, he moved hold stocks or bonds, however, exports, and attract the purchase to Charlotte, North Carolina what will thev do with the cash? of investments at bargain prices." in December of 1986, where he started CFO Financial Services. The company serves small to medium associate superintendent, Bureau of 9/? t PROFESSOR JOSEPH W. manufacturing and marketing firms Business Management, for the Dade \3\J DELLAPENNA, BBA '65, as a "part-time" CFO and serves County public schools in Miami. of the Villanova University School large companies in the field of Dade County school district is the of Law, has been selected for a financial training and education. fourth largest in the country. In Fulbright Senior Lectureship in Law Robert has taught accounting and that position, James is responsible at Jilin University for the academic finance as adjunct instructor at for maintenance and operations, year 1987-88. Jilin University has Mallinckrodt College in Wilmette, facilities planning and construction, what is generally considered one Illinois, and at Queens College food services, transportation of the better law schools in the and Central Piedmont Community and supply, and distribution People's Republic of China. Over College in Charlotte, North departments. His previous job the last ten years more than 50 law Carolina. was in a similar role with the schools have been opened there independent school district in in an effort to create a legal 9/? C\ JAMES A. DAMM, BSE '61, Dallas. He writes that his younger profession, reversing a nearly O A MBA '62, has been named son will be entering the University 25-year-long policy of determined in LS&A this fall. " efforts to eliminate lawyers from

45 Chinese society. Jilin University is located in Changchun, a city of about 2,000,000 in the Northeast Geary Rummler, BBA '59, MBA W, of China. Changchun is the capital of Jilin (formerly Kirin) province. Is Elected to the HRD Hall of Fame Professor Dellapenna will be on Geary Rummler, BBA '59, carrying them out. He has been a sabbatical from Villanova during MBA '60, has been elected to the pioneer in applying instructional his time in China, and will return Human Resources Development and performance technologies in 1988. He previously spent a (HRD) Hall of Fame — one of in organizations ranging from Fulbright year in 1978-79 at two people chosen out of 24 aircraft manufacturers to the National Chengchi University in candidates. He holds a Ph.D. Internal Revenue Service. the Republic of China (Taiwan). in Continuing Education from In a nutshell, Rummler is a His manuscript on Suing Foreign The University of Michigan. "systems" man. When he looks at Governments and Their Corporations Geary began to make a name a worker, he rarely sees a trainee in U.S. Courts has been accepted for himself in 1962, when he with some deficiency that can be by the Bureau of National Affairs joined the U-M's Bureau of cured by a simple injection of two for publication later this year. Industrial Relations and founded parts knowledge and one part the University's Center for skill. He sees instead a performer }/? M ROBERT A. HULL, MBA Programmed Learning. In 1969, operating within a complex \3 4 '67, is now vice-president Geary joined Thomas Gilbert environment that may require and co-owner of Kingsbury Casting in a consulting venture called any number of adjustments in and Accurate Castings, Inc., the The Praxis Corp., which became order for the person to do the family foundry business which he an influential force in the job properly. joined in 1975 after working in the HRD world during the 1970s. "Understanding the performer foundry group at Deere & Co. for In 1979, Praxis was bought by isn't enough," he insists. "You several years. He has a degree in Kepner-Tregoe of Princeton, N.J. have to manage the system to metallurgical engineering from Geary served briefly as president effect a real change in results. Purdue. In 1986, Robert was elected of KT's Strategy Group, then . . . Put a good performer up to the LaPorte County Council, launched his own firm, The against a bad system and the which is the budgetary and financial Rummler Group, of Summit, system will win every time." arm of county government in N.J., specializing in developing The HRD Hall of Fame Indiana. He writes that he is a human performance systems. was established and sponsored "single" parent with two children, Although Rummler has by Training Magazine and Eric 17, and Ellen 14. published several books and Lake wood Conferences as a a number of articles on topics permanent way to recognize and JEROME M. HESCH, BBA '66, ranging from labor relations honor the people who have made MBA '67, writes, "I have recently to instructional design, his significant contributions to the published (co-authored) a law reputation rests not so much on theory and practice of human school casebook entitled 'Federal describing HRD strategies as on resources development. Income Taxation: Problems, Cases, and Materials' (West Publishing Company 1987). The book in Malibu, Calif., where he will be and daughter Cheryl is senior vice incorporates the 1986 Tax Reform associate professor of accounting. president. The company is located Act. My favorite law school course in Los Angeles. to teach is accounting for lawyers, STEPHEN C. WEXLER, MBA '67, says, a subject that allows me to bring up "My MBA training at Michigan was 'fiQ RlCHARD FlNE' MBA '69' many of the concepts and principles fabulous. As President and CEO of vf %J tells us he is heading up I was exposed to while at the the 189th fastest growing private a new division of Cambridge-Lee Business School. In fact, many of company in the USA, I feel that I Industries/Inc, a multi-national the approaches and skills I was use my Michigan training regularly company with headquarters in exposed to as a student in the and often visualize the classrooms. Boston. The division (entitled the Business School have found their I founded Wexco International, "Accessory Division") consists of way into my law school courses. which is dedicated to enhancing imported high quality bathroom My wife and I have two children the state of the art of construc­ products made in Europe (such as and live in Coral Gables. If any tion management and claims medicine cabinets, lighted mirrors, classmates are ever in Miami, they management. Through our five bathroom accessories, and vanities). should give me a call." divisions (construction management, He says the U.S. market for upscale claims management, critical path products for the kitchen and bath PAUL FOOTE, BBA '67, writes that method, Wexpro software company, is growing at a rapid pace due to he is relocating from New York and seminar division) we have made dramatic increases in remodeling. University to Pepperdine University a real mark." He writes that his wife He and his wife live in Holliston, Bette is executive vice president Mass. with their three children.

46 HARLAN L. REBEL, MBA '69, was recently presented with the Please Tell Us About Yourself honorary and professional degree of engineering of mines by the We would like to include more news about alumni in Dividend, and hope you will University of Missouri-Rolla help us by providing us with information about yourself. We'd like to know where during the May 17, 114th annual you are working, and other news about you, such as promotions, new business commencement at UMR. Rebel is ventures, any business or academic honors, authorship of books or articles, or director of mining and exploration other information that would be of interest to alumni. If you would take the time for the United States Gypsum to fill out the form below and send it to "Pringle Smith, Editor, Dividend Maga­ Company of Chicago. He joined zine, Graduate School of Business Administration, University of Michigan, U.S. Gypsum in 1956, and has held Ann Arbor, Michigan 48109," we would very much appreciate it. various manufacturing management positions since then, including plant Name: Degree(s) and Class Years: manager of operations in Sperry, Iowa, and Hagersville, Ontario, Business Position: Canada. He was manager of manufacturing for the Wood Business Address: Fiber Division from 1978 to 1985, when he was named to his present Home Address: _ position. Harlan is a member of the national and local chapters of Please write below some personal or business news about yourself that we can the American Institute of Mining, share with other alumni. Metallurgical, and Petroleum Engineers, and the Industrial Advisory Board of the College of Engineering at the University of Wisconsin. He has served as building committee chairman for the United Church of Christ, Naperville, Illinois. He and his wife, Marcia, are the parents of three children and live in Naperville.

'*7 A. ROGER w- HEINS> MBA / ^K. '74, has been promoted from manager-treasury operations at Mobay Corporation to manager-treasury operations at Bayer USA, Inc. (parent company to Mobay Corporation and Miles Laboratories). He lives in Clair, Pennsylvania.

^M K DAVID D. HINMAN, BBA / D '73, MBA '75, has joined the Superior Products Company of Southfield, Michigan, as financial vice president. He received his CPA from the State of Michigan while associated with the public accounting firm of Peat, Marwick, Main 8c Company. David is the current president of the Southeastern Michigan Chapter of the American Subcontractors Association. He and his wife, Patricia, live in Birmingham, Michigan, and have two children, Susan and Robert.

47 Peat, Marwick, Main & Co. Dan and his wife Karen have one son, Ronald E. Ferguson, MAS '65, Becomes Matthew, and live in Farmington Chairman and CEO of General RE Corp. Hills. 9Q "| PHILIP M. COMERFORD, Ronald E. Ferguson, MAS '65, company, becoming assistant vice Ol BBA'81, received an MBA became chairman, president, president in 1972, vice president from the Darden School and a and CEO of General RE Corp. of the research/actuarial division doctorate of law from the law school on June 1, 1987. General in 1974 and of the management as well as the University of Virginia RE Corporation is a holding information division in 1975. during final exercises on May 17 in company with subsidiaries In 1977, he became senior vice Charlottesville. Philip has accepted operating in the fields of president, and in 1981 was a position with Citicorp Investment reinsurance, insurance, and appointed vice president and Bank in New York. insurance services. The domestic group executive of General RE reinsurance subsidiaries comprise Corporation, the parent company the largest reinsurance operation of General Reinsurance Group. PETER BERGMAN, MBA '81, moved domiciled in the United States He became president, COO, and to the Los Angeles area three years and one of the largest in the director of General RE in 1983. ago after being laid off from Atari. world. Companies of the Group He is a member of the American He now works for Epson Ambrica, operate from offices in 29 cities Academy of Actuaries, a fellow of a subsidiary of the $3 billion in the United States and Canada, the Casualty Actuaries Society, Seiko-Epson Corporation. He was and from offices in 12 cities and a founding member and a recently promoted to director of overseas. past-president of Casualty product marketing, responsible for Epson's complete line of personal Ferguson joined General Actuaries of New York. He also computers, printers, and consumer Reinsurance Corporation in holds directorships in numerous electronics products. He works with 1969 as an actuarial assistant and reinsurance corporations. TIM DITOMASO, MBA '82, who is a worked his way up through the product manager. He and his wife Muriel often see other Michigan LA-area alums. She is a food technologist at Hunt-Wesson 9JT/? PARESH CHARI, MBA '76, Inc., a subsidiary of Time, Inc., as a in Fullerton, CA. 4 \3 joined the Ameritech manager of finance. In his current Publishing corporate planning and position he supervises the billing, ? O O G. SCOTT HAISLET, BBA development department (which accounts receivable, credit, and O^ '82, has joined William J. deals with strategic and business audit departments for what he says Atkinson in forming Atkinson & planning) in Sept., 1986 after six is "the number 1 pay TV channel Haislet, certified public accountants, years with (Pullman) Kellogg and in the U.S." He writes that he was a professional corporation in three years with Enserch Corp. in married in December, 1984, to his Oakland, California. He writes: Houston, Texas. While at Enserch, wife Linda. "This is a great opportunity to he was treasurer and manager of own my own business with little risk finance for one of their subsidiaries. 9Q/\ JOE S. RICHIE, MSME '74, of capital and the opportunity He is married and has two sons, OVJ MBA '80, has worked in to consult with some of the most Ashwin and Ajay, aged 6 and 4. He truck operations marketing at Ford fascinating business people in and his family live in Troy, Mich. Motor Company, and at Cummins the country — those of the San Engine Company in product Francisco Bay Area. Our practice 9^^ JOAN E. HAUSER, MBA planning and marketing since involves small business consultancy / / '77, has been promoted receiving his MBA. In July, 1986, and personal financial planning. to manager, Corporate College he joined the marketing depart­ Contrary to popular belief, we do Relations & Recruiting-East, at IBM. ment of Freightliner Corporation in much more than tax returns. In a She is responsible for coordinating Portland, Oregon with responsibility nutshell, we attempt to put money activity at the universities where for managing the development and in our clients' pockets through tax IBM regularly recruits in the marketing of vehicle maintenance avoidance and financial control of Northeast. computer software for freightliner's assets and business operation. In dealers and truck fleet customers. addition to traditional services of '*7Q RoBERT RoTH> MBA '79> audit, review and accounting and / %y worked on the audit staff DANIEL H. ROSE, BBA '80, has compliance related to tax return at Arthur Young & Company in recently become the VP-Finance filings, we also work in the New York after graduation from for Amsteel International, Inc. areas of financial forecasting and Business School and while obtaining of Farmington Hills, Mich. projections, litigation support, estate his CPA. In 1982, he left Arthur He previously was an audit senior (family wealth) planning, business Young to join Home Box Office, manager in the Detroit office of

48 valuations, feasibility studies, systems consultation, structuring settlements related to civil litigation, Mary L. Campbell, MBA '79, Will and a variety of other financial matters. I was previously employed Manage a New Venture Capital Fund by Merrill Lynch as an account Enterprise Management, Inc., executive (the personal financial Enterprise Management," said an Ann Arbor-based venture results of that venture allowed me Hayden H. Harris, President. management company, to compile the resources to enter "Her investor experience announced recently that Mary L. into self-employment), and with two complements the firm's strong Campbell, MBA '79, has joined Big Eight CPA firms and a local operating expertise and will allow the firm to manage the venture San Francisco CPA firm in tax and us to develop a strong venture capital fund which the firm is in business consulting." capital capability to assist the process of forming. The new emerging companies." seed capital fund, called the A partner in forming ROSEMARY BLACK, MBA '82, was Enterprise Development Fund, Enterprise Management is promoted to manager at Arthur was created to invest in Michigan Thomas Porter, MBA '67. Andersen & Co. Rosemary and her companies soon after their Porter started his business career husband Bill are both managers formation (often called with Procter & Gamble, and in the Columbus, Ohio office. "seed stage"). Earlier this year later became vice president (She says it's a little too close to Enterprise Management was of marketing for Yard-Man. OSU during football season.) She selected from among 14 firms He recently served as president and her husband have a new son, which made proposals to and CEO of Environmental William Emery, born in October, the Michigan Strategic Fund Research Group, Inc., one of the 1986. to be a recipient of a $2 million nation's leading environmental investment from the State. monitoring firms. He and TONY ZAMBELLI, BBA '82, has Before joining Enterprise Hayden Harris founded joined Tunstall Consulting, Inc., Management, Campbell served Enterprise Management in based in Tampa, Florida, as a as President of Michigan Capital 1984 to provide a variety of corporate financial consultant. The and Service, Inc., the Ann management services to new firm specializes in the creation of Arbor-based venture capital and developing companies. It has comprehensive business plans used subsidiary of National Bank of assisted a number of successful to secure appropriate capital for Detroit (NBD). She has a broad local companies, including rapidly growing companies and in range of experience in finance Software Services Corporation, acquisition and leveraged buy-out and venture capital, both with COSI, National Sanitation situations. Tony is a CPA in both NBD and other well-known Foundation, University Michigan and Florida, and says financial institutions. Microfilms, Quad Six, Deucalion, he looks forward to meeting more "We are pleased to have an Cottage Inn, and International Michigan alumni in the Tampa individual with Mrs. Campbell's Consumer Technologies. area. He previously worked for venture capital experience join four years with Peat, Marwick, Main & Co. in both the Detroit and Tampa areas. 9Q A JACK DOLMAT-CONNELL, mayor in Marlboro, Mass., where JOO CHERI L. JACOBS, BBA '83, OA MBA '84, worked after the family lives. OJ was promoted to manager graduation at Data General at Price Waterhouse in Pittsburgh, Corporation in a variety of 9 O fif PAUL CANCHESTER, BBA, effective July 1. Cheri, most compensation positions. He is OD '80, MBA '85, has been recently a senior consultant in the now manager of compensation and appointed finance manager of the management consulting services benefits for Digital Equipment Illinois Hospital Association (IHA). department, has been with Price Corporation's semiconductor In this position, he will develop Waterhouse since 1985. Previously, operations. There he is responsible statewide policy for the financing she was a financial analyst at Baxter for all of the compensation and and delivery of medical care Travenol Laboratories in Deerfield, benefits activities for about 3,000 to Medicaid recipients and the Illinois. She is a member of the employees, including employees medically indigent. IHA is the American Institute of Certified at two facilities in Massach and a state professional association Public Accountants, the University new one opening in Edinborough, that represents the interests of of Michigan Alumni Association, Scotland. He and his wife Carrie community hospitals in Illinois. and Alpha Phi Sorority. have a new baby boy, Scotc, born Before joining IHA in 1984 in December 1986 and a daughter as a finance intern, Paul was a Stephanie, almost six. Carrie, who reimbursement analyst and staff is a 1981 U-M graduate and holds accountant for the Oakwood an MS in natural resources from Hospital Corporation in Dearborn, the U-M, is executive aide to the Mich.

49 seminars to be given to the new interim president of Wayne County armed forces of the Philippines), Community College, and fiscal Ph.D. Notes the Brotherhood of Christian adviser for Detroit Mayor Roman Businessmen and Professionals, Gribbs. and the Institute for Pastoral He retired from Wayne County 3 £lf\ JOHN D. DANIELS has Development. He and his wife, government in 1957 after 32 years \J%J recently moved to Peru, Priscy, have three children — of service, the last 18 as county where he is with the Academy for Yanee, 9; JB, 7; and Marie, 3. budget director, and joined WSU Educational Development. John shortly afterward. complains that mail takes eighteen LAURENCE MADEO moved He attained further stature after days to reach him, but we've had '76 to St. Louis, Missouri at he took a leave of absence from that experience in the States, the end of 1986, where he is now WSU to enter city government in without even having had the assistant professor of Management January 1962 as chief fiscal officer privilege of going to Peru! Information Systems at the with the Cavanaugh administration University of Missouri-St. Louis. — the highest city administrative ERIC FLAMHOLTZ is active both post ever held by a Black. as a consultant and as a professor. 9 ^ Q JORGE CALDERON-ROSSELL The new mayor cited city finances President of Management Systems / O has been with the World as his most difficult problem, and Consulting Corporation, which he Bank Group for the last eight years. Mr. Pelham, first as Cavanaugh's founded in 1978, he is also He is now in the Capital Markets interim financial adviser, then as Professor of Management at the Department of the International city controller, charted Detroit's Graduate School of Management at Finance Corporation, an affiliate course back to fiscal stability. He UCLA and Assistant Director of the World Bank, which he has also served on innumerable boards of the UCLA Institute of Industrial found to be a "very satisfying and commissions, and in 1973 was Relations where he heads the professional experience." presented with one of his proudest Center for Research on Human honors, the Brotherhood Award Resource Management. Jossey-Bass 9 Q fif JULIAN CATTANEO, in of the National Conference of recently published two of his books O %J addition to acting as Christians and Jews for "promoting — Human Resource Accounting and associate professor and director the best interest of all members of How to Make the Transition from an of research and publications at the the community, of every race and Entrepreneur ship to a Professionally faculty of business administration, religion, in his many and arduous Managed Firm. the University of Windsor, Canada, civic responsibilities." is also editor of the newsletter of To quote his obituary in the 9^ "1 STEVE DAWSON, now in the International Management Detroit News of April 4, "To his / JL the Finance Department at Division of the Academy of countless friends, Mr. Pelham was the University of Hawaii at Manoa, Management and is past chair of well-known for his personal warmth reports that he had a visiting the International Business Division and wit as he was for his financial appointment at the University of the Administrative Sciences knowledge. Asked once about the of International Business and Association of Canada. secret of his ability with figures Economics in Beijing for the spring running into the millions, he term 1987. quipped, 'I've got 12 fingers.' " " 'There's no question that Al BOB ALLISON is now Pelham was one of this city's and '72 at Ouachita Baptist Deaths this state's great men,' (Detroit) University, Arkadelphia, Arkansas, Mayor Coleman A. Young said. having left Wayne State in Detroit 'It will be a long time before we last July. The Twenties see his kind again.' " Alfred M. Pelham, a business Surviving in addition to his wife WILLIAM CARLSON writes administration major who Doris are a son, Alfred M., Jr.; '73 enthusiastically about graduated from the U-M in 1922, a daughter, Frances Carnaghi; St. Olaf College's strong economics died April 3 in Detroit after a long and four grandchildren. program which graduates more illness. Information about him was than 100 econ majors with strong sent to us by a classmate of his, quantitative skills each year. Many H. T. Stark, who graduated in 1921 students have joint majors with a from the U-M, also with a business Bernard A. Nagelvoort, a loyal foreign language and/or spend a administration major. Michigan alumnus, died in semester abroad. Mr. Pelham had been Wayne Anchorage, Alaska, on April 30, County director of budget and 1987, after an illness of several 9^ A LARRY (VICTOR) GAMBOA finance, city controller under months. He came to the University / ^t wrote a lengthy letter Detroit Mayor Jerome P. in 1922 and was awarded an A.B. describing his involvement with Cavanaugh, vice-president of degree in 1925 and an MBA in Soldiers for Christ (a series of finance at Wayne State University, 1926. He was a member of the first

50 class to graduate from the Business and Huyler's of Indianapolis. the hectic days of the 1930s and School. In this class there were After the beginning of WW II, 1940s, Bernie, his wife, Caroline, only thirteen students including Renown and many other small and their two children, were an three orientals, two Chinese and a manufacturers became interested integral part of the social, civic, Japanese. Now there are only two in war-related production. As Mr. and religious life of the community. members living. At the University Nagelvoort said, "When WW II They achieved a nice blend of and throughout his life, Mr. broke out it soon became apparent business activities with family Nagelvoort was familiarly known that a lot of industries in this life and participation in many as Bernie by a host of friends country were going to have endeavors to improve the lives of and business contacts. to convert their facilities into other people in the community. Yet After graduation he entered the something more vitally needed his influence and contributions went investment banking field in Detroit than stoves could possibly be." So far beyond the local level. In 1963, with the Guaranty Trust Company Renown management soon became he accepted a position proffered and later worked at other financial interested in salvage suction and by the International Bank for institutions. But in the fall of 1932 discharge assemblies and concluded Reconstruction and Development he left the financial community and that the market for them would (World Bank) to serve as an in association with Millard H. Pryor, be substantial so long as boats were advisor to the general manager another Michigan alumnus, became being sunk, harbors blocked, etc. of the Industrial Finance Corpora­ affiliated with the Independent Then the question was whether tion of Thailand. This was a most Stove Company of Owosso, Renown was in position to produce interesting assignment but Michigan, under a management these products. So there was a one which was undoubtedly contract which gave them majority thorough study of production frustrating at times. Nevertheless, control when certain financial goals capability, needed equipment, this two-year assignment (1964-65) had been met. This contract went and procurement problems. The was rewarding in many ways both to into effect at or near the lowest decision was in the affirmative. A Thailand and to the Nagelvoorts. It level of the great depression of the contract was secured from the U.S. gave them the opportunity to travel early 1930s. The company's name Navy and production was started extensively in that part of the world. was changed to Renown Stove in 1941. Before long, shipments of Soon after their return to Owosso Company and later to Renown these products were being made Mr. Nagelvoort became active in the Corporation. to Great Britain, France, and the affairs of the Interlochen Center for USSR. This all happened before Through this transaction the Arts, the home of the National Pearl Harbor, but this event just these two young men, both Music Camp at Interlochen, increased demand. This rapid shift with financial experience, took Michigan, and was a member of its from stoves to war-related products the entrepreneurial approach to National Advisory Board in 1967. by Renown management surely business careers in marked contrast He was active in fund-raising efforts was a significant accomplishment. to other members of the 1926 class. for most of the following year, but Surely there was much risk involved Later Renown contributed to through no fault of his own the and, in fact, the going was very the war effort by the production project was unsuccessful and rough indeed for the first two or of salvage gears, aircraft spark abandoned in 1970. three years, but they weathered the plug cleaners, and magnesium Mr. Nagelvoort was a strong, storm largely through a loan from castings. That Renown played an quiet, unassuming individual. the RFC (Reconstruction Finance important part in the war effort He had all the good qualities of his Corporation), a federal agency. was recognized when the coveted Dutch ancestors who migrated from After the rigors of the depression Army-Navy E Award was made to Amsterdam to a Nebraska farm in subsided the stove business became all employees. All contracts for war 1880. He was a rather conservative at least reasonably profitable. Mr. material were terminated after V-J person with a high level of personal Nagelvoort handled production and day in 1945. But in 1948, contracts integrity. Like most Dutchmen labor relations; Mr. Pryor — sales were secured from the Navy he had a very strong family and other outside functions. As Department and later from the orientation. Yet his humanity entrepreneurs Mr. Nagelvoort and Army Quartermaster Corps for extended beyond family to all Mr. Pryor also became interested production of a large number of of mankind. It was a pleasure to in other enterprises, notably The wall clothes-lockers. Also in 1951, be with him often over the several Barnes Manufacturing Company Renown secured a contract from decades since the first class of Mansfield, Ohio; the Toledo the Army Air Corps to produce graduated from the Business Commutator Company which they gasoline dispensers. Finally in School in 1926. bought and moved to Owosso. In 1953, Renown was liquidated and all Surviving in addition to his wife 1939, Mr. Pryor became President equipment was sold. The land and Caroline are a son, Bernard C, who of Barnes, and soon thereafter buildings were sold in 1956. received his MBA from the Business Mr. Nagelvoort became Executive The Nagelvoorts continued to School in 1957, and a daughter, C. Vice-President. Later he became live in Owosso until 1980 when they Elaine Mills, of Anchorage, Alaska. a director of the Inter-American moved to Ann Arbor, and on to by D. Maynard Phelps Engineering Company of Fremont Anchorage in early 1987. Even in Professor Emeritus of Marketing

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