‘Viable defenses' exist to stall bid from Dana rival

7/13/2003

Toledo's Dana Corp. was a pioneer in using so-called poison pills to ward off hostile takeover attempts, but the auto supplier hasn't employed other tactics that could strengthen its position against a smaller Michigan rival trying to swallow it.

Dana has a typical and solid poison pill, a device allowing the number of a company's shares to balloon, making it harder for an unwanted suitor to gain a controlling share. The device could make it too expensive for ArvinMeritor, Inc., to follow through on its $15-a-share offer.

Further, the Toledo multi-national company is incorporated in Virginia, which has useful anti-takeover measures, such as a three-year waiting period before a hostile acquirer can sell many assets or offer more stock.

But Dana's board members don't have staggered terms, which can be a good anti-takeover defense. As a result, ArvinMeritor could back enough candidates to take a majority of director seats during next year's annual shareholders meeting.

If that happens, the suburban Detroit company could have its representatives remove Dana's poison pill. Such action would be made easier because Dana, a $10.3 billion corporation , previously opted out of a Virginia statute that could prevent ArvinMeritor from voting its shares during such a proxy fight.

“The combination is really pretty severe: a staggered board and a poison pill,” said Jerry Davis, a business professor at the University of Michigan. “If I'm trying to take them over, what I would do is probably take over their board first.”

Still, Dana's array of anti-takeover measures should be strong enough to keep ArvinMeritor at bay while leaders plot a strategy, some experts said. By Virginia law, it is difficult for Dana to call a special shareholders' meeting, and its next regular one is several months off.

“The pill that Dana has in place will be adequate in at least stalling ArvinMeritor for a long time,” said Beth Young, senior research associate at the Corporate Library in Portland, Maine. “Dana is in a strong position to resist.”

Said Michael Dooley, a law professor at the University of Virginia: “The clear intent of the Virginia Legislature has been to give the board of the target company a lot of discretion in determining what is in the best interest of the shareholders. ... I think Dana does have viable defenses.”

Still, if ArvinMeritor persists, the takeover bid could drag out for a year or more, analysts say, and the battle could get bloody, especially if another bidder comes forward or if Dana tries its own takeover of ArvinMeritor. One analyst, Darren Kimball of Lehman Brothers, said the pending takeover attempt could have a 60 percent chance of succeeding.

ArvinMeritor, a $6.9 billion company in Troy, Mich., last week fired a bold shot at Toledo's largest corporation and one of its oldest. Repeatedly rebuffed by Dana's top executive and board since early June, ArvinMeritor took its case directly to Dana shareholders, publicly offering to buy their stock for $15 a share.

The offer would cost ArvinMeritor about $2.2 billion in cash, plus the acquirer would absorb another $2.2 billion in Dana debt, making the deal worth $4.4 billion. Such a combined company would be the third-largest auto-parts maker in the United States.

In its latest financial report, Dana had 148.6 million outstanding shares held by 37,400 owners. ArvinMeritor owns 1.1 million shares of Dana, or less than 1 percent. Dana's stock, which was at $12.02 a share before the takeover announcement, closed at $15.96 a share Friday, leading some analysts to speculate that ArvinMeritor will have to raise its offer to attract acceptance.

Dana has urged shareholders to wait until its board can review the offer and give its recommendation by the middle of next week. Until then, Dana executives are in a “quiet period” in which laws do not permit them to talk publicly about the possible transaction.

Company spokesman Gary Corrigan told The Blade yesterday that it was too early to know what the board might do. “It's too speculative to even guess,” he said.

Toledo industrialist Chester Devenow, former chairman and chief executive of the former Sheller-Globe Corp., said last week that Dana should fight the takeover. He recommended Dana make a counter-offer to take over ArvinMeritor, as well as reinstate its quarterly dividend of 31 cents a share, cut two years ago to a penny a share.

Analyst Joseph Phillippi, president of AutoTrends Consulting in Short Hills, N.J., said Dana likely will tell shareholders to reject the proposal, saying the offer isn't nearly high enough, the combined company would have far too much debt, and any cost savings are too limited.

ArvinMeritor has made it clear the stock-purchase offer depends on a number of factors, including the removal of Dana's poison pill and acceptance by owners of more than two-thirds of Dana's shares. An ArvinMeritor spokesman said executives hope Dana's board recognizes the value of the offer and negotiates with them.

The Michigan firm has, however, sued Dana in state court in Virginia in part to seek an order that would bar the Toledo Fortune 500 firm from using its poison pill. In what experts called a typical move, the lawsuit accuses Dana board members of breaching their fiduciary duties to shareholders by rejecting proposals without meeting with the suitor.

The lawsuit, filed in the Circuit Court for the City of Buena Vista, Va., where Dana has a factory, contends that the implementation of Dana's poison pill “has the practical effect of precluding ArvinMeritor from consummating its tender offer, regardless of the extent to which Dana's shareholders wish to sell their shares.”

Any amendment to strengthen the poison pill, the lawsuit maintains, would constitute a further breach of the board's fiduciary duties. It claims that Dana's refusal to talk to the would-be acquirer about the offer “has no economic justification, serves no legitimate purpose, and is an unreasonable response to the proposed acquisition, which poses no threat to the interests of Dana shareholders.”

Nothing will help Dana's management and directors if ArvinMeritor's bid satisfies shareholders, who in turn could pressure company leaders, said Jeff Fromson, an attorney with Roetzel & Andress in Columbus and Toledo.

“All the defense mechanisms often break down once an adequate offer is on the table,” he said.

Dana has had a poison pill in place since 1986. The founding partner of the New York law firm it uses, Martin Lipton of Wachtell, Lipton, Rosen & Katz, is credited with being the co-developer of the poison-pill technique.

Dana's poison pill, in place since 1996, is a fairly standard means to dilute the value of a bidder's stock, some experts said.

If a hostile bidder acquires more than 15 percent of Dana stock, then shareholders can buy new company stock at half price, thus sharply diluting the acquirer's new stock and forcing it to buy even more at market price.

Under Dana's poison pill, if either a merger is completed or half the assets or earnings power is sold to ArvinMeritor, remaining Dana shareholders can buy stock in the rival at half price.

In some states, a board has to go through extra steps to prove it is fulfilling its fiduciary duties after a tender offer commences, but that's not the case in Virginia, which should help Dana's board, said Mr. Dooley of the University of Virginia.

A larger benefit of being incorporated in Virginia is the state's three-year waiting period following a hostile acquisition of a company's stock, Mr. Dooley and others said. During that period, a hostile acquirer can't dispose of more than 5 percent of the firm's assets, offer additional shares, and do other financial transactions expected in a merger.

The waiting period is triggered after a hostile bidder gets 10 percent of a company's stock, said Allen Goolsby, a Richmond attorney with Hunton & Williams.

Ohio, meanwhile, has some anti-takeover provisions that Virginia doesn't, said Howard M. Friedman, a law professor at the University of Toledo.

Both Virginia and Ohio laws, for example, require a shareholder vote to accept the transaction and both exclude ArvinMeritor's and Dana's leaders from taking part.

Yet, of the two states, only Ohio prevents professional speculators and others who bought Dana stock following the offer's commencement - and who would be less loyal to Dana - to vote too, he said.

Ohio also explicitly takes into account the fate of communities, creditors, and other parties when deciding whether a company's directors were acting in the best interest of shareholders, Mr. Friedman said.

Even if Dana is able to fend off ArvinMeritor, he said, it might have to spend so much money that it will be left weakened financially.

Yet, observed Ms. Young of the Corporate Library: “If Dana's board is hell-bent on resisting ArvinMeritor, it may seek out a white knight.”

Dana itself was such a friendly suitor for Echlin, Inc., when SPX Corp. made a hostile bid for it in 1998. But many experts have criticized Dana's costly acquisition of Echlin, which made auto parts mostly for the replacement market.

Analysts say there are no obvious industry contenders for Dana. Valeo SA of France and Visteon Corp. of Dearborn, Mich., come to mind as strategic buyers, but they have their own restructuring and balance-sheet problems, said Merrill Lynch analyst John Casesa.

Dana management more likely would want to take the company private (no longer offering public stock) and remain in Toledo in some fashion, than to end up as part of ArvinMeritor, said Mr. Phillippi, the analyst.

Buyout firms like Blackstone Group and Ripplewood Holdings probably are taking a good look at Dana, he said. “Every investment banker worth his fancy pinstripe suit has been putting together development memos,” Mr. Phillippi said.