Fellowship, a question. I had some time to think about your points and was wondering what you think the best course of action is with North Korea, which I'm sure we could agree is a much bigger threat due to their ability to now produce nuclear weapons.
You said this about Iraq:
[quote] I do not see the UN disarming Iraq. Think about it. If disarming Iraq was left to a peaceful UN means do you really trust the job would get done? Would Saddam not sell some WOMD out the back door while the UN team is distracted in other parts of the country? I mean if Saddam has to get rid of them he might as well sell some of them while nobody sees it on the radar screen. Why not get some money from terrorists for the WOMD. If we do not go to war with Iraq I would be afraid for not just the economy but the world we will live in. So war is the only way to get the job done. If we were to not have this war sure we may save some money now. How then do we view that "saved money at this point in time" when ohh 3 years from now (fill in the blank) instead of a handfull of planes hit American targets it is a handful of American cities hit with WOMD of one sort or another. What do you think that will cost? This is where I take a different view of the whole process of what Bush is doing in terms of the war and the economy. The cost of not going to war is far far far greater than the cost of going to war. Sure we can count how much we could save now by not going. But one day if having not gone to war we could wake up to a world that is far more dangerous that is faced with a handful of american cities at crisis and countless american lives gone. At such a time we would be faced with a medical crisis, an economic crisis worth mention, we would also then be in a bind as to what would we do. How would we do it. If the country was hit hard and I don't live in a bubble ( it could happen ) We would be facing a far greater disaster in all areas. It would bring the entire world econonmy into a major tailspin and the entire world would be unstable like we have never seen in our lifetimes. To me going to war in iraq is a small price to pay in order to prevent this scenario I just presented. It is like hiring a termite pest control company to spray your house every year to prevent termites from destroying your home. That is far cheaper and smarter than to let termites destroy the home and then rebuild the home. <hr></blockquote>
So I'm assuming that by using your own rhetoric, you would support military action against North Korea even more than military action against Iraq, especially since they might sell not just biological weapons to terrorists, but possibly nuclear weapons as well.
I was just wondering if you could clarify your position on this, since an invasion of North Korea would definitely be much more difficult than an invasion of Iraq (the death tolls of American and South Korean troops would be astronomical).
Edit: zKillah, calling people 'commies' was the classic way for the right to get American citizens to fall in line behind their ideas. The sad thing is that if he could, you know Ashcroft would be out there calling everyone that is even slightly to the left of conservative a 'commie'.
<strong>Edit: zKillah, calling people 'commies' was the classic way for the right to get American citizens to fall in line behind their ideas. The sad thing is that if he could, you know Ashcroft would be out there calling everyone that is even slightly to the left of conservative a 'commie'.[ 03-08-2003: Message edited by: Fran441 ]</strong><hr></blockquote>
They've just changed the accusation from "commie" to "unpatriotic." And then there's the argument that if you don't fall in line, you're either a) aiding the terrorists or b) going to be responsible for the piles of bodybags in Iraq.
Read "Defending Civilization" from <a href="http://www.goacta.org/publications/reports.html"; target="_blank">this site</a>, and make sure you note that the vice pres's wife's name is displayed prominently on the title page.
They've just changed the accusation from "commie" to "unpatriotic." And then there's the argument that if you don't fall in line, you're either a) aiding the terrorists or b) going to be responsible for the piles of bodybags in Iraq.
</strong><hr></blockquote>
My favorite example of this were the TV ads telling me that by smoking pot, I was willingly aiding and funding terrorist endeavors. Rhetoric is fun!
First off, do you want to give some examples of these misguided regulations zkillah? I'm waiting with baited breath.
You laissez faire capitalists crack my ass up. You are so blinded by your ideology you can't see shit. We have the best example of the failures of a full on laissez faire approach to economics, just look at American History prior to about 1930 or so. Tell me how wonderfull things were for the average American. Now take a look at the post WWII American History. Possibly the greatest economic period the world has ever seen and was it led by Republican ideas? Or was it the time of the most regulations, the highest levels of union membership and a congress dominated by Democrats?
BR, I honestly don't blame our two political parties for their ineptitude and sell out culture because I agree with you, the parties are just trying to get re-elected, I mean that's actually the natural order of things, they should be trying to get re-elected. No, I blame you, and I blame me and all the other lazy ass Americans that would rather watch tv and argue on the internet than actually go out and do anything about it. In my opinion our two major parties are mearly a reflection of our current patheticness as a culture.
<strong>Fellowship, a question. I had some time to think about your points and was wondering what you think the best course of action is with North Korea, which I'm sure we could agree is a much bigger threat due to their ability to now produce nuclear weapons.
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I think the US with all countries in the region must work together to convince North Korea that what it is doing is wrong and will isolate it from the world even further. However if North Korea were to stop this program the world would come to aide North Korea. If this does not work a plan will have to be devised that will include many deaths on all sides when force will have to be used against North Korea. I see a change in leadership in North Korea a reality to come as well. I am by no means happy of the world today and how it is on this course of massing up and distributing WOMD. It truly is a dangerous world today. I will have to leave the military plan up to those who have the best information. I do fear it will not be something we wish to see. Left unchecked however things are even worse.
zKillah I read those articles and well, let's just say I'm still waiting. That first link to capmag.com was priceless though. I haven't laughed so hard in a long time.
<strong>zKillah I read those articles and well, let's just say I'm still waiting. That first link to capmag.com was priceless though. I haven't laughed so hard in a long time.</strong><hr></blockquote>
The first link refers to Daniel Fischel's book: Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution. I should've linked to it directly. Anyway, you might want to read this to appreciate a little more what I?m trying to get at.
If you want to get the economy going its better to give to those who have less than those who have more. If you give money to those who have (esp. in times like now with economical uncertainty) they tend NOT to spend it but to save it.</strong><hr></blockquote>
Who's talking about GIVING any money -- I thought it was about NOT TAKING the money in the first place.
For the second point, you need a citation. With respect to the middle class, I doubt that's true.
don't give rebate checks like last time, nor cut taxes...
instead give people credit cards that only work at malls and stores..
ie. you want to give a 300 dollar rebate to all tax payers (to use last years refund as an example), instead you give them a card that works like a target gift card or cash card...except it works at all stores for purchases...no cash back options, the person has to buy merchandise....last year my wife and i got 600 bucks and it went right in the bank...
so this rebate doesn't go to savings or paying off a credit card or spent on travel to other countries or whatnot...it goes right back into the economy...people are getting a tax break, the economy is getting shoppers and the work force needs more people to handle those shoppers, thus cutting down on the jobless rate and brings in more tax-payers...
make it malls and department stores and electronic stores (ie best buys) etc...but not food nor gas nor utilities nor mortgages nor rent...it may seem mean, but people have to pay these anyways and it wouldn't add any boost to the economy...we need people to have some extra cash in their pockets so they go out and buy something they want but don't absolutely need (like food, heat, lodging, sex)
First, everyone in this nation needs to start voting third party: Green, Libertarian, Commie, Reform, whatever. Just send a message to the Republicrats.
Second, the saving device for the economy (and possibly for international prosperity as well) is true liberal economics, by which I mean completely free trade (no more protectionist measures for agriculture or steel or anything) enacted by all governments. Follow John Stuart Mills and Keynes' ideas about government's role in the market (keep it at a minimum, provide for what the market can't, break up monoplies, etc.) and just let it go. Unfortunately, it's unlikely to happen, but until the Revolution comes, it's probably the best shot we have.
and then there is the usual patter about that idiotic mythology, that romantic notion as sickly sacchrine as a golden light breakfast commercial known as Ayn Rand . . .
The funny thing about a lot of leftists is that they can't see their own hypocrisy. Many hide behind a curtain of pretending to be above it all. They feel their agenda is righteous and pious and truly for all the people. Meahwhile they demonize anyone with wealth and large corporations and seek to divide into an us vs them scenario. They bleat when someone labels them but are the first and loudest to cry out labels of racism, bigotry, classism, elite, warmonger, evil and so on. They constantly question conservative motives and imply conspiracies and agendas but seem truly hurt if their motives are brought into question. Leftists preach an all inclusive society and then exhaust every option to block any people or ideas that don't coincide with theirs. They claim to have all the answers to fix society's ills but the ills remain after decades. Leftists claim to represent the common man in America but routinely need leftist judges to institute their policies and ideas that are routinely voted against or don't have popular support. What makes all this hypocrisy worse is that they truly don't see it. They don't see themselves as leftist or liberal. Many won't even use these terms to describe themselves. They use terms like moderate or middle of the road. Being left or right is admitting you're too far in one direction or the other and when your views are as righteous and caring as the liberals you can't be too far in any direction. You're just where you should be and everyone else is wrong.
<strong>The funny thing about a lot of leftists is that they can't see their own hypocrisy. Many hide behind a curtain of pretending to be above it all. They feel their agenda is righteous and pious and truly for all the people. Meahwhile they demonize anyone with wealth and large corporations and seek to divide into an us vs them scenario. They bleat when someone labels them but are the first and loudest to cry out labels of racism, bigotry, classism, elite, warmonger, evil and so on. They constantly question conservative motives and imply conspiracies and agendas but seem truly hurt if their motives are brought into question. Leftists preach an all inclusive society and then exhaust every option to block any people or ideas that don't coincide with theirs. They claim to have all the answers to fix society's ills but the ills remain after decades. Leftists claim to represent the common man in America but routinely need leftist judges to institute their policies and ideas that are routinely voted against or don't have popular support. What makes all this hypocrisy worse is that they truly don't see it. They don't see themselves as leftist or liberal. Many won't even use these terms to describe themselves. They use terms like moderate or middle of the road. Being left or right is admitting you're too far in one direction or the other and when your views are as righteous and caring as the liberals you can't be too far in any direction. You're just where you should be and everyone else is wrong.</strong><hr></blockquote>
The funny thing about a lot of right wingers is that they can't see their own hypocrisy. Many hide behind a curtain of pretending to be above it all. They feel their agenda is righteous and pious and truly for all the people. Meahwhile they demonize anyone who's poor or homeless and seek to divide into an us vs them scenario. They bleat when someone labels them but are the first and loudest to cry out labels of racism, bigotry, classism, elite, maggot-infested longhair peacenik, evil and so on. They constantly question liberal motives and imply conspiracies and agendas but seem truly hurt if their motives are brought into question. Right wingers preach an all inclusive society and then exhaust every option to block any people or ideas that don't coincide with theirs. They claim to have all the answers to fix society's ills but the ills remain after decades. Right wingers claim to represent the common man in America but routinely need right-wing judges to institute their policies and ideas that are routinely voted against or don't have popular support. What makes all this hypocrisy worse is that they truly don't see it. They don't see themselves as right-wingers or conservatives. Many won't even use these terms to describe themselves. They use terms like moderate or middle of the road. Being left or right is admitting you're too far in one direction or the other and when your views are as righteous and caring as the right-wingers you can't be too far in any direction. You're just where you should be and everyone else is wrong.
Changing the presidency to one six year term wouldn't help a thing. Then the president would still make decisions to remain in power, the only difference is he'd aim for the party to stay in power, not himself. 'Round election time the voters would just say "Well out last president was a member of this party and he was great, so let's elect one again!"
<strong>Changing the presidency to one six year term wouldn't help a thing. Then the president would still make decisions to remain in power, the only difference is he'd aim for the party to stay in power, not himself. 'Round election time the voters would just say "Well out last president was a member of this party and he was great, so let's elect one again!"</strong><hr></blockquote>
Maybe Chuck has a point when he says that political parties should be outlawed as well.
and then there is the usual patter about that idiotic mythology, that romantic notion as sickly sacchrine as a golden light breakfast commercial known as Ayn Rand . . .
heeheeha that's such malarcky . . .
sheeesh </strong><hr></blockquote>
Hmm,..
This stuff's over your head professor? If you can follow Kierkegaard you can follow me. I?ll make it simple:
The 1980s has been labeled the decade of greed. Advocates of this view contend that abuses of all kinds abounded unimpeded by the Reagan administration. Only the vigilance of sincere politicians and media elite saved the American people from catastrophe. The primary abuse occurred on Wall Street in the frenzy of corporate takeovers. And Michael Milken epitomized this greed in his willingness to finance the corporate raiders. Unfortunately, Americans have come to accept this charge and to blame corporate greed for all the financial problems of the 1980s. Daniel Fischel's book Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution seeks to give another explanation. The author is a professor at the University of Chicago Law School with extensive knowledge of financial markets. The title of the book is somewhat misleading in that it focuses on more than just the Milken case. The author's basic premise is that the 1980s witnessed an increase in the effort to fuel class envy on the part of liberals and a backlash of old, established money trying to protect itself from upstarts like Milken. Throw in a government willing to change the rules in the middle of the game and you have the unsavory prosecutions that took place at the end of the 1980s.
The first chapter describes corporate America as it headed into the 1980s. "Managers in the modern corporation no longer have a reason to perform well ... their domination of the voting machinery makes it next to impossible for them to be replaced, they have no reason to exert themselves to maximize profitability. Better to be lazy and enjoy the perks of office." (pp. 12-13) Laws such as the Glass-Steagall Act gave corporate managers greater discretion to pursue their own objectives rather than their shareholders' interests. Antitrust policy, which limited horizontal and vertical mergers, resulted in the wave of conglomerate mergers of the 1960s which made no economic sense but generated power and prestige for managers. Events of the 1970s and early 1980s ushered in an era of corporate restructuring.
The subsequent restructuring that occurred alienated several groups. First to be alienated were those who took affront at any wealth accumulation: "Antigreed rhetoric is not about truth or reality; its real purpose is to delegitimize and discredit the efforts and success of others." (p. 4) Second, managers of targeted corporations wanted a return to the status quo. Likewise, established old-line investments banks that avoided involvement with hostile takeovers for fear of offending its blue-chip corporate clients, were envious of the gains made by Drexel, Burnham, Lambert and other firms that did finance takeovers. Finally, labor was antagonistic toward takeovers because takeovers inevitably resulted in the closing of unprofitable plants.
This unholy alliance resulted in a publicity campaign and, ultimately, government action that greatly diminished the financial revolution that occurred in the 1980s. The result has been a return to a slowdown in productivity. Despite the rhetoric, the 1980s witnessed a rebound in American productivity. Much of this can be attributed to the corporate restructuring that took place. Incompetent managers were replaced and inefficient operations terminated. The conspiracy described by Fischel has effectively returned the United States to the inefficiencies of the 1960s and 1970s. The rest of the book describes how this was accomplished.
Though distasteful to some, restructuring companies, selling off assets, renegotiating labor contracts, and firing corporate executives was not illegal. Without any illegal activity, the aggrieved groups could not crack down on what was happening. Some illegal activity must be found. The candidate: Insider trading. For most of American history, there has been virtually no regulation on insider trading. Manages buying their own corporation's stock demonstrate they have confidence in their own abilities and signal such to the market. In fact, no concrete definition of insider trading has ever been offered. Also, the government has never developed a theory to explain why insider trading is bad. Fischel offers an analogy: "If someone wants to buy farmland because he believes the land contains valuable mineral deposits, he can do so without saying anything about it to the farmer. The law imposes no duty on him to disclose his knowledge or belief." (p. 44) It must be recognized that trade only exists when the transactors possess different subjective values for the commodity traded. Some of these differences come from differences in information. If the government is ever successful in making all traders equal then trading would cease. "But none of these esoteric arguments made any difference. The government recognized that its campaign to restore ?confidence' by making everyone equal was very much in sync with the rich-bashing, ?decade of greed' rhetoric of the 1980s" (p. 46)
The government, in an attempt to make takeover bids "above board", passed the Williams Act in 1968. This act required disclosure when anyone acquired more than 5% of a company's stock. It also required any acquirer to disclose volumes of information to the shareholders of targeted companies. The delays caused by this act actually encouraged and generated insider trading. Prior to its passage, takeovers could be consummated quickly with no problem of stock run-ups prior to acquisition. If there is any evil in insider trading then the government must be blamed, for it fostered this type of activity.
With typical ineptitude, instead of replacing the Williams Act, Congress, in 1984, passed the Insider Trading Sanctions Acts to crack down on this activity. Congress stiffened the penalty on an activity it still could not adequately define. In fact, Congressman John Dingell, chairman of the House Committee on Energy and Commerce, vigorously opposed any clear definition, for to do so would inevitably be underinclusive and provide a "road map for fraud". (p. 59) In other words, Congress wanted the definition open-ended so, at any moment, the government could prosecute anyone it disliked: "Nothing should permit any targets of the government's wrath to escape." (p. 60)
Several court cases followed. In many of these, brokers were performing their historic fiduciary responsibilities by sharing tips with clients yet were prosecuted for using inside information.
Having tightened the screws on insider trading, the government next focused on corporate takeovers. Like insider trading, the government never defined, in the security laws, the term stock parking. Nevertheless, it became illegal. In fact, Ivan Boesky pled guilty in October 1986 to engaging in an illegal stock parking scheme. In essence, stock parking is the activity where a principle hires an agent to purchase the stock of a company for him, thereby concealing his identity and preventing a run-up of the stock price. There would appear to be nothing inherently evil about this practice. But entrenched management would like to be made aware that a takeover is in process. In fact, they would prefer to know ahead of time so that they could undertake some preemptive action. The government obliged.
The government's vendetta against Michael Milken hinged on his incredible success (i.e., class envy) and the fact he worked for Drexel, Burnham, Lambert; a firm that was not an established, blue-nose investment banking firm. With Drexel and Milken, the government prosecutors switched tactics. They continuously leaked criminal allegations to friendly reporters. "The government hoped that by repeatedly publicizing allegations of criminal conduct before any charges were filed, Drexel and Milken would realize that trying to defend themselves was hopeless." (p. 128)
Drexel plead guilty in December 1988. In March 1989, the government filed a ninety-eight-count indictment against Milken and his brother Lowell accusing them of racketeering, and securities, mail, and wire fraud. In April 1990, Milken pled guilty to 6 felonies. The man on the street would take this as confirmation of Milken's guilt. Fischel offers a different explanation.
Most of the government's prosecutions in the 1980s resulted in plea bargains. The typical government ploy was to levy multiple charges that would take a defendant years to defend against. Next the government would offer a reduced indictment as well as a reduced or suspended sentence for a guilty plea and cooperation in the prosecution of other defendants. In economic literature, the prisoner's dilemma is a situation where it is rational to confess to a crime you did not commit. For instance, if tried and convicted the sentence will be life imprisonment (if acquitted, set free). If the prisoner pleads guilty then a reduced 5-year sentence will be received. Confronted with these options many will choose the latter. Such was the case with many who were prosecuted in the 1980s. Some individuals even perjured themselves in helping the government prosecute someone else. Fischel reserves a whole chapter (Chapter 4) for the unsavory, and many times unconstitutional, practices of New York prosecutor Rudolph Giuliani. Fischel contends that Giuliani's political ambitions resulted in a "reign of terror".
Michael Milken's guilty plea could be the classic example of the prisoner's dilemma. The government had unlimited resources and could allow prosecution to go on for years. Any actual crimes Milken committed were not defined as crimes at the time the action was taken. Yet that didn't matter to the prosecution. Compounding the situation was the government's indictment of his brother. The government offered Milken the option to plead guilty to 6 charges (reduced from the original 98 counts) and have charges against his brother Lowell dropped. Given that jury decisions are unpredictable, Milken accepted the government's offer. As Fischel points out, this cannot be construed as a sincere admission of guilt.
During the "decade of greed," movies portrayed takeover artists as slick Gordon Geckos, destroyers of wealth. Policymakers initiated new regulations to deal with the perceived economic adversities of takeovers. An increasing number of studies by financial economists suggest that public condemnation was, at minimum, too harsh and perhaps wrong. Still, laws and regulations from the decade survive as flotsam, making mergers dangerous sailing and possibly sinking future attempts by firms adjusting to new competitive and economic realities. Unlike the 1980s, the current boom lacks financial takeovers; takeovers leading to reorganized, more efficient companies, and a more efficient distribution of assets.
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Contrary to negative perceptions, many leveraged acquisitions in the 1980s profited buyers and strengthened the acquired company. Some found poorly run companies and turned them around. Some saw opportunities based on a unique combination of factors.
The federal government had relaxed antitrust restrictions on mergers. State courts and legislatures were not yet serious about blocking acquisitions. Many major firms had been pursuing unsound business strategies that reduced their market values but offered potential profits for those who could run them more competently. And new innovations in debt financing made money cheaper.
The time was ripe for strategic acquisitions. Companies could purchase reasonably priced assets in their own industry or sector. Strategic deals dominated major sectors of business such as oil and gas, pharmaceutical and chemical, retail clothing and food, media and entertainment. Such takeovers might include Quaker Oats? acquisition of Gatorade, General Electric?s acquisition of RCA, Wells Fargo Bank?s acquisition of Crocker National, and KKR?s buyout of Beatrice and Duracell.
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Most leveraged acquisitions reallocated assets from diversified firms and conglomerates to firms in the same industries as those assets. If a bidding firm and target firm shared their core business, the purchaser saved the core business and sold any others. Other firms acted as conduits, buying diversified firms and selling off assets to corresponding businesses; known as "bust-ups" or "sell-offs."
Sources of Gains
Three interrelated sources produced gains. First, strategic acquisition firms enjoyed gains by expanding their operations in their own industry or business. Classified as synergy gains, the value of the combined firm was greater than the value of the two firms operating separately because of real operating efficiencies. Acquisitions of firms in businesses related to the bidder were generally profitable. Acquisitions of unrelated companies in the 1980s produced significantly lower returns.
Second, bidders in financial takeovers produced gains by eliminating the value-destroying effects of excessive diversification. In a 1992 Journal of Finance article Steven Kaplan and Michael Weisbach showed firms that diversified in the 1960s, 1970s and early 1980s lost significant value (on average about 15 percent of the value of their lines of business) becoming ripe candidates for takeovers. Acquisitions cured the ills created by incumbent managers? strong aversion to value-maximizing divestitures. A significant portion of the gains from hostile takeovers came from a reallocation of target assets; for example, sales of assets to owners of related assets. Firms that swam against the current, making diversifying acquisitions, were four times more likely to later divest the assets than firms that made acquisitions in their own or a related field.
And third, bidders purchasing poor performing targets benefited from replacing the existing management while leaving the target with enough new debt to motivate whoever was left. LBOs targeted firms with high cash flow and low performance histories. Accordingly, poor performers were usually targets of tender offers. In 1992, Financial Management published a study by David Denis about the investment decisions of LBO candidates over a five-year period prior to the LBO. The study found that such firms had invested in projects having a negative net present value as viewed by the market. Kenneth Martin and John McConnell reported in the Journal of Finance in 1991, management turnover to be much more frequent after a takeover.
Usually managers run companies in ways that improve their authority; that is, control and compensation at the expense of the companies? owners, shareholders, and long-term strength. Takeovers weed out or discipline such managers. After a takeover, the increase in the debt-to-equity ratio in the target effectively adjusted managers? incentives, better aligning them with the interests of the shareholders. The pressure of periodic interest obligations disciplined managers to better generate and marshal cash.
Critics of LBOs assume that bidding firms successfully squeezed additional cash flow out of the target?s operations by expropriating the wealth from third parties, for example the federal government. Takeover targets pay less taxes because interest payments on debt are tax-deductible while dividend payments to shareholders are not. Two other candidates considered vulnerable to abuse were employees of the target companies who would face lower wages or lost jobs; and customers who would have to pay the monopoly prices of the new company. The data demonstrates, however, that on average, gains from "victimizing" any of the groups equal only a small portion of the premiums paid to target shareholders.
To many observers, the tax code explained the preference of bidders for firms with modest debt-to-equity ratios during the 1980s acquisition spree. Increases in leverage and deductibility of interest payments on debt became the most important potential source of tax gains in acquisitions.
Kaplan, in a 1989 Journal of Finance study of leveraged buyouts, showed that tax savings from leverage explained at least 50 percent and perhaps 100 percent of the takeover premium paid by the bidders for target company stock. The strength of his finding is tempered somewhat, however, by the fast debt repayment typically following leveraged acquisitions and by the increased tax payments made by selling target shareholders and by post-acquisition debt holders.
Another source of tax gains involved merging a profitable company with one having significant carry-back tax losses or credits. Further, acquiring a company with depreciated assets and re-depreciating those at accelerated rates resulted in significant tax advantages. And finally, acquiring a company, then converting it to a partnership, allowed purchasers to avoid double taxation. In 1986, changes in the Internal Revenue Code eliminated the three latter tax benefits.
Frank R. Lichenberg and Donald Siegel showed in a 1990 Journal of Finance Economics article that companies purchased in leveraged acquisitions substantially reduced their number of white-collar employees. Union employees also suffered wage reductions, including pension reductions, though not as severely. Indeed a 1995 Industrial and Labor Relations Review study by Brian Becker found, in the aggregate, no statistically significant wage changes in leveraged buyouts. And Lichenberg and Siegel found no statistically significant wage changes between hostile takeovers and friendly takeovers. There were, of course, notable exceptions, such as Icahn?s acquisition of TWA.
Leveraged acquisitions creating significant consolidations of market power were the exception, not the rule.
What Hampered Bidders?
Entrepreneurs in the 1980s knew how to use debt financing to acquire troubled firms and turn them around. But a tough acquisition market gave significant bargaining advantages to their opposite parties, the sellers, and to subsequent bidders. It was one thing to see potential gains from acquisitions, but quite another to secure a profit in the price negotiations with a seller. Why was the split between seller and buyer in the 1980s so lopsided? At issue: whether the disadvantage was predominately determined by the market or the law.
Those who point to basic market phenomena when determining the buyer/seller split usually offer three explanations. First, the takeover market matured quickly, the buyers competed for targets. Competition among buyers drove the price of targets up until the marginal gains to a buyer from any acquisition were small. Second, successful buyers suffered a "winner?s curse." In an auction of targets, the buyer willing to pay the most paid above-market prices, the market being determined by the average price all willing buyers would pay. And third, managers in the 1980s habitually made poor decisions in acquisitions, by either overvaluing the target or choosing personal gain over shareholder interest.
If those market-based phenomena explained the disparity between the gains of bidder and target shareholders, one would expect market corrections. Bidding firms and their managers would learn from their mistakes and over time economic incentives would lead them to correct their practices. One would expect that managers of bidders would become more cautious, or firms, under pressure from their shareholders, would discipline reckless managers. Arguably, the lull in acquisitions from 1989 to 1992 and the numerous shareholder resolutions encouraging boards to welcome takeover bids represented such a correction.
Actually, a growing body of law aimed at restricting bidder power affected the takeover market. Three sets of regulations: disclosure rules, rules against preferential treatment of shareholders, and restrictions by state governments, help explain the course of takeovers in the 1980s.
Disclosure Rules
In the 1970s and 1980s the federal government?s Securities and Exchange Commission (SEC) increasingly required disclosure of important information about takeover plans. The rules "leveled the playing field" by eliminating any initial gains in the acquisition for the winning bidder. The rules forced bidders to reveal their strategy for using a target?s assets after the acquisition. The strategy explained and justifies whatever price the bidder is willing to pay. Second bidders could use the disclosed information to compete with the first bidder.
Even if competing bidders do not appear, a seller?s shareholders could use the bidder?s disclosures to price their stock before consummation of the acquisition, capitalizing the expected gain in the pre-acquisition stock price. The run-up in target stock price affects the acquisition price. At minimum, a seller?s managers would bargain for an advantageous price based on the bidder?s disclosures. What seller in any line of business would not want credible evidence of a buyer?s bottom line price?
The early disclosure requirements exacerbate two of the market phenomena noted above. Both the winner?s curse and competition among bidders debilitate winning bidders when all bidders are required to reveal their material information on the potential benefits of the target?s assets.
Bars to Preferential Stock
The second heavy-handed takeover regulation required bidders to extend equal treatment to all shareholders in stock acquisitions. The SEC took it upon itself to protect shareholder equality in tender offers. It based its actions on the Williams Act of 1968. It put disclosure and timing restrictions on tender offers. The SEC went well beyond the explicit requirements of the Act, and in the 1970s and 1980s crafted a series of rules to protect small shareholders who otherwise could not command the takeover premiums due large shareholders.
As a consequence of the rules of that Act, bidders had to include all shareholders in a tender offer. For example, they could not discriminate among shareholders by offering some a preferred price for their stock. If an offer were oversubscribed, bidders were required to take some stock from all tendering shareholders pro rata . They could not purchase shares privately while an offer was open. They had to give price increases to all those who tendered before the announced increases, and had to commence their tender offer on the date of the first price specific public announcement of an intent to purchase.
The anti-discrimination rules, so uncritically accepted in that context, have been met with rebuke in antitrust law and in case law on the fiduciary duties of directors. The rejections are based on economic theory and on pragmatic notions that an individual ought to have the freedom to negotiate an offer at arms-length. Thus if takeover bidders could discriminate among shareholders, large shareholders would clearly be better off. In serious question is the knee-jerk conclusion that discrimination among shareholders, if permitted, would make small shareholders worse off. Clearly, bidders? costs in successful acquisitions are higher with anti-discrimination rules. The anti-discrimination rules discourage the marginal bidders from making bids, resulting in fewer takeovers.
State Regulations
State courts and legislatures established the third set of regulations hindering bidders. They supplied target managers with a powerful array of defenses to structure the bargaining in their favor. State anti-takeover statutes and court opinions gave target companies more power to control the timing, pace, and process of negotiations. Targets could set or relax all the final offer deadlines once bargaining began. Some states gave targets the power to choose the structure of the sale, for example through auctions or privately negotiated bids. If an auction was the means of sale, the target could structure it as a closed or open bidding process. Obviously, a well-positioned bidder could force a desperate target to forgo those bargaining advantages. But between equally situated bidders and targets, the law gave the target advantage in negotiation at the margin.
The cumulative effect of federal and state regulations placed bidders at a severe disadvantage. A successful bidder required extraordinary care and foresight; normal perspicacity would not do. Only the very sagacious bidder could make serious money in such a bargaining environment. The result, marginal bidders were and continue to be discouraged from bidding. The falloff in takeovers at the end of the 1980s reduced not only the gains to bidders but the gains to target shareholders.
Mergers and Acquisitions: Then and Now
After a lull in the early 1990s, mergers and acquisitions have returned to the economic landscape, stronger than ever. Given the surge in deals, one might argue that the laws remaining from the 1980s have had little effect and should not worry us.
Economic forces drive the current pace of acquisitions. Relatively low interest rates make borrowing cheap. Record high share prices (based on price earnings ratios) encourage buyers to use them as the medium of exchange. The federal government relaxed fifty-year-old regulations to allow more freedom of movement in major American industries: banking, telecommunications, utilities, radio and television, and railroads. Enforcement of antitrust laws has also been relaxed.
But the current acquisition boom looks different from the boom of the 1980s in important ways. In addition to economic conditions and softening regulations, other factors are at work. First, announcements of hostile acquisitions as a proportion of all acquisitions announcements are down significantly as are cash deals. Highly leveraged buyouts are less infrequent.
A high percentage of hostile acquisitions currently in the news are hostile offers made by second bidders seeking to purchase a firm that has announced a friendly combination with a competitor. In such cases the second, unwanted bidder is worried about the enhanced market position of a competitor if an announced acquisition in its industry proceeds unimpeded. Currently, the number of hostile bid announcements made by first bidders is very small indeed.
A second major change from the 1980s is that financial buyers have largely disappeared, corporate strategic takeovers now hold center stage. Those buyouts, that characterized the 1980s saw purchasers of single firms conducting major reorganizations, changes in operations, or recapitalizations from the outside rather than the inside. They did not purchase targets to combine with the assets of an otherwise ongoing operating company. Rather, financial buyers spotted corporations they believed could maximize shareholder value through reorganization. Management in such targets were viewed as ripe for change. In short, there are few Ronald O. Perelmans, Carl Icahns, Michael Steinhardts, Saul Steinbergs, Fred Lorenzos, Jay Pritizers, T. Boone Pickens, or Sir Ronald Goldsmiths in the news.
Examples of financial takeovers in the 1980s followed by major operating changes included a retail clothing company that retained downtown department stores more valuable as office buildings; the takeover of an airline that was paying employees too much after the deregulation of the industry; and the takeover of an oil company wasting resources on marginally productive oil and gas exploration. Examples of financial takeovers in the 1980s leading to reorganizations included Ronald Perelman?s takeover of Revlon, a dinosaur conglomerate that needed to both spin-off under-performing divisions and refocus on its specialty divisions.
Two beneficial aspects of financial takeovers in the 1980s have not been properly appreciated. First, those takeovers often precluded strategic acquisitions as the financial buyer spun off companies to strategic buyers or resold the residual firm to strategic buyers or back to the public. In a sense, many financial buyers were intermediaries, dealers of companies they bought. As such, financial takeovers added liquidity to the acquisition market.
Second, the threat of a financial takeover based on unrealized gains in operating changes, recapitalizations, or reorganizations often stimulated change by incumbent managers. For example, to defend against a takeover by Sir James Goldsmith, Goodyear retained only its core tire and rubber business. Phillips Petroleum, defending against a takeover by T. Boone Pickens and later Carl Icahn, changed its exploration philosophy and made larger dividend payments to its shareholders.
Some of the strongest salutary effects of financial takeovers in the 1980s resulted from unsuccessful cases. That was, of course, a positive effect from takeovers too often ignored. When Warren Buffett, a premier takeover white knight, sided with public opinion and opined that takeovers LBOs do not create value, he was mistaken. Financial and operating restructuring, the effect of threatened and successful LBOs, did create value and the careful studies of financial economists on the takeovers of the 1980s found it.
One misses the discipline created by financial takeovers most sorely at the end of an acquisition wave. The financial takeovers of the 1980s corrected the mistakes of the conglomerate mergers of the 1970s. When the current boom in strategic acquisitions winds down, mistakes made and opportunities lost will leave some firms with sub-optimal operating strategies or sub-optimal organizational or capital structures. Sluggish incumbent managers, often responsible for the mistakes, will need the pressure applied by financial purchasers to make appropriate changes. Financial acquisitions then are an important market correction mechanism for mistaken mega-decisions by firms. At issue is whether the legal flotsam of the 1980s deters the financial purchasers we would otherwise expect to see in the late 1990s.
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Conclusion
The takeover boom of the 1980s introduced methods and styles of acquisitions that were novel for the time. It was high drama, we reacted with alarm. By the end of the decade, public perceptions of the harms created had outstripped fact, our government institutions (state legislatures, federal agencies and state courts) translated our misgivings into law.
Comments
You said this about Iraq:
[quote] I do not see the UN disarming Iraq. Think about it. If disarming Iraq was left to a peaceful UN means do you really trust the job would get done? Would Saddam not sell some WOMD out the back door while the UN team is distracted in other parts of the country? I mean if Saddam has to get rid of them he might as well sell some of them while nobody sees it on the radar screen. Why not get some money from terrorists for the WOMD. If we do not go to war with Iraq I would be afraid for not just the economy but the world we will live in. So war is the only way to get the job done. If we were to not have this war sure we may save some money now. How then do we view that "saved money at this point in time" when ohh 3 years from now (fill in the blank) instead of a handfull of planes hit American targets it is a handful of American cities hit with WOMD of one sort or another. What do you think that will cost? This is where I take a different view of the whole process of what Bush is doing in terms of the war and the economy. The cost of not going to war is far far far greater than the cost of going to war. Sure we can count how much we could save now by not going. But one day if having not gone to war we could wake up to a world that is far more dangerous that is faced with a handful of american cities at crisis and countless american lives gone. At such a time we would be faced with a medical crisis, an economic crisis worth mention, we would also then be in a bind as to what would we do. How would we do it. If the country was hit hard and I don't live in a bubble ( it could happen ) We would be facing a far greater disaster in all areas. It would bring the entire world econonmy into a major tailspin and the entire world would be unstable like we have never seen in our lifetimes. To me going to war in iraq is a small price to pay in order to prevent this scenario I just presented. It is like hiring a termite pest control company to spray your house every year to prevent termites from destroying your home. That is far cheaper and smarter than to let termites destroy the home and then rebuild the home. <hr></blockquote>
So I'm assuming that by using your own rhetoric, you would support military action against North Korea even more than military action against Iraq, especially since they might sell not just biological weapons to terrorists, but possibly nuclear weapons as well.
I was just wondering if you could clarify your position on this, since an invasion of North Korea would definitely be much more difficult than an invasion of Iraq (the death tolls of American and South Korean troops would be astronomical).
Edit: zKillah, calling people 'commies' was the classic way for the right to get American citizens to fall in line behind their ideas. The sad thing is that if he could, you know Ashcroft would be out there calling everyone that is even slightly to the left of conservative a 'commie'.
[ 03-08-2003: Message edited by: Fran441 ]</p>
<strong>Edit: zKillah, calling people 'commies' was the classic way for the right to get American citizens to fall in line behind their ideas. The sad thing is that if he could, you know Ashcroft would be out there calling everyone that is even slightly to the left of conservative a 'commie'.[ 03-08-2003: Message edited by: Fran441 ]</strong><hr></blockquote>
They've just changed the accusation from "commie" to "unpatriotic." And then there's the argument that if you don't fall in line, you're either a) aiding the terrorists or b) going to be responsible for the piles of bodybags in Iraq.
Read "Defending Civilization" from <a href="http://www.goacta.org/publications/reports.html"; target="_blank">this site</a>, and make sure you note that the vice pres's wife's name is displayed prominently on the title page.
Cheers
Scott
<strong>
They've just changed the accusation from "commie" to "unpatriotic." And then there's the argument that if you don't fall in line, you're either a) aiding the terrorists or b) going to be responsible for the piles of bodybags in Iraq.
</strong><hr></blockquote>
My favorite example of this were the TV ads telling me that by smoking pot, I was willingly aiding and funding terrorist endeavors. Rhetoric is fun!
You laissez faire capitalists crack my ass up. You are so blinded by your ideology you can't see shit. We have the best example of the failures of a full on laissez faire approach to economics, just look at American History prior to about 1930 or so. Tell me how wonderfull things were for the average American. Now take a look at the post WWII American History. Possibly the greatest economic period the world has ever seen and was it led by Republican ideas? Or was it the time of the most regulations, the highest levels of union membership and a congress dominated by Democrats?
BR, I honestly don't blame our two political parties for their ineptitude and sell out culture because I agree with you, the parties are just trying to get re-elected, I mean that's actually the natural order of things, they should be trying to get re-elected. No, I blame you, and I blame me and all the other lazy ass Americans that would rather watch tv and argue on the internet than actually go out and do anything about it. In my opinion our two major parties are mearly a reflection of our current patheticness as a culture.
<strong>First off, do you want to give some examples of these misguided regulations zkillah? I'm waiting with baited breath.
</strong><hr></blockquote>
Yesterday:
] <a href="http://www.capmag.com/article.asp?ID=42"; target="_blank">http://www.capmag.com/article.asp?ID=42</a>;
Today:
] <a href="http://www.trendmacro.com/a/luskin/20020514luskinbrennerAS.asp"; target="_blank">http://www.trendmacro.com/a/luskin/20020514luskinbrennerAS.asp</a>;
] <a href="http://www.trendmacro.com/a/luskin/20020903luskinbrennerWSJ.asp"; target="_blank">http://www.trendmacro.com/a/luskin/20020903luskinbrennerWSJ.asp</a>;
[ 03-08-2003: Message edited by: zKillah ]</p>
<strong>Fellowship, a question. I had some time to think about your points and was wondering what you think the best course of action is with North Korea, which I'm sure we could agree is a much bigger threat due to their ability to now produce nuclear weapons.
</strong><hr></blockquote>
I think the US with all countries in the region must work together to convince North Korea that what it is doing is wrong and will isolate it from the world even further. However if North Korea were to stop this program the world would come to aide North Korea. If this does not work a plan will have to be devised that will include many deaths on all sides when force will have to be used against North Korea. I see a change in leadership in North Korea a reality to come as well. I am by no means happy of the world today and how it is on this course of massing up and distributing WOMD. It truly is a dangerous world today. I will have to leave the military plan up to those who have the best information. I do fear it will not be something we wish to see. Left unchecked however things are even worse.
Fellowship
[ 03-08-2003: Message edited by: FellowshipChurch iBook ]</p>
<strong>zKillah I read those articles and well, let's just say I'm still waiting. That first link to capmag.com was priceless though. I haven't laughed so hard in a long time.</strong><hr></blockquote>
The first link refers to Daniel Fischel's book: Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution. I should've linked to it directly. Anyway, you might want to read this to appreciate a little more what I?m trying to get at.
] <a href="http://www.cato.org/pubs/regulation/reg20n2d.html"; target="_blank">http://www.cato.org/pubs/regulation/reg20n2d.html</a>;
[ 03-08-2003: Message edited by: zKillah ]</p>
<strong>
If you want to get the economy going its better to give to those who have less than those who have more. If you give money to those who have (esp. in times like now with economical uncertainty) they tend NOT to spend it but to save it.</strong><hr></blockquote>
Who's talking about GIVING any money -- I thought it was about NOT TAKING the money in the first place.
For the second point, you need a citation. With respect to the middle class, I doubt that's true.
instead give people credit cards that only work at malls and stores..
ie. you want to give a 300 dollar rebate to all tax payers (to use last years refund as an example), instead you give them a card that works like a target gift card or cash card...except it works at all stores for purchases...no cash back options, the person has to buy merchandise....last year my wife and i got 600 bucks and it went right in the bank...
so this rebate doesn't go to savings or paying off a credit card or spent on travel to other countries or whatnot...it goes right back into the economy...people are getting a tax break, the economy is getting shoppers and the work force needs more people to handle those shoppers, thus cutting down on the jobless rate and brings in more tax-payers...
make it malls and department stores and electronic stores (ie best buys) etc...but not food nor gas nor utilities nor mortgages nor rent...it may seem mean, but people have to pay these anyways and it wouldn't add any boost to the economy...we need people to have some extra cash in their pockets so they go out and buy something they want but don't absolutely need (like food, heat, lodging, sex)
it's not what your country can do for you
it is what you can do for your country
g
Second, the saving device for the economy (and possibly for international prosperity as well) is true liberal economics, by which I mean completely free trade (no more protectionist measures for agriculture or steel or anything) enacted by all governments. Follow John Stuart Mills and Keynes' ideas about government's role in the market (keep it at a minimum, provide for what the market can't, break up monoplies, etc.) and just let it go. Unfortunately, it's unlikely to happen, but until the Revolution comes, it's probably the best shot we have.
<strong>
Yesterday:
] <a href="http://www.capmag.com/article.asp?ID=42"; target="_blank">http://www.capmag.com/article.asp?ID=42</a>;
Today:
] <a href="http://www.trendmacro.com/a/luskin/20020514luskinbrennerAS.asp"; target="_blank">http://www.trendmacro.com/a/luskin/20020514luskinbrennerAS.asp</a>;
] <a href="http://www.trendmacro.com/a/luskin/20020903luskinbrennerWSJ.asp"; target="_blank">http://www.trendmacro.com/a/luskin/20020903luskinbrennerWSJ.asp</a></strong><hr></blockquote>;
Unbelieveable . . . utterly hopeless . . . .
Beyond reason itself
and then there is the usual patter about that idiotic mythology, that romantic notion as sickly sacchrine as a golden light breakfast commercial known as Ayn Rand . . .
heeheeha that's such malarcky . . .
sheeesh
<strong>The funny thing about a lot of leftists is that they can't see their own hypocrisy. Many hide behind a curtain of pretending to be above it all. They feel their agenda is righteous and pious and truly for all the people. Meahwhile they demonize anyone with wealth and large corporations and seek to divide into an us vs them scenario. They bleat when someone labels them but are the first and loudest to cry out labels of racism, bigotry, classism, elite, warmonger, evil and so on. They constantly question conservative motives and imply conspiracies and agendas but seem truly hurt if their motives are brought into question. Leftists preach an all inclusive society and then exhaust every option to block any people or ideas that don't coincide with theirs. They claim to have all the answers to fix society's ills but the ills remain after decades. Leftists claim to represent the common man in America but routinely need leftist judges to institute their policies and ideas that are routinely voted against or don't have popular support. What makes all this hypocrisy worse is that they truly don't see it. They don't see themselves as leftist or liberal. Many won't even use these terms to describe themselves. They use terms like moderate or middle of the road. Being left or right is admitting you're too far in one direction or the other and when your views are as righteous and caring as the liberals you can't be too far in any direction. You're just where you should be and everyone else is wrong.</strong><hr></blockquote>
The funny thing about a lot of right wingers is that they can't see their own hypocrisy. Many hide behind a curtain of pretending to be above it all. They feel their agenda is righteous and pious and truly for all the people. Meahwhile they demonize anyone who's poor or homeless and seek to divide into an us vs them scenario. They bleat when someone labels them but are the first and loudest to cry out labels of racism, bigotry, classism, elite, maggot-infested longhair peacenik, evil and so on. They constantly question liberal motives and imply conspiracies and agendas but seem truly hurt if their motives are brought into question. Right wingers preach an all inclusive society and then exhaust every option to block any people or ideas that don't coincide with theirs. They claim to have all the answers to fix society's ills but the ills remain after decades. Right wingers claim to represent the common man in America but routinely need right-wing judges to institute their policies and ideas that are routinely voted against or don't have popular support. What makes all this hypocrisy worse is that they truly don't see it. They don't see themselves as right-wingers or conservatives. Many won't even use these terms to describe themselves. They use terms like moderate or middle of the road. Being left or right is admitting you're too far in one direction or the other and when your views are as righteous and caring as the right-wingers you can't be too far in any direction. You're just where you should be and everyone else is wrong.
Cheers
Scott
[ 03-09-2003: Message edited by: midwinter ]</p>
<strong>Changing the presidency to one six year term wouldn't help a thing. Then the president would still make decisions to remain in power, the only difference is he'd aim for the party to stay in power, not himself. 'Round election time the voters would just say "Well out last president was a member of this party and he was great, so let's elect one again!"</strong><hr></blockquote>
Maybe Chuck has a point when he says that political parties should be outlawed as well.
[ 03-09-2003: Message edited by: BR ]</p>
<strong>
Maybe Chuck has a point when he says that political parties should be outlawed as well.
[ 03-09-2003: Message edited by: BR ]</strong><hr></blockquote>
What are you BR the Talliban? You find something "you" don't like and you get to make it outlawed? What about the will of everyone else?
So is your title "Dictator BR"?
Fellowship
<strong>
Unbelieveable . . . utterly hopeless . . . .
Beyond reason itself
and then there is the usual patter about that idiotic mythology, that romantic notion as sickly sacchrine as a golden light breakfast commercial known as Ayn Rand . . .
heeheeha that's such malarcky . . .
sheeesh
Hmm,..
This stuff's over your head professor? If you can follow Kierkegaard you can follow me. I?ll make it simple:
] <a href="http://www.visi.com/~contra_m/cm/reviews/cm15_rev_money.html"; target="_blank">http://www.visi.com/~contra_m/cm/reviews/cm15_rev_money.html</a>;
.
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The 1980s has been labeled the decade of greed. Advocates of this view contend that abuses of all kinds abounded unimpeded by the Reagan administration. Only the vigilance of sincere politicians and media elite saved the American people from catastrophe. The primary abuse occurred on Wall Street in the frenzy of corporate takeovers. And Michael Milken epitomized this greed in his willingness to finance the corporate raiders. Unfortunately, Americans have come to accept this charge and to blame corporate greed for all the financial problems of the 1980s. Daniel Fischel's book Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution seeks to give another explanation. The author is a professor at the University of Chicago Law School with extensive knowledge of financial markets. The title of the book is somewhat misleading in that it focuses on more than just the Milken case. The author's basic premise is that the 1980s witnessed an increase in the effort to fuel class envy on the part of liberals and a backlash of old, established money trying to protect itself from upstarts like Milken. Throw in a government willing to change the rules in the middle of the game and you have the unsavory prosecutions that took place at the end of the 1980s.
The first chapter describes corporate America as it headed into the 1980s. "Managers in the modern corporation no longer have a reason to perform well ... their domination of the voting machinery makes it next to impossible for them to be replaced, they have no reason to exert themselves to maximize profitability. Better to be lazy and enjoy the perks of office." (pp. 12-13) Laws such as the Glass-Steagall Act gave corporate managers greater discretion to pursue their own objectives rather than their shareholders' interests. Antitrust policy, which limited horizontal and vertical mergers, resulted in the wave of conglomerate mergers of the 1960s which made no economic sense but generated power and prestige for managers. Events of the 1970s and early 1980s ushered in an era of corporate restructuring.
The subsequent restructuring that occurred alienated several groups. First to be alienated were those who took affront at any wealth accumulation: "Antigreed rhetoric is not about truth or reality; its real purpose is to delegitimize and discredit the efforts and success of others." (p. 4) Second, managers of targeted corporations wanted a return to the status quo. Likewise, established old-line investments banks that avoided involvement with hostile takeovers for fear of offending its blue-chip corporate clients, were envious of the gains made by Drexel, Burnham, Lambert and other firms that did finance takeovers. Finally, labor was antagonistic toward takeovers because takeovers inevitably resulted in the closing of unprofitable plants.
This unholy alliance resulted in a publicity campaign and, ultimately, government action that greatly diminished the financial revolution that occurred in the 1980s. The result has been a return to a slowdown in productivity. Despite the rhetoric, the 1980s witnessed a rebound in American productivity. Much of this can be attributed to the corporate restructuring that took place. Incompetent managers were replaced and inefficient operations terminated. The conspiracy described by Fischel has effectively returned the United States to the inefficiencies of the 1960s and 1970s. The rest of the book describes how this was accomplished.
Though distasteful to some, restructuring companies, selling off assets, renegotiating labor contracts, and firing corporate executives was not illegal. Without any illegal activity, the aggrieved groups could not crack down on what was happening. Some illegal activity must be found. The candidate: Insider trading. For most of American history, there has been virtually no regulation on insider trading. Manages buying their own corporation's stock demonstrate they have confidence in their own abilities and signal such to the market. In fact, no concrete definition of insider trading has ever been offered. Also, the government has never developed a theory to explain why insider trading is bad. Fischel offers an analogy: "If someone wants to buy farmland because he believes the land contains valuable mineral deposits, he can do so without saying anything about it to the farmer. The law imposes no duty on him to disclose his knowledge or belief." (p. 44) It must be recognized that trade only exists when the transactors possess different subjective values for the commodity traded. Some of these differences come from differences in information. If the government is ever successful in making all traders equal then trading would cease. "But none of these esoteric arguments made any difference. The government recognized that its campaign to restore ?confidence' by making everyone equal was very much in sync with the rich-bashing, ?decade of greed' rhetoric of the 1980s" (p. 46)
The government, in an attempt to make takeover bids "above board", passed the Williams Act in 1968. This act required disclosure when anyone acquired more than 5% of a company's stock. It also required any acquirer to disclose volumes of information to the shareholders of targeted companies. The delays caused by this act actually encouraged and generated insider trading. Prior to its passage, takeovers could be consummated quickly with no problem of stock run-ups prior to acquisition. If there is any evil in insider trading then the government must be blamed, for it fostered this type of activity.
With typical ineptitude, instead of replacing the Williams Act, Congress, in 1984, passed the Insider Trading Sanctions Acts to crack down on this activity. Congress stiffened the penalty on an activity it still could not adequately define. In fact, Congressman John Dingell, chairman of the House Committee on Energy and Commerce, vigorously opposed any clear definition, for to do so would inevitably be underinclusive and provide a "road map for fraud". (p. 59) In other words, Congress wanted the definition open-ended so, at any moment, the government could prosecute anyone it disliked: "Nothing should permit any targets of the government's wrath to escape." (p. 60)
Several court cases followed. In many of these, brokers were performing their historic fiduciary responsibilities by sharing tips with clients yet were prosecuted for using inside information.
Having tightened the screws on insider trading, the government next focused on corporate takeovers. Like insider trading, the government never defined, in the security laws, the term stock parking. Nevertheless, it became illegal. In fact, Ivan Boesky pled guilty in October 1986 to engaging in an illegal stock parking scheme. In essence, stock parking is the activity where a principle hires an agent to purchase the stock of a company for him, thereby concealing his identity and preventing a run-up of the stock price. There would appear to be nothing inherently evil about this practice. But entrenched management would like to be made aware that a takeover is in process. In fact, they would prefer to know ahead of time so that they could undertake some preemptive action. The government obliged.
The government's vendetta against Michael Milken hinged on his incredible success (i.e., class envy) and the fact he worked for Drexel, Burnham, Lambert; a firm that was not an established, blue-nose investment banking firm. With Drexel and Milken, the government prosecutors switched tactics. They continuously leaked criminal allegations to friendly reporters. "The government hoped that by repeatedly publicizing allegations of criminal conduct before any charges were filed, Drexel and Milken would realize that trying to defend themselves was hopeless." (p. 128)
Drexel plead guilty in December 1988. In March 1989, the government filed a ninety-eight-count indictment against Milken and his brother Lowell accusing them of racketeering, and securities, mail, and wire fraud. In April 1990, Milken pled guilty to 6 felonies. The man on the street would take this as confirmation of Milken's guilt. Fischel offers a different explanation.
Most of the government's prosecutions in the 1980s resulted in plea bargains. The typical government ploy was to levy multiple charges that would take a defendant years to defend against. Next the government would offer a reduced indictment as well as a reduced or suspended sentence for a guilty plea and cooperation in the prosecution of other defendants. In economic literature, the prisoner's dilemma is a situation where it is rational to confess to a crime you did not commit. For instance, if tried and convicted the sentence will be life imprisonment (if acquitted, set free). If the prisoner pleads guilty then a reduced 5-year sentence will be received. Confronted with these options many will choose the latter. Such was the case with many who were prosecuted in the 1980s. Some individuals even perjured themselves in helping the government prosecute someone else. Fischel reserves a whole chapter (Chapter 4) for the unsavory, and many times unconstitutional, practices of New York prosecutor Rudolph Giuliani. Fischel contends that Giuliani's political ambitions resulted in a "reign of terror".
Michael Milken's guilty plea could be the classic example of the prisoner's dilemma. The government had unlimited resources and could allow prosecution to go on for years. Any actual crimes Milken committed were not defined as crimes at the time the action was taken. Yet that didn't matter to the prosecution. Compounding the situation was the government's indictment of his brother. The government offered Milken the option to plead guilty to 6 charges (reduced from the original 98 counts) and have charges against his brother Lowell dropped. Given that jury decisions are unpredictable, Milken accepted the government's offer. As Fischel points out, this cannot be construed as a sincere admission of guilt.
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[ 03-09-2003: Message edited by: zKillah ]</p>
] <a href="http://www.cato.org/pubs/regulation/reg20n2d.html"; target="_blank">http://www.cato.org/pubs/regulation/reg20n2d.html</a>;
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During the "decade of greed," movies portrayed takeover artists as slick Gordon Geckos, destroyers of wealth. Policymakers initiated new regulations to deal with the perceived economic adversities of takeovers. An increasing number of studies by financial economists suggest that public condemnation was, at minimum, too harsh and perhaps wrong. Still, laws and regulations from the decade survive as flotsam, making mergers dangerous sailing and possibly sinking future attempts by firms adjusting to new competitive and economic realities. Unlike the 1980s, the current boom lacks financial takeovers; takeovers leading to reorganized, more efficient companies, and a more efficient distribution of assets.
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Contrary to negative perceptions, many leveraged acquisitions in the 1980s profited buyers and strengthened the acquired company. Some found poorly run companies and turned them around. Some saw opportunities based on a unique combination of factors.
The federal government had relaxed antitrust restrictions on mergers. State courts and legislatures were not yet serious about blocking acquisitions. Many major firms had been pursuing unsound business strategies that reduced their market values but offered potential profits for those who could run them more competently. And new innovations in debt financing made money cheaper.
The time was ripe for strategic acquisitions. Companies could purchase reasonably priced assets in their own industry or sector. Strategic deals dominated major sectors of business such as oil and gas, pharmaceutical and chemical, retail clothing and food, media and entertainment. Such takeovers might include Quaker Oats? acquisition of Gatorade, General Electric?s acquisition of RCA, Wells Fargo Bank?s acquisition of Crocker National, and KKR?s buyout of Beatrice and Duracell.
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Most leveraged acquisitions reallocated assets from diversified firms and conglomerates to firms in the same industries as those assets. If a bidding firm and target firm shared their core business, the purchaser saved the core business and sold any others. Other firms acted as conduits, buying diversified firms and selling off assets to corresponding businesses; known as "bust-ups" or "sell-offs."
Sources of Gains
Three interrelated sources produced gains. First, strategic acquisition firms enjoyed gains by expanding their operations in their own industry or business. Classified as synergy gains, the value of the combined firm was greater than the value of the two firms operating separately because of real operating efficiencies. Acquisitions of firms in businesses related to the bidder were generally profitable. Acquisitions of unrelated companies in the 1980s produced significantly lower returns.
Second, bidders in financial takeovers produced gains by eliminating the value-destroying effects of excessive diversification. In a 1992 Journal of Finance article Steven Kaplan and Michael Weisbach showed firms that diversified in the 1960s, 1970s and early 1980s lost significant value (on average about 15 percent of the value of their lines of business) becoming ripe candidates for takeovers. Acquisitions cured the ills created by incumbent managers? strong aversion to value-maximizing divestitures. A significant portion of the gains from hostile takeovers came from a reallocation of target assets; for example, sales of assets to owners of related assets. Firms that swam against the current, making diversifying acquisitions, were four times more likely to later divest the assets than firms that made acquisitions in their own or a related field.
And third, bidders purchasing poor performing targets benefited from replacing the existing management while leaving the target with enough new debt to motivate whoever was left. LBOs targeted firms with high cash flow and low performance histories. Accordingly, poor performers were usually targets of tender offers. In 1992, Financial Management published a study by David Denis about the investment decisions of LBO candidates over a five-year period prior to the LBO. The study found that such firms had invested in projects having a negative net present value as viewed by the market. Kenneth Martin and John McConnell reported in the Journal of Finance in 1991, management turnover to be much more frequent after a takeover.
Usually managers run companies in ways that improve their authority; that is, control and compensation at the expense of the companies? owners, shareholders, and long-term strength. Takeovers weed out or discipline such managers. After a takeover, the increase in the debt-to-equity ratio in the target effectively adjusted managers? incentives, better aligning them with the interests of the shareholders. The pressure of periodic interest obligations disciplined managers to better generate and marshal cash.
Critics of LBOs assume that bidding firms successfully squeezed additional cash flow out of the target?s operations by expropriating the wealth from third parties, for example the federal government. Takeover targets pay less taxes because interest payments on debt are tax-deductible while dividend payments to shareholders are not. Two other candidates considered vulnerable to abuse were employees of the target companies who would face lower wages or lost jobs; and customers who would have to pay the monopoly prices of the new company. The data demonstrates, however, that on average, gains from "victimizing" any of the groups equal only a small portion of the premiums paid to target shareholders.
To many observers, the tax code explained the preference of bidders for firms with modest debt-to-equity ratios during the 1980s acquisition spree. Increases in leverage and deductibility of interest payments on debt became the most important potential source of tax gains in acquisitions.
Kaplan, in a 1989 Journal of Finance study of leveraged buyouts, showed that tax savings from leverage explained at least 50 percent and perhaps 100 percent of the takeover premium paid by the bidders for target company stock. The strength of his finding is tempered somewhat, however, by the fast debt repayment typically following leveraged acquisitions and by the increased tax payments made by selling target shareholders and by post-acquisition debt holders.
Another source of tax gains involved merging a profitable company with one having significant carry-back tax losses or credits. Further, acquiring a company with depreciated assets and re-depreciating those at accelerated rates resulted in significant tax advantages. And finally, acquiring a company, then converting it to a partnership, allowed purchasers to avoid double taxation. In 1986, changes in the Internal Revenue Code eliminated the three latter tax benefits.
Frank R. Lichenberg and Donald Siegel showed in a 1990 Journal of Finance Economics article that companies purchased in leveraged acquisitions substantially reduced their number of white-collar employees. Union employees also suffered wage reductions, including pension reductions, though not as severely. Indeed a 1995 Industrial and Labor Relations Review study by Brian Becker found, in the aggregate, no statistically significant wage changes in leveraged buyouts. And Lichenberg and Siegel found no statistically significant wage changes between hostile takeovers and friendly takeovers. There were, of course, notable exceptions, such as Icahn?s acquisition of TWA.
Leveraged acquisitions creating significant consolidations of market power were the exception, not the rule.
What Hampered Bidders?
Entrepreneurs in the 1980s knew how to use debt financing to acquire troubled firms and turn them around. But a tough acquisition market gave significant bargaining advantages to their opposite parties, the sellers, and to subsequent bidders. It was one thing to see potential gains from acquisitions, but quite another to secure a profit in the price negotiations with a seller. Why was the split between seller and buyer in the 1980s so lopsided? At issue: whether the disadvantage was predominately determined by the market or the law.
Those who point to basic market phenomena when determining the buyer/seller split usually offer three explanations. First, the takeover market matured quickly, the buyers competed for targets. Competition among buyers drove the price of targets up until the marginal gains to a buyer from any acquisition were small. Second, successful buyers suffered a "winner?s curse." In an auction of targets, the buyer willing to pay the most paid above-market prices, the market being determined by the average price all willing buyers would pay. And third, managers in the 1980s habitually made poor decisions in acquisitions, by either overvaluing the target or choosing personal gain over shareholder interest.
If those market-based phenomena explained the disparity between the gains of bidder and target shareholders, one would expect market corrections. Bidding firms and their managers would learn from their mistakes and over time economic incentives would lead them to correct their practices. One would expect that managers of bidders would become more cautious, or firms, under pressure from their shareholders, would discipline reckless managers. Arguably, the lull in acquisitions from 1989 to 1992 and the numerous shareholder resolutions encouraging boards to welcome takeover bids represented such a correction.
Actually, a growing body of law aimed at restricting bidder power affected the takeover market. Three sets of regulations: disclosure rules, rules against preferential treatment of shareholders, and restrictions by state governments, help explain the course of takeovers in the 1980s.
Disclosure Rules
In the 1970s and 1980s the federal government?s Securities and Exchange Commission (SEC) increasingly required disclosure of important information about takeover plans. The rules "leveled the playing field" by eliminating any initial gains in the acquisition for the winning bidder. The rules forced bidders to reveal their strategy for using a target?s assets after the acquisition. The strategy explained and justifies whatever price the bidder is willing to pay. Second bidders could use the disclosed information to compete with the first bidder.
Even if competing bidders do not appear, a seller?s shareholders could use the bidder?s disclosures to price their stock before consummation of the acquisition, capitalizing the expected gain in the pre-acquisition stock price. The run-up in target stock price affects the acquisition price. At minimum, a seller?s managers would bargain for an advantageous price based on the bidder?s disclosures. What seller in any line of business would not want credible evidence of a buyer?s bottom line price?
The early disclosure requirements exacerbate two of the market phenomena noted above. Both the winner?s curse and competition among bidders debilitate winning bidders when all bidders are required to reveal their material information on the potential benefits of the target?s assets.
Bars to Preferential Stock
The second heavy-handed takeover regulation required bidders to extend equal treatment to all shareholders in stock acquisitions. The SEC took it upon itself to protect shareholder equality in tender offers. It based its actions on the Williams Act of 1968. It put disclosure and timing restrictions on tender offers. The SEC went well beyond the explicit requirements of the Act, and in the 1970s and 1980s crafted a series of rules to protect small shareholders who otherwise could not command the takeover premiums due large shareholders.
As a consequence of the rules of that Act, bidders had to include all shareholders in a tender offer. For example, they could not discriminate among shareholders by offering some a preferred price for their stock. If an offer were oversubscribed, bidders were required to take some stock from all tendering shareholders pro rata . They could not purchase shares privately while an offer was open. They had to give price increases to all those who tendered before the announced increases, and had to commence their tender offer on the date of the first price specific public announcement of an intent to purchase.
The anti-discrimination rules, so uncritically accepted in that context, have been met with rebuke in antitrust law and in case law on the fiduciary duties of directors. The rejections are based on economic theory and on pragmatic notions that an individual ought to have the freedom to negotiate an offer at arms-length. Thus if takeover bidders could discriminate among shareholders, large shareholders would clearly be better off. In serious question is the knee-jerk conclusion that discrimination among shareholders, if permitted, would make small shareholders worse off. Clearly, bidders? costs in successful acquisitions are higher with anti-discrimination rules. The anti-discrimination rules discourage the marginal bidders from making bids, resulting in fewer takeovers.
State Regulations
State courts and legislatures established the third set of regulations hindering bidders. They supplied target managers with a powerful array of defenses to structure the bargaining in their favor. State anti-takeover statutes and court opinions gave target companies more power to control the timing, pace, and process of negotiations. Targets could set or relax all the final offer deadlines once bargaining began. Some states gave targets the power to choose the structure of the sale, for example through auctions or privately negotiated bids. If an auction was the means of sale, the target could structure it as a closed or open bidding process. Obviously, a well-positioned bidder could force a desperate target to forgo those bargaining advantages. But between equally situated bidders and targets, the law gave the target advantage in negotiation at the margin.
The cumulative effect of federal and state regulations placed bidders at a severe disadvantage. A successful bidder required extraordinary care and foresight; normal perspicacity would not do. Only the very sagacious bidder could make serious money in such a bargaining environment. The result, marginal bidders were and continue to be discouraged from bidding. The falloff in takeovers at the end of the 1980s reduced not only the gains to bidders but the gains to target shareholders.
Mergers and Acquisitions: Then and Now
After a lull in the early 1990s, mergers and acquisitions have returned to the economic landscape, stronger than ever. Given the surge in deals, one might argue that the laws remaining from the 1980s have had little effect and should not worry us.
Economic forces drive the current pace of acquisitions. Relatively low interest rates make borrowing cheap. Record high share prices (based on price earnings ratios) encourage buyers to use them as the medium of exchange. The federal government relaxed fifty-year-old regulations to allow more freedom of movement in major American industries: banking, telecommunications, utilities, radio and television, and railroads. Enforcement of antitrust laws has also been relaxed.
But the current acquisition boom looks different from the boom of the 1980s in important ways. In addition to economic conditions and softening regulations, other factors are at work. First, announcements of hostile acquisitions as a proportion of all acquisitions announcements are down significantly as are cash deals. Highly leveraged buyouts are less infrequent.
A high percentage of hostile acquisitions currently in the news are hostile offers made by second bidders seeking to purchase a firm that has announced a friendly combination with a competitor. In such cases the second, unwanted bidder is worried about the enhanced market position of a competitor if an announced acquisition in its industry proceeds unimpeded. Currently, the number of hostile bid announcements made by first bidders is very small indeed.
A second major change from the 1980s is that financial buyers have largely disappeared, corporate strategic takeovers now hold center stage. Those buyouts, that characterized the 1980s saw purchasers of single firms conducting major reorganizations, changes in operations, or recapitalizations from the outside rather than the inside. They did not purchase targets to combine with the assets of an otherwise ongoing operating company. Rather, financial buyers spotted corporations they believed could maximize shareholder value through reorganization. Management in such targets were viewed as ripe for change. In short, there are few Ronald O. Perelmans, Carl Icahns, Michael Steinhardts, Saul Steinbergs, Fred Lorenzos, Jay Pritizers, T. Boone Pickens, or Sir Ronald Goldsmiths in the news.
Examples of financial takeovers in the 1980s followed by major operating changes included a retail clothing company that retained downtown department stores more valuable as office buildings; the takeover of an airline that was paying employees too much after the deregulation of the industry; and the takeover of an oil company wasting resources on marginally productive oil and gas exploration. Examples of financial takeovers in the 1980s leading to reorganizations included Ronald Perelman?s takeover of Revlon, a dinosaur conglomerate that needed to both spin-off under-performing divisions and refocus on its specialty divisions.
Two beneficial aspects of financial takeovers in the 1980s have not been properly appreciated. First, those takeovers often precluded strategic acquisitions as the financial buyer spun off companies to strategic buyers or resold the residual firm to strategic buyers or back to the public. In a sense, many financial buyers were intermediaries, dealers of companies they bought. As such, financial takeovers added liquidity to the acquisition market.
Second, the threat of a financial takeover based on unrealized gains in operating changes, recapitalizations, or reorganizations often stimulated change by incumbent managers. For example, to defend against a takeover by Sir James Goldsmith, Goodyear retained only its core tire and rubber business. Phillips Petroleum, defending against a takeover by T. Boone Pickens and later Carl Icahn, changed its exploration philosophy and made larger dividend payments to its shareholders.
Some of the strongest salutary effects of financial takeovers in the 1980s resulted from unsuccessful cases. That was, of course, a positive effect from takeovers too often ignored. When Warren Buffett, a premier takeover white knight, sided with public opinion and opined that takeovers LBOs do not create value, he was mistaken. Financial and operating restructuring, the effect of threatened and successful LBOs, did create value and the careful studies of financial economists on the takeovers of the 1980s found it.
One misses the discipline created by financial takeovers most sorely at the end of an acquisition wave. The financial takeovers of the 1980s corrected the mistakes of the conglomerate mergers of the 1970s. When the current boom in strategic acquisitions winds down, mistakes made and opportunities lost will leave some firms with sub-optimal operating strategies or sub-optimal organizational or capital structures. Sluggish incumbent managers, often responsible for the mistakes, will need the pressure applied by financial purchasers to make appropriate changes. Financial acquisitions then are an important market correction mechanism for mistaken mega-decisions by firms. At issue is whether the legal flotsam of the 1980s deters the financial purchasers we would otherwise expect to see in the late 1990s.
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Conclusion
The takeover boom of the 1980s introduced methods and styles of acquisitions that were novel for the time. It was high drama, we reacted with alarm. By the end of the decade, public perceptions of the harms created had outstripped fact, our government institutions (state legislatures, federal agencies and state courts) translated our misgivings into law.
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